What are fiat currencies?

To form a picture of cryptocurrencies, we must also know what stands behind the term fiat currency.

These are currencies that are known to everyone. Fiat currencies include traditional financial currencies, such as the US Dollar, Euro, Pound sterling, Yen… These are currencies that are not made of valuable goods or are not supported by their value.

Prior to the 20th century, most countries used something in the form of a gold standard or commodity currency, backed by valuable goods, such as gold. As the volume of international trade and finance increased, the limited supply of gold could no longer match the new values. This began to cause serious disruptions in world markets and trade. In 1971, US President Richard Nixon officially abolished the peg of the US Dollar to the value of gold. This made the US Dollar a fiat currency.

The definition of fiat currencies is that they are currencies, issued by the government, backed and strictly regulated by a central bank. They offer governments more control over the management of their own currency and enable fractional-reserve banking. This means that the bank does not actually have the entire amount it lends someone, in physical form.

The fiat currency system allows the government to increase the amount of money available for loans and/or credits. Thus, in modern times, the value of fiat currencies is supported only by the national governments’ credits and by the trust people have in them, to manage them according to the rules. Fiat currencies, with the power to control the amount of printed money, give central banks strong control over the overall economy. The more money that is newly printed, the lower its value and the greater the chance of severe inflation.

Fiat currencies are, to a large extent, digitalized, as we tend to monitor their balance in our bank accounts and use payment cards. Still, they should not be confused with cryptocurrencies. Fiat currencies also differ from cryptocurrencies in that they require intermediaries such as banks, credit card issuers, or government agencies to carry out transactions.

At this point, however, it is worth highlighting one of the key goals that actually led to the development of cryptocurrencies, namely decentralization and greater individual economic freedom. Fiat currencies are controlled and managed by central banks, while cryptocurrencies act as a decentralized financial instrument that operates independently of banks or intermediaries. Key cryptocurrencies, such as Bitcoin, have a fixed and known number of s.c. coins that will be issued at any time, which means that such a financial asset, unlike fiat currencies, is not subject to inflation.