Fiat

Fiat money, or simply fiat, refers to a currency that is issued and regulated by a government. It acts as a legal tender in a particular country.

Fiat money primarily serves as a medium of exchange. It’s indeed the most common form of money in the world today for everyday transactions, including buying goods and services, paying taxes, and settling debts. It can also serve as a unit of account and store of value However, its value can be influenced by economic conditions, government policies, and monetary decisions made by central banks.

Fiat money operates through a combination of government regulation, central banking, and the trust and confidence of the people who use it. Here are a few important characteristics of how fiat money works:

• Government-issued: Fiat money is typically issued and regulated by a government's central bank or monetary authority. They have the authority to control the money supply, print physical currency (banknotes and coins), and regulate the financial system.
• Legal tender: Fiat money is recognised as "legal tender," which means it is accepted as a valid means of payment for all debts, public and private, within the country where it is issued. This designation is typically established by law, and refusing to accept legal tender as payment is generally prohibited.
• Currency supply: Central banks manage the issuance of physical currency (banknotes and coins) and maintain records of the digital money supply in the banking system. They monitor the overall quantity of money in circulation to ensure it meets the needs of the economy.
• Banking system: Commercial banks and financial institutions play a pivotal role in the circulation of fiat money. They provide various financial services to individuals and businesses, including storing deposits, facilitating transactions, and extending loans. Most money exists in digital form as bank deposits rather than as physical cash.
• Trust and confidence: One particularity of fiat money is that it’s not backed by a physical commodity like gold or silver. Instead, its value is derived from the trust and confidence of the people who use it as a medium of exchange. Individuals and businesses accept fiat money as payment because they have faith that it can be exchanged for goods, services, and other assets.
• Inflation: The value of fiat money can be affected by inflation, which decreases its purchasing power over time. Central banks aim to manage inflation to maintain price stability and preserve the value of the currency.
• Physical and digital forms: Fiat money exists in both physical and digital forms. Physical currency includes banknotes and coins, while digital currency is represented by digital bank account balances and electronic payment methods.

There are several fiat currencies used in different countries all around the world. A few examples of fiat currencies are:

• US Dollar (USD),
• Euro (EUR)
• British Pounds (GBP),
• Japan Yen (JPY)

Cryptocurrencies, like Bitcoin, have emerged over the past 10 years as an alternative to fiat currencies. They offer unique features and benefits that make them an attractive alternative to fiat money for some users:

• Decentralisation: Cryptocurrencies operate on decentralised blockchain networks without any intervention from a central authority or government. This characteristic can appeal to individuals who prefer financial systems that are not subject to government interference.
• Global accessibility: Cryptocurrencies are accessible to anyone with an internet connection, regardless of their location. This global accessibility can be particularly beneficial for individuals in regions with limited access to traditional banking services.
• Lower transaction costs: Cryptocurrency transactions can have lower fees compared to traditional financial systems, especially for international transfers. This can make cryptocurrencies an economical choice for cross-border payments.
• Security: Cryptography is used to secure cryptocurrency transactions and control the creation of new units. This technology makes it difficult for unauthorised parties to alter transaction data or create counterfeit tokens, enhancing security.
• Transparency: Blockchains provide transparent and immutable records of all transactions, which users can verify on their own through block explorers. Therefore, blockchain technology can help reduce fraud and increase trust in the system.
• Financial inclusion: Cryptocurrencies have the potential to provide financial services to unbanked and underbanked populations who may not have access to traditional banking infrastructure.
• Ownership: Cryptocurrency users have direct ownership and control over their assets. They can store and manage their funds in personal wallets without relying on intermediaries like banks.