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What is fiat currency? This payment method is popular and widely accepted around the world. However, it also suffers from problems such as inflation and manipulation. In contrast, cryptocurrency is a new type of currency that has the potential to address some of the limitations of Fiat currencies. Let’s explore in more detail with COINSTRATEGISTS.
WHAT IS FIAT CURRENCY?
Fiat money is a legal currency that the government issues and regulates its value, not based on physical goods or assets. The power and influence of the government is what determines the value of fiat currency.
Widely used globally, fiat currency play an important role in transactions of buying and selling goods, services, investments and savings. This system replaced gold-based standards and other commodity-based systems in determining modern currency value.
POPULARITY OF FIAT CURRENCY
Fiat money originated in China in the 11th century when Sichuan province issued paper money, which could initially be exchanged for silk, gold or silver. Kublai Khan in the late 13th century established the traditional monetary system, which is said to have contributed to the collapse of the Mongol Empire due to overspending and hyperinflation.
In Europe in the 17th century, countries such as Spain, Sweden and the Netherlands also adopted fiat money, but later failed in Sweden and switched to the silver standard.
In the 20th century, the United States returned to using a limited commodity-based currency. In 1933, the government stopped exchanging paper money for gold, and in 1972 under Nixon, the United States completely abandoned the gold standard system, ending the collapse on an international scale, and switched to a universal, fiat currency globally today.
FIAT CURRENCY COMPARED TO THE GOLD STANDARD
The gold standard converted paper money into gold, with each paper currency backed by a finite amount of gold held by the government. This system only allows governments and banks to issue new money when there is enough gold to back its value, limiting the ability to create money and increase the value of money based on economic factors.
In contrast, in a fiat currency system, money cannot be exchanged for anything else. The government can govern the value of the currency directly and adjust it according to economic conditions. This gives governments and central banks more control over the monetary system, allowing them to respond to crises and financial events with measures such as increasing reserve bank creation and implementing loose monetary policy.
Supporters of fiat money argue that gold prices are unstable. Currently, both commodity-based and fiat currency systems are subject to fluctuations in value. However, with fiat currency, governments can be more flexible in responding to economic emergencies.
PROS AND CONS OF USING FIAT CURRENCY
Economists and financial experts are divided into two camps in the debate over a fiat currency system. Although there are proponents and opponents, fiat currencies offer benefits such as being unaffected by the scarcity of commodities such as gold, and being easier to produce than commodity money.
Fiat currencies provide flexibility for governments and central banks to address economic crises, are accepted in international trade, and do not require the costs of relying on physical reserves. However, fiat money has no intrinsic value, allowing governments to issue money from nothing, potentially risking hyperinflation and threatening the stability of the economic system.
FIAT CURRENCY VS CRYPTOCURRENCY
Both fiat currencies and cryptocurrencies are not backed by physical goods, but differ in their operating mechanisms and properties. Fiat currencies are controlled by governments and central banks, while cryptocurrencies like Bitcoin are typically decentralized and use a distributed digital ledger system called Blockchain.
Cryptocurrency transactions are irreversible and have no physical form, making them more convenient for global transactions. Although the current cryptocurrency market is smaller and more volatile, with the development and maturity of the cryptocurrency economy, it is expected that stability will increase.
The future of both currencies is uncertain. Bitcoin and cryptocurrencies are new currencies built on a distributed peer-to-peer network platform. Bitcoin may not have been created to completely replace the fiat currency system, but instead provide an alternative economic network. The potential to create a more improved financial system for a better society.
CONCLUDE
Fiat currency has a long history and a strong position with national governments. Currently, fiat currencies and crypto complement each other. Crypto will not replace fiat currency in the near future, as major countries are studying combining the two currencies. Once fiat cryptocurrency testing is complete, there will be major changes in the world’s monetary landscape.
