What is fiat currency?
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.