Fiat Money

Fiat money, derived from the Latin word “fiat,” meaning decree or command (“let it be done”), refers to both physical (paper) and digital currency issued by different countries within their respective territories. Unlike commodity money, fiat money is not backed by gold or other precious metals; instead, its nominal value is determined and guaranteed by the government, irrespective of the material used in its production.

Fiat money, like traditional currency, is considered legal tender and is centralized, with issuance and circulation controlled by the central banks of respective countries. Examples of fiat currencies include the US Dollar, Euro, and British Pound, with the US Dollar being the most widely used in international financial transactions.

The value and price of modern banknotes have no inherent connection; essentially, they are paper with minimal production costs, and their value lies in the nominal value printed on them. The initial paper money served as a certificate indicating how much gold the owner had deposited in the bank, leading to the term “banknote.”

The first backed banknotes, according to various sources, appeared in China in the 9th-10th centuries. For an extended period, many countries operated on the gold standard, where banknotes were backed by state reserves, limiting the issuance of paper money to the amount held in reserves.

The transition to fiat money occurred in 1971 when the United States abandoned the gold standard. In 1976, most countries adopted the Jamaican monetary system, which still operates today and is based on the principle of freely floating exchange rates.

Types and drawbacks of fiat money:

Fiat currency operates in both physical and electronic forms. Despite widespread use, fiat money has significant drawbacks:

• Lack of physical value due to the abandonment of the gold standard.
• Lack of intrinsic value as they are printed seemingly out of thin air, which, if mismanaged, can lead to the collapse of a country’s financial system.
• Persistent inflation, leading to the depreciation of currency.
• Counterfeiting issues, despite various security measures on banknotes.

Digital Currency – Cryptographic Form of Fiat Money

Currently, there is a growing discussion about digital currencies. National digital currency is essentially the same non-cash fiat money but in the form of cryptocurrency. In other words, it is a government-regulated cryptocurrency, such as the digital yuan, digital ruble, etc.

Unlike other cryptocurrencies, digital currency is regulated by the government, with its issuance and circulation controlled by the central bank. Unlike “commercial” cryptocurrencies operating outside government control, digital currency will be a legal tender, usable for buying goods, selling, receiving a salary, paying taxes, etc.

In contrast to the non-cash form, digital currency will be stored directly in the central bank, not in the accounts of commercial or other banks. Transaction speed will be instantaneous, whereas non-cash transactions may take hours to several days.

In simpler terms, digital currency is a technologically advanced form of non-cash fiat money in terms of control.

Perhaps the most pressing question regarding digital currency is the limitation of two-way communication with commercial banks. Previously, commercial banks could support and assist their clients, but with money in the form of digital currency directly on the central bank’s server, disputing the central bank’s decision to restrict transactions on a digital account appears challenging.