Fiat currency is the currency issued by the central bank of a country. This currency has no intrinsic value and is only supported by the creditworthiness of the issuing country. The value of this currency is determined by supply and demand.
On the other hand, along with increasingly rapid technological developments, the current world financial system structure that has been running so far has also changed. One of the changes is the introduction of digital currencies.
Currently, digital currency is used as an investment tool in Indonesia, although it is still considered illegal for transactions. However, cryptocurrencies—as digital currency—can still be traded as commodities on commodity exchanges that have permits from the government.
So, what is fiat money, and how is it different from digital currencies? Check out the description below.
Know What is Fiat Currency
As explained earlier, fiat money is a currency with no intrinsic value, but it becomes the official means of payment in the economy. An example is paper money that is used in everyday life.
The nominal value of this money is seen on paper, while the actual value appears from the number of goods and services that can purchase with the money.
The fiat money circulating in Indonesia is Rupiah, while abroad, there are many currencies such as US Dollars, GBP, Euros, and other currencies.
History of the Creation of Fiat Currency
This currency was initially introduced in the 10th century in China. During the heyday of the Yuan, Song, Ming, and Tang Dynasties (between AD 618 and AD 907), the demand for coins was so great that the supply of the main ingredient was limited.
As a result, the Chinese people also lack coins, and the government then looks for other alternatives, namely switching from coins to paper money. Paper money later became the accepted means of payment and the first currency until the Yuan dynasty.
Then, this paper currency goes to other countries. Since the 18th century, this money began to be used by the western world. Then, in the 20th century, this money gained popularity after American President Richard Nixon passed a law that canceled converting United States dollars into gold. Greenbacks are the paper currency used by the US.
Fiat Money Function
The function of fiat money is as the main payment instrument in the economy. However, this function can only run efficiently if it fulfills the following three critical roles.
- Legal means of payment
- As a unit of account
- Save value
Difference between Fiat Money and Digital Currency
Although both are valuable as currencies, fiat money and digital currency are pretty much different. Take, for example, crypto assets as digital currencies so that the differences are as follows.
In fiat money, the system is centralized, i.e., this currency is fully controlled by the government through the central bank.
As for crypto money—which becomes digital money—the system is decentralized. That is, it is not tied to government authorities.
As is known, the prints of assets on fiat money are in the form of paper. The central bank of a country carries out the printing of this money. This money is then distributed through financial institutions and banks.
On the other hand, crypto is money in digital form. This digital currency can be obtained through the mining process in the blockchain system or purchased on crypto commodity exchanges, among others, including Indodax.
With its fluctuating and centralized nature, fiat money will be very vulnerable to inflation from a country’s financial policies.
Meanwhile, crypto assets as digital currencies have a more volatile value, but their supply is minimal. Today, the stability of crypto money is almost comparable to that of fiat money—referred to as stablecoins.
This is because the stablecoin has a value based on the official currency of the central bank. For example, the value of 1 USDT = 1 USD.
Advantages of Fiat Money Over Digital Currencies
When compared to digital currencies, fiat money has the following advantages:
- It can be widely accepted by the public to buy all types of products. It is also possible to exchange these currencies globally.
- The physical form of this type of money is more practical. The reason, paper can indeed easy stored.
- The government will find it easier to print new money and increase the money supply.
- Lack of Fiat Money
Here are some disadvantages of fiat currency:
- Vulnerability to inflation and purchasing power of products or services may fall quickly.
- The existence of a supply monopoly by the central bank, which in this case acts as the sole supplier. When the central bank prints too much
- money, it creates hyperinflation and obliterates the price and value of fiat money.