Money Fiat Cos' is that? Why do people often use this term when talking about digital currencies? Does it have anything to do with the famous Italian car brand? We are here to provide you with the answers! Today, The Coin Shark will say which colored cards we use to buy things, how fiat money appeared, what is the logic behind our current economy and money and how all these things deal with virtual currencies.
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- What is fiat money?
- A brief history of fiat money
- Fiat and virtual currency
We deal with fiat money almost every day. Well, today a huge number of financial transactions is cashless, whether we buy coffee, recharge the phone, pay bills or exchange currency. This is especially true for developed countries where money seems to vanish over the medium term. However, we still use cash. Our pockets still make the sound of coins and we still have colored cards in our wallets. And these are legal money.
Money can be cash or without cash. Cash includes coins and banknotes. While coins are made of metals (or their alloys) – mainly gold, silver, copper, but also brass, zinc, platinum, palladium, etc., the banknotes are actually just colored pieces of paper. Yes, they have protective elements, watermarks, and so on, but nevertheless the banknotes have no physical value. "Fiat" is a Latin word for "decree", "education". So fiat money is a means of payment, which has a value established by the state. In other words, the value of the legal currency is not based on the value of the material of which they are made. The card used to print $ 100 of banknotes is certainly not $ 100. However, the state determines the face value of this sheet and tells everyone that this piece of paper should be worth 100, another – 50, another – 20 and another – ten. So the fiat is actually a symbolic money without physical value that we are obliged to use as a means of payment.
Fiat's money is not just paper money. There are also so-called token money or token coins. Their metal value is lower than the legal value determined by the state. These are, for example, US coins with a face value of less than one dollar – daim (10 cents), a quarter (25 cents) and one half (50 cents).
The monetary systems of ancient states and communities were often based on coins that had the same value as the amount of metal from which they were made. However, there are also many examples of coin coins. Those were often silver coins that were minted with the use of other metals, thereby reducing the physical value of the coin, while its nominal value was retained. Scientists agree that the first known paper currency appeared in China in the eighth century. Subsequently, their use developed under the dominion of the Song dynasty in the eleventh century, and became widely disseminated during the Yuan dynasty (13-14 centuries), when the Mongols led by the nephew of Genghis Khan, Kublai conquered the Kingdom of Half.
Long after that legal money close to those we have today started to appear in England. The Bank of England started issuing paper notes. At that time the banknotes already existed, however, they were not used as a means of payment. In fact, they were banknotes that the banks gave to depositors, taking a certain sum of money in gold coins. If this was not a nominal note, then it could pass from hand to hand and had no connection with its original owner. Subsequently they became means of payment supported by an equivalent amount of gold. In such a system, the amount of money that was in circulation was equal to the amount of gold deposited in the banks. But as capitalist relations developed, the British economy required more money in circulation, so the central bank began issuing paper notes that were no longer supported by a stock of gold. However, in the mid-19th century, the government legally established the structure of such a question. It was a certain relationship with the state's gold reserve. Before the First World War, there was a so-called gold coin standard: the amount of legal currency in circulation was provided by a certain number of gold coins stored in banks. Each holder of banknotes (each owner of legal tender) could exchange his documents with an equivalent amount of gold. After the First World War, most countries established a gold bullion standard, which meant that the notes could be exchanged for gold bars weighing 12.5 kilograms. All those who had less money than the price of this amount of gold did not have the opportunity to exchange their banknotes with precious metal. However, the notes were already backed by assets and circulated in the economy as a means of payment. In the new economic conditions that emerged after the Second World War, the gold standard was replaced by the gold standard. The United States played a key role there. The country has pledged to support the US dollar with a particular amount of gold, as hundreds of tons have been accumulated in American vaults. According to this standard, only the financial regulators of the other states had the right to request the exchange, while the US dollar became a reserve currency. The gold standard era ended in the early 1970s, when the US government refused to provide gold at the request of other states. Since then, the international monetary system "has been left to float freely". Today currencies are no longer linked to gold, can be converted freely and the market (supply and demand of a particular currency) plays a significant role in determining exchange rates.
Today the term "legal currency" is often used in the community of cryptocurrencies and is often opposed to digital currencies. The state is responsible for issuing legal currency, is centrally carried out by central banks and controlled by state bodies. The legal currency rate is also established by the state. cryptocurrency it has been considered as an alternative to such centralized and regulated systems. Fiat transactions are managed by financial, tax and banking structures, while cryptocurrency transfers are carried out in a peer-to-peer manner without intermediaries and regulators.
The money and the cryptocurrencies of Fiat have an important common feature: both are not supported by anything. However, in fact, the Fiat is still supported by assets that can be purchased for it. And here's the point where virtual coins have some problems. Even these great cryptocurrencies like Bitcoin or Ethereum they still have little liquidity, while other digital coins can not be used to buy at least something. In any case, the community of cryptocurrencies is convinced that this problem lies in the absence of mechanisms, while the demand for digital currencies is and will be quite high, so their full liquidity is a matter of time.
Today, cryptocurrencies still amount to a relatively low percentage of global resources and can not compete with legal tender money.
Thus, fiat money is a currency that government agencies claim to be a legitimate means of payment and prescribe to use it at a fixed nominal value, despite the fact that it has no physical value. Almost all paper money, as well as many coins, are currently legal tender. Fiat is not backed by gold, and today the world economy is based on this principle. Cryptocurrency offers an alternative to decentralized and unregulated payment structures. However, the rationale behind the cryptocurrency is similar to the one on which the fiat is based. Unlike the old system, where the means of payment were tied to gold, modern legal money exists in the relatively free market paradigm. The cryptocurrencies have gone even further, eliminating those elements of strict regulation that have remained in legal tender.
However, there are different predictions regarding the future of digital currencies. The financial system of cryptocurrency is developing and can not yet compete with the traditional economy and fiat money, of course. Will he be able to do it in the future? Well, the answer is "no" in the short term and "time will tell" in the long run.
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