What is fiat currency?

Anthony Caruana 15 February 2018

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The world of cryptocurrency has a language of its own. And one of the terms that's coming into common parlance is fiat currency. But what is fiat currency?

Fiat currency is some sort of token that is issued by a government and declared to be legal tender. Its value isn't directly held in a physical asset like a precious metal or an item that is of use to someone. It is an instrument that can be used because it is based on a trust relationship between the issuer, the holder and those that receive it.

If trust in the value of a currency is eroded then it loses its value. And that trust is based on actors in the economy believing it is worth something.

For example, when the government of Zimbabwe started issuing more money, that created, eventually, a situation where no-one trusted the value of the currency. So, it collapsed as a form of fiat currency.

In effect, the value of the currency is due to what it can be used for, not because the coins or cash have any particular value.

At the moment, cryptocurrencies are still evolving and differ from fiat currencies in several ways. Firstly, they are not minted into physical coins or notes. Also, they are not issued by central governments. This is why many regulators are struggling with seeing it as a legitimate currency.

Finally, fiat currencies can be used to buy almost any good or service. At the moment, the number of exchanges of cryptocurrencies for physical goods and services has been limited although that is changing.

This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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