Fiat currency
Fiat currency, often called fiat money, is money that a government recognizes as legal tender. The euro and the dollar are well-known examples.
What is fiat money?
Fiat money doesn’t get its value from the paper or metal it’s made of. It has value because people trust the government, the central bank, and the economy.
A central bank manages the money supply and sets interest rates, among other things. Fiat money isn’t backed by physical goods like gold or silver.
An example of fiat money
A 50-euro bill costs little to produce. Even so, you can use it to pay for groceries because stores and people accept the euro.
This shows how fiat money works: its value comes mainly from trust and the agreement that it can be used for payments.
Why is fiat money important in crypto?
In crypto, fiat money is often compared with cryptocurrencies like Bitcoin. Fiat money is managed centrally. Crypto generally works without a single central authority and uses technology to record transactions.
News about inflation can matter for fiat money. If too much new money is created, its purchasing power can decline. That doesn’t automatically mean that crypto will rise or fall in value.
You may also see news about a CBDC: a digital version of money issued by a central bank. This kind of currency is still fiat money, even though it’s digital.
