On cryptocurrency platforms, it is possible to transfer money almost instantly, either by stablecoin (USDT…), in 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?
“Fiat” currency differs somewhat from the so-called “fiduciary” currency. This first emanates 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 paper currencies usable today are fiat currencies. These include the US dollar, euro, yen and other major world currencies.
As these currencies are not pegged to physical reserves like gold or silver, they can be strongly impacted by inflation or even become worthless in the event of hyperinflation. It is in this sense that cryptocurrencies take the opposite view of 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 limit by central banks, Bitcoin is limited in quantity (21,000,000 units). It is therefore an even rarer asset than gold. Be careful, however, Bitcoin should not be equated with a safe haven or a kind 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 on its citizens the forced course of this currency. In addition, the State undertakes to ensure the maintenance of the value of the currency by forcing its use and by prohibiting the use of other currencies.
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As you will have understood, when fiat money is used, there is necessarily an intermediation 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.
Common points and differences between cryptocurrencies and Fiat currencies?
Fiat currencies and cryptocurrencies share several notable similarities:
- Allow payments between two parties.
- Build stores of value.
- Rely 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. Conversely, cryptocurrencies are not controlled by any central authority, this is the principle of decentralization.
- Cryptocurrencies are deemed tamper-proof and can only be spent once.
- A cryptocurrency transaction cannot be reversed or “charged back”.
Conclusion: Cryptocurrencies VS Fiat currencies
While the money supply issued by a central authority guarantees trust in fiat currencies, trust in cryptocurrencies is based instead on its underlying technology: the blockchain.
In this sense, cryptocurrencies are revolutionizing the use of money, both in creation and exchange. These can be spent and received by anyone, anywhere, anytime, without having to rely on a bank or a government. This is “THE” big difference with Fiat currencies.