Fiat Currency

What is fiat currency?

A fiat currency is any currency that is created and governed by a government but has no inherent value. If gold and other stores of value are called money because of their intrinsic value, fiat currency has its purchasing power dictated to it by a governing authority. Fiat currency has no usable value outside of what it determines (which is why you need a new currency any time you travel to a new country – your old one is virtually worthless! ), but its value is preserved entirely by labor production and the government. This implies that if fiat currencies are not properly maintained, they will lose their value.

How fiat currency works?

Since fiat money is always regulated by a central governing authority, various monetary authorities run their financial systems in different ways. Outside factors such as economic, social, and national factors that differ by country also influence how fiat currency is managed. The Federal Reserve, in the case of the United States, regulates and controls the country's fiat currency, the U.S. Dollar. Despite the fact that it is a body of unelected officials, the Federal Reserve has complete control over the country's monetary policy. Their objectives are to encourage maximum job opportunities in the United States, maintain market stability, and promote moderate long-term interest rates.

What Determines the Value of Fiat Currency?

The state of the economy, labor demand, trade value, and other factors all affect the value of fiat currency, but buying power and inflation rate are two of the most critical. We've seen reasonably stable currencies lose 75 percent to 99 percent of their value due to inflationary mismanagement in many failed states. Governments can't afford to pay their bills, so they print more money to cover them, devaluing the whole currency system; if this reaches a breaking point, the fiat currency is effectively worthless.

Who makes fiat currency?

All fiat currency is created by some form of governing body, depending on the country or jurisdiction you reside in. The Treasury Department, specifically the Bureau of Engraving and Printing, is in charge of this mission in the United States of America. The Federal Reserve determines the quantity and supply of currency, which is then dictated to the Treasury Department for printing.

Cryptocurrency versus Fiat

Despite the fact that Bitcoin and cryptocurrencies were designed to be the antithesis of fiat money, there are a number of parallels between the two. The key similarity is that fiat currencies and most cryptocurrencies, such as Bitcoin, are not backed by a commodity; this ensures that the value of cryptocurrencies is decided by their network of users (users, miners, investors, traders, etc). As compared to cryptocurrencies, fiat currency derives its value from different sources than cryptocurrency, making it a very different form of "money."

Will cryptocurrency replace fiat money?

One of the most significant advantages of fiat currency is that it is required by statute to be an appropriate type of legal tender for all transactions, implying that it must be recognized within the jurisdiction. Furthermore, since taxes are charged and collected in local fiat currency, the fact that the government collects and distributes this note as a measure of value has value. If the fiat currency is used as a levy, it will continue to have purchasing power and derive value as long as the economy is productive and the labor market is producing.

Is fiat money better than cryptocurrency?

When deciding the is better as money when contrasting fiat and cryptocurrency, you must first determine what qualifies an asset as money. The six characteristics of money are as follows:

• Usage acceptance

• Limited quantity available

• Consistency

• The ability to divide

• Longevity

• Convenience

When comparing most government-issued fiat currencies to cryptocurrencies, acceptance of use is the only factor that clearly favors fiat currency (at least for now). At the moment, everybody within a jurisdiction accepts fiat currency as payment for goods and services; however, this is not always the case for cryptocurrencies. In terms of the other five features, most cryptocurrencies outperform fiat currency in terms of how they manifest.

Bitcoin and Fiat

Bitcoin and fiat have had a long-standing partnership that goes back to the Bitcoin network's inception. When you look at the history of Bitcoin, you can see why it was created, when it was created, and who created it. This helps you understand the relationship between Bitcoin and fiat currency. Bitcoin was developed in the aftermath of the 2008 subprime mortgage crisis, which plunged the world and millions of people into financial ruin. Rather than punishing the bad actors, or at the very least allowing them to collapse due to corruption and malice, governments bailed out these companies with fiat currency to the amount of hundreds of billions of dollars in the United States and billions more from governments across the world.

Satoshi Nakomoto, the pseudonymous founder of Bitcoin, was fed up with a lack of representation in fiscal and monetary policy, so he created a currency with no central authority, power, or distribution. Bitcoin was created to be the polar opposite of fiat money, attempting to establish a superior monetary system akin to the gold standard.

Although governments around the world were inflating their fiat currencies to be able to bail out these businesses, Satoshi Nakomoto developed a scheme that does the exact opposite, producing a currency that is essentially deflationary, with less capital being made over time rather than more. Bitcoin is a real "money" choice (according to the characteristics that make up money) that enables people with corrupt regimes or unstable currencies to have monetary protection over their value.

People no longer have to believe that their government would not be greedy or exploit them since there is now an alternative mechanism that enables everyone to access an equitable and decentralized monetary system with no restrictions. Does this imply that Bitcoin has the potential to supplant fiat money? It's conceivable that Bitcoin could replace fiat currency based on its features and how it's used, but it's far more likely that it will be a widely used parallel currency.

Do Cryptocurrency Exchanges Accept Fiat?

Despite the fact that cryptocurrency is meant to be the polar opposite of fiat currency in terms of how it is regulated and distributed, there are occasions when blockchain and cryptocurrency-based applications must function with fiat currency to onboard customers. There are two forms of cryptocurrency exchanges: centralized exchanges and decentralized exchanges; they may or may not accept fiat currency, depending on your needs and which one you want.

In general, if a cryptocurrency exchange wishes to accept and sell fiat currency in addition to cryptocurrency, it must adhere to more stringent regulations. KYC (know your customer) and AML (anti-money laundering) procedures can be included in these regulations to ensure that the fiat currency entering the exchange is not being used for illegal purposes.

Due to the nature of their organization's structure, a centralized exchange is far more likely to be able to embrace and trade with fiat currency because these anti-money laundering measures need more oversight by an overseeing governing body. With decentralized exchanges, trades are performed peer to peer without the use of a middleman to regulate the trading room, reducing or eliminating the need for third-party supervision. This means that decentralized exchanges will not provide customers with KYC and AML options, which normally means that the jurisdiction in which they operate will not allow them to transact in fiat currency.

Since cryptocurrencies are still classified as commodities or intangible assets rather than money in most jurisdictions, they are subject to less oversight and do not need the same procedures as fiat currency. Since they have the requisite legal structure to do so and comply with the law, only centralized exchanges accept fiat currency. Some of the most reputable centralized exchanges that accept fiat currency, such as Binance, Coinbase, and others, are mentioned below.

Final Thoughts

When you compare the monetary characteristics of fiat currency to cryptocurrencies and Bitcoin, you can see why a technology like Bitcoin was required in the first place. Individuals' control over how to store and use their money is taken away by fiat currencies; now, thanks to Bitcoin and cryptocurrencies, everybody has an alternative.