Fiat currency

Fiat currency

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Fiat money is used all over the world. In fact, this is the most common money that we are used to seeing in the form of coins and banknotes. They also include the same money, but in a non-cash form, which we store on accounts and credit cards.

When studying the cryptocurrency sphere, it is worth understanding how fiat currency differs from cryptocurrencies and stablecoins. We will tell you more about this type of currency, and its main differences from virtual assets.

What is fiat currency?

In simple words, fiat money is the currency of a state, which is issued by its Central Bank. It is the Central Bank that considers how much currency is put into circulation, predicts its exchange rate for a certain period, and regulates it. The rate of fiat money is not tied to the value of precious metals or the price of production. Value is determined by trust in the state and its authority in the world. In all countries, fiat currency is the main instrument for paying for goods and services, as well as for investing. Today it has completely replaced the gold standard and other obsolete systems of commodity-money relations.

There are more than 150 official currencies in different countries of the world, the main ones that are most quoted can be considered less than 20.

Types of fiat currency

In developed and developing countries, fiat money is used in two forms: cash and non-cash. Cash – paper banknotes and metal coins. Non-cash – these are funds on the account of an individual or legal entity, deposits, loans, bills, promissory notes. Today, it is non-cash funds that account for the largest volume of foreign exchange settlements.

Fiat, crypto and stablecoin: what is the difference?

There is a big difference between fiat money, cryptocurrency and stablecoins. They have little in common, except that all these currencies are not backed by gold, with the exception of certain types of stablecoins, which are not so numerous.

Before we get into the differences, it is worth noting that stablecoins are a type of cryptocurrency backed by fiat money. That is, it is a special kind of virtual assets, pegged to real money, usually to US dollars, but there are also stablecoins backed by the euro and other world currencies.

The main differences between fiat money, cryptocurrency and stablecoins:

  • Fiat currency is issued exclusively by the state. Crypto and stablecoins or crypto dollars, as they are also called, are issued by private companies and are not subject to regulation by the state or government agencies. Thus, no state influences the cryptocurrency market, cannot control it.

  • Fiat currency is the official money of the country that issues it, it is used for any payment transactions. Cryptocurrency, including stablecoins, is not officially recognized in most countries of the world. Today, only in some states the owner of the crypt can pay for certain goods or services with it. Therefore, cryptocurrency does not participate in the development of the economies of countries, but it is possible that with the gradual legalization of digital assets by different countries, the process will begin to change.

  • How to generate currency. Cryptocurrency is usually issued in limited quantities. For example, Bitcoin is designed in such a way that a maximum of 21 million coins can be mined, no more. Stablecoins are issued in almost unlimited quantities, as is the fiat money that Central Banks create based on their needs, from almost nothing.

  • The market for cryptocurrencies and stablecoins is much smaller than the market for fiat currency. Therefore, cryptocurrency is volatile and carries high risks. It is precisely because of the high volatility that states are in no hurry to officially recognize the cryptocurrency, but as its popularity grows, official recognition in developed countries is inevitable, it is only a matter of time.

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