What is Fiat Currency?

What is Fiat Currency?

Is fiat currency sustainable?



The fiat currency is typically money that is given value by a central bank or governmental organization within its respective country. They are often found in the forms of banknotes and coins and used as the medium of exchange for goods and services. Examples of fiat currencies are the Thai Baht, U.S. dollar, and Euro.





The History behind Money



Paper banknotes have been around since the 7th-century Chinese era. Customers would spend paper bonds on various products, instead of the previously used copper coins. Afterward, in the 11th century, Jiāo zi, the first banknote, was created as a result of the shortage of copper in the market.



However, as time went by, it was found that paper banknotes had the downside of only being usable in some reserved areas. Until the 13th-century, Kublai Khan established the first unified currency system, which revolutionized the world economy.



Following that, in the 17th century, paper banknotes became influential in Europe after some big nations, such as Spain, Sweden, and the Netherlands, using this means of currency.



As two centuries went by, England later established the Gold Standard monetary system, which issued paper banknotes as currencies with their values directly supported by gold. It was also advertised that the notes and gold are tradable. The Gold Standard was unique as it prevented the government from printing new banknotes without providing the equivalent amount in gold.



As time went by, gold situations became dire. During World War 1, an apparent shortage of gold was found, coercing the world to change to a new monetary system, The Gold Exchange Standard. This system was introduced with a unique focal feature of allowing only the world’s most economically prosperous nations to centrally control all the gold reserves, while other countries would hold their own currencies instead. Such countries were the United States of America.



When President Nixon came into power in 1971, the United States abolished all monetary systems regarding gold and instead introduced a newly polished system called the fiat system, which was detailed to mean that every country would hold their own currency which would be valued in the corresponding ratio with other currencies.



However, in hindsight, this model was flawed as to how the United States was the holder of the globally-used currency, which no longer demanded the peg of gold. This allowed the U.S. to print their fiat currency in as high quantities as desired, resulting in difficulty in management once the financial crisis took place.





Fiat Currency v.s. Cryptocurrency



With cryptocurrency being hailed as the new medium of exchange, many have compared it to the previous traditional currency systems.



The main similarity found between the two is neither are pegged nor supported by any tangible asset. However, the difference between them is arguably a large point of focus as fiat currencies are centralized, controlled by the government and central banks, whilst cryptocurrency coins are managed in a decentralized manner on their respective blockchain network..



Additionally, to eliminate the possibility of creating coins out of thin air, which would lead to inflation-related disasters, the total supply of each crypto coin is often limited. On the other hand, fiat currencies can be printed as seen fit by the central organizations, which often takes place during economic crises.





Reference:



Binance Academy, Longtunman

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