Fiat is a currency that has been designated as a legal form of money, usually backed by government regulations declaring it legal tender.
The term fiat comes from Latin and is a word used to describe a government decision, order, or resolution. By definition, paper money is currency that has no intrinsic value because it is not backed by a physical commodity and is usually made of a worthless or low-value material (such as a small piece of paper). Even so, paper money is widely accepted as a means of payment.
Apart from government approvals and regulations, the main reason why paper money is considered legal and valuable in our society is because of collective trust. In other words, fiat value is highly dependent on mutual agreement which has market value and can be used as a medium of exchange, with intrinsic purchasing power. Thus, the acceptance of fiat money is highly dependent on government decisions and social conventions (and hopes that their value will be maintained in the future). If social trust or government decisions are compromised, the real value of currency, as a means of payment, quickly and greatly diminishes.
Due to the fact that most fiat currencies are not backed by precious metals (such as gold, silver, and copper) or other commodities, central banks can cause large variations in the money supply, which can eventually lead to episodes of very high inflation rates (hyperinflation). .
Advantages of fiat currency
- Economic stability – countries can react more flexibly when facing economic changes or on the verge of a financial crisis
not constrained by a lack of physical commodities (gold)
- Growth potential – the government can increase the supply of banknotes simply by printing new notes, thereby promoting economic growth
- Greater affordability than commodity-based money
- Worldwide use = suitability for international trade
Lack of fiat currency
- Inflation – because governments can easily print new notes, fiat currencies are likely to suffer from inflation
- Government-bound values ??– relying on government stability.
- Limited privacy – governments can quickly identify and track who, when, and for what purposes someone spends their currency
- High fees and restrictions – you have to pay high fees to send money to a foreign country.