Certain currencies can be referred to as fiat, but fiat does not mean crypto.
So, what exactly is fiat currency, and what is its role in our modern day?
What Is Fiat Currency?
Simply put, a fiat currency is issued by a government but not backed up by a physical asset.
But as economies grow and inflation increases, the ability to use physical collateral dwindles.
This is one of the reasons why fiat currencies have come about.
The term “fiat” is used because it describes a kind of formal decree.
Therefore, when a government issues any kind of currency, it does so via fiat.
What’s nice about fiat money is that it essentially gives governments more economic control.
This is because governments can decide how much of a given fiat currency they want to print or mint.
Today, many of the currencies you’re likely familiar with can be considered fiat.
Unlike precious metals and other valuable resources, fiat money is given value by the government that issues it.
After all, a dollar bill is just a piece of paper if its subjective economic value is stripped.
But fiat money wasn’t always this dominant.
The US Dollar, for example, was once backed by gold.
This was known as the “gold standard”.
It wasn’t until centuries later that this form of currency began to become central to national economies.
So, why is this the case?
But this doesn’t mean that all cryptocurrencies are fiat.
In fact, most aren’t.
This is because, in 2021, the South American nation ofEl Salvador adopted Bitcoin as a legal tender.
The El Salvadorian government has declared Bitcoin its main fiat currency, along with the US dollar.
But El Salvador isn’t the only country with a vested interest in digital currency.
There’s also a lot of controversy around both of these financial asset types.
The Stablecoin Confusion
But not all cryptocurrencies aren’t backed by anything at all.
Such assets are often referred to as stablecoins.
However, it’s important to note that not all stablecoins are backed by collateral.
There arevarious types of stablecoinsout there, some of which have no kind of tangible backing.
But let’s discuss a stablecoin backed by physical collateral: Tether Gold.
You may have heard ofTether (USDT)before.
How Fiat Currency Is Used
Unlike most cryptocurrencies, fiat currencies can be spent in various ways.
The British Pound, for example, can be used to buy anything within the United Kingdom.
It is also used in loans, mortgages, gift-giving, and insurance.
But, as we already know, fiat currency is not very internationally versatile.
Therefore, most fiat currencies are subjective, and their value depends on where you are.
