What is A Fiat Currency?
Fiat currency, also known as paper money, is a medium of exchange issued by the government of any given country as a legal tender.
The term fiat is a Latin word that means "let it be done" used in the sense of an order, decree, or resolution. So, fiat money is declared to have value even if the material from which it is made does not.
The value of fiat money is dependent on the economic strength of the issuing country. Traditionally, currencies were based on valuable commodities such as silver and gold, but fiat money is based on the credit of the economy.
The Rise of Fiat Currency.
The earliest known origin of Fiat currency is China, during the 11th century. At first, the notes were valued at a certain exchange rate for silk, gold, or silver.
Initially, the notes were to be redeemed after three years and replaced by new ones for a 3% service charge. Rather, more notes were printed without the old ones being retired resulting in inflation.
*A banknote of 5 Dragon dollars was issued in 1907 by the Kiangnan Yu-Ning Government Bank for circulation in the Jiangnan region - Image source: Wikipedia. *text in bold
During the 17th century, Spain, Sweden, and the Netherlands also adopted Fiat currency. The system was a failure in Sweden and the government eventually abandoned it for the silver standard.
The first banknotes in Europe are issued by the Swedish bank Stockholms Banco - Image source: Wikipedia.
Also, New France (now a part of Canada), the American Colonies, and the then U.S. Federal Government experimented with fiat money with different results.
Some Pros and Cons of Using Fiat Currency.
Economists and other financial experts are not unanimous in their support of fiat currency. Defenders and opposers passionately argue the pros and cons of this currency system.
Cost: Fiat money is easier to produce than commodity-based money.
Responsiveness: Fiat currency gives governments and their central banks the flexibility to quickly address economic issues.
International Trade: Fiat currency is used globally, making it an acceptable form of currency for international trade.
Convenience: Unlike gold, fiat money is not reliant on physical reserves that require storage, protection, monitoring, and other costly demands.
Availability: Fiat money is not impacted and is limited by the scarcity of a physical commodity like gold. Since Fiat money can be printed or mined at will, the issuing government is at risk of inflation.
No Intrinsic Value: Fiat currency holds no intrinsic value because governments can create money from nothing. Which could lead to hyperinflation and the collapse of their economic system.
Historically risky: Historically, the implementation of fiat currency systems has typically led to financial collapses, which indicates that these systems present some risks.
Fiat Currency vs. Cryptocurrency____text in bold
Cryptocurrency and fiat, have slight similarities neither of them is backed by a physical commodity, but that’s where the similarity ends.
While fiat money is controlled by governments and central banks, cryptocurrencies are decentralized, due to an open digital ledger called Blockchain.
Another notable difference between these two currency systems is the creation of each one. Bitcoin, like most cryptocurrencies, has a controlled and limited supply. In contrast, banks can create fiat money out of nothing, according to their judgment of their economic needs.
The nature of cryptocurrencies makes tracking considerably more difficult when compared to the fiat system.
As a digital form of money, cryptocurrencies have no physical counterpart and are borderless, making them less restrictive for worldwide transactions.
One of the factors that influenced the creation of cryptocurrencies is to explore a new form of money. Chances are Bitcoin was not created to replace the whole fiat currency system, but to offer an alternative economic network. Still, it certainly has the potential to create a better financial system for a better society.
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