Fiat money, aka fiat currency, is a currency that has been declared as a legal tender by the government and is not backed by any physical commodity. The value of fiat money depends on the relationship between supply and demand of the said currency.
The government controls and maintains the value of fiat money using numerous measures and agencies. To ensure fiat money maintains its value the government controls the supply and demand of the currency in the market as well as controlling the inflation in the country.
Fiat currency was created to replace commodity backed currencies like gold and other precious stones and metals.
How was fiat money born?
The oldest fiat currencies in the world are the British pound which was introduced in 1694 and the US dollar that was launched in 1792. Prior to their introduction, precious metals were used as currencies. One British pound was equivalent to one troy pound of sterling silver while one US dollar was equal to 24.75 grains of gold.
The shift towards the use of receipts as a way of payment, which is now referred to as banknotes, started in the private sector. The transactional model became very popular in UK and US and banknotes were officially recognized as legal tender in the two countries with time.
The emergence of cryptocurrencies and the threat to fiat
The meteoric rise in the use of cryptocurrencies in the recent past all over the world has been interpreted as a decline in trust in fiat currencies. Cryptocurrencies have gathered unimagined support from innovators, investors, and entrepreneurs from all over the world, placing ever-increasing pressure on central banks.
Although cryptocurrency is not a legal tender, the widespread acceptance has seen various governments come up with stringent measures to limit their use to protect their fiat currency from losing value.
Lower transaction fees have led to cryptocurrencies emerging as a preferred way of sending and receiving funds across borders. Sending or receiving money using the traditional bank systems can be very expensive due to the various number of fees that are charged before the funds can reach the final destination.
Cryptocurrencies offer fast settlement times which has seen their adoption accelerate in the world. Unlike other electronic cash settlement systems mostly offered by financial institutions using fiat money that take days to process transactions, cryptocurrencies allow instant settlements that take a fraction of seconds.
Although fiat currency is said to be stable, this has not always been the case. Economic recessions and hyperinflations have been witnessed over the years leading to greater loss of value of the fiat money. Similarly, regular increase in global prices have been witnessed over the years yet the central banks have a greater control of the economy. These instances create more appetite for the use of cryptocurrencies.
Fiat crypto exchanges
Over the years, crypto trading has gained steam in the world. While most exchanges offer crypto-to-crypto trading, the need to attract more people has seen various fiat crypto exchanges introduced. Fiat crypto exchanges allow traders to buy cryptos using fiat currency. They also allow people to sell their cryptos for fiat currency. Binance is one of the largest fiat crypto exchanges with operations all over the world.