In most materials on cryptocurrencies, the expression “fiat money” slips through. In general terms, everyone knows the meaning of these words, but for fruitful work with finances, it is better to understand the issue in more detail.
Fiat money (from the Latin fiat) is otherwise called fiduciary. These are classic means of payment familiar to ordinary people. All national currencies belong to the category of fiat currencies: rubles, dollars, euros, pounds sterling. They are issued in the form of paper or plastic banknotes, metal coins, and are also presented in a non-cash form.
Fiat money is issued by the state, independent emission is illegal. The state determines that people must pay in national currency (taxes, goods within the country). Previously, fiduciary means of payment were backed by gold, that is, behind each banknote there was a certain amount of precious metal from the state’s gold reserve. Today there is no such thing, fiat is not provided with anything, it is held by the government and the people’s trust.
Differences between fiat money and cryptocurrency
Cryptocurrency is a virtual alternative to conventional banknotes. The main purpose of its creation is to eliminate intermediaries involved in the transfer of funds between people, even if they live in different parts of the world. In this case, payment becomes much more profitable and faster.
The key difference between cryptocurrency and fiat money is that it is not physically expressed in any way. At the same time, at the information level, the coins are carefully encrypted, which reduces the likelihood of counterfeiting to zero. The calculation of the balance of a specific user is based on the transactions sent and received by him. The legislation of many states is still wary of this type of means of payment.
Fiat money is absolutely legal and allowed in all countries of the world. They have no independent value, and the course is determined depending on state policy and guarantees given by the authorities.
Overview: Fiat crypto exchanges.
Advantages, disadvantages of cryptocurrencies and fiat money
Pros of cryptocurrencies:
- Lack of a central server, breaking into which would lead to the loss of money for millions of people. Cryptocurrencies are based on the idea of decentralization. There are copies of the blockchain on many computers around the world, and a majority consent is needed to make changes to the blockchain.
- Transparency of transactions. Information about all payments is forever stored in the blockchain and is available for viewing by anyone.
- Cryptocurrency is not subject to government or banking institutions, although they are trying very hard to get hold of influence over it. Not being tied to banks will protect the crypt’s position even in the event of a worldwide default.
- The technical impossibility of counterfeiting.
- Resistant to inflation, since the emission of most cryptocurrencies is limited. For example, Bitcoin has a maximum coin supply of 21 million and will be mined by 2140.
- Anonymity. Despite the fact that cryptocurrency addresses and transaction amounts are publicly available, it is impossible to find out exactly who owns the wallet. To use cryptocurrency, you do not need to disclose your personal information such as name or passport details.
Cons of cryptocurrencies:
- The value of coins depends only on the ratio of supply and demand. Hence the high volatility, sharp fluctuations in the exchange rate, and the difficulty of forecasting. On the other hand, volatility often plays into the hands of traders in generating income.
- It is very easy to lose access to a crypto wallet – just forget the password, not save the seed phrase or private key to recover it. If these three conditions are met, then you can forget about the money on the balance sheet.
- It is impossible to cancel the transaction, return funds sent to the wrong address.
Pros of fiat money:
- More conspicuous stability, no strong volatility. Despite the growing popularity of cryptocurrencies, fiat money is still more in demand both in life and on currency exchanges. They are traded by a huge number of people, which makes price fluctuations more predictable.
- Losing a plastic card or forgetting a pin code does not mean losing money. Finances are still in the bank, where you can easily withdraw them and order a new card, having a passport.
- Bank operations are returnable. In case of an error, it is possible to cancel the transaction if the fact of fraud is proven, and the bank considers the reasons to be weighty.
- Fiat money is widespread and accepted everywhere: in shops, restaurants, taxis, airports. Until the time when it will be possible to buy cucumbers on the market for bitcoins, we are still several decades away.
Cons of fiat money:
- Centralization. Most fiat projects are based on a central server. Hacking it, a hacker gains access to user accounts. Such situations happen with enviable regularity.
- Inflation. The state is forced to regularly print new money, which leads to its gradual depreciation.
- Lack of anonymity. To open a bank card or account, you must provide the bank with all your personal information, from your last name and passport data to your place of work.
Thus, both means of payment have advantages and disadvantages. At the moment, they complement each other, and the cryptocurrency cannot yet exist without fiat. An example of this is the fact that exchanges where it is possible to buy or sell cryptocurrency for fiat money are very popular: Localbitcoins, Exmo, DSX, Livecoin, Crex24 and others.
Examples of fiat money
All currencies are conventionally divided into two types:
- Backed by gold.
- Supported exclusively by the trust of the authorities and the population.
As of 2018, no country in the world issues gold-backed money. Therefore, any national currency can be called fiat.
There are no restrictions on the issue of fiat money, except for the guarantee of the authorities that this particular currency will be used as the main one for paying for goods and services. Printing paper money does not entail practically any costs, besides, most of the turnover today is in electronic form (in the Central Bank and third-party payment systems, for example, Yandex.Money, Advcash, Payeer).
Forecast for the use of cryptocurrencies and fiat
An important question is whether cryptocurrency can replace fiat money. And if so, how soon will it happen. Even experts cannot give an exact answer, although the controversy does not subside, and the most diverse opinions are expressed.
The key point is the youth of cryptocurrencies. Only 9 years have passed since they were formed, and fiat money has been used by mankind for thousands of years. Of course, with the development of the Internet and technologies in general, progress began to march at a rapid pace, but still, most analysts agree that it is too early to talk about the full adoption of cryptocurrencies. No matter how many crypto enthusiasts there are in the world, the attitude of the authorities still plays the main role.
Despite all its advantages (speed, anonymity and low cost of transactions), cryptocurrency is too new and obscure phenomenon for the world. In addition, the transition to crypt will be disadvantageous to the leading financial authorities.
Therefore, it remains to observe the situation, monitor the news and draw your own conclusions about whether fiat money will yield its positions.