On cryptocurrency platforms, it is possible to transfer money almost instantly, either via stable currency (USDT …), a cryptocurrency (BTC, ETH, etc.) or in fiat currency. But concretely, what does this notion of fiat currency correspond to and what is its use within the crypto ecosystem?
What is a fiat currency?
The “Fiat” currency differs somewhat from the so-called “fiduciary” currency. This former comes from a government and has no intrinsic value. It is assigned a value because a state declares it to be legal tender. As such, most of the paper currencies usable today are fiat currencies. These include the US dollar, euro, yen and other major world currencies.
Since these currencies are not pegged to physical reserves such as gold or silver, they can be heavily influenced by inflation or even become useless in the event of hyperinflation. It is in this sense that cryptocurrencies have the opposite point of view with respect to these fiat currencies and appear today as credible alternatives.
Indeed, cryptocurrencies aim to challenge the inflationary nature of Fiat currencies. For comparison, while fiat currencies can be created at any time and without any limits by central banks, Bitcoin is limited in quantity (21,000,000 units). It is therefore an even rarer asset than gold. Beware, however, Bitcoin must not be identified with a safe haven or some sort of “digital gold”!
How do Fiat currencies work?
In principle, a state will entrust a central bank, in this case the ECB, with the management of a “monetary monopoly” in a geographical area. The fiat currency is therefore issued by a central bank and the state will impose the forced rate of this currency on its citizens. Furthermore, the State undertakes to guarantee the maintenance of the value of the currency by forcing its use and prohibiting the use of other currencies.
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As you may have guessed, when using fiat money, there is necessarily a brokerage that applies. Either that of the European Central Bank (ECB) or that of a government to guarantee the value of the currency. With cryptocurrencies we are exempt from any intermediation. It is purely the game of supply and demand that applies.
Points in common and differences between cryptocurrencies and Fiat currencies?
Fiat currencies and cryptocurrencies share several noteworthy similarities:
- Allow payments between two parties.
- Build shops of value.
- Relying on widespread consumer trust to serve as a medium of exchange.
There are also many differences:
- Fiat currency is issued and controlled by central banks and governments. On the contrary, cryptocurrencies are not controlled by any central authority, this is the principle of decentralization.
- Cryptocurrencies are considered tamper-proof and can only be spent once.
- A cryptocurrency transaction cannot be canceled or “charged back”.
Conclusion: cryptocurrencies VS Fiat currencies
While a central authority-issued coin offering ensures trust in fiat currencies, trust in cryptocurrencies instead relies on its underlying technology – the blockchain.
In this sense, cryptocurrencies are revolutionizing the use of money, both in creation and in exchange. These can be spent and received by anyone, anywhere, at any time, without having to rely on a bank or government. This is “THE” big difference with Fiat currencies.