Advantages and disadvantages of fiat currencies

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Advantages and disadvantages of fiat currencies

Everyone interested in cryptocurrencies has undoubtedly come across the word fiat as it occurs in various discussions and articles. However, the term has nothing to do with an Italian elegant on four wheels well known for its unreliability. This fiat is slightly different, although the unreliability is something they both have in common.

Fiat currency

Fiat means paper money or coins issued by the government as legal tender regulated by the central bank. Examples include countries’ national currencies, e.g. the US dollar, British pound, euro etc. Since they are not backed by any commodity, there is a real danger that they will become worthless due to hyperinflation. Their value is derived from the forces of supply and demand in the market based on people’s trust.

The history of fiat currency dates back to the 11th century. So who could come up with this novelty? The Chinese, of course. The Chinese began issuing paper money in exchange for silk, gold or silver. Over time, these currencies spread throughout the world. Initially, all the world’s currencies were pegged to the US dollar, which was pegged to gold. This system called the gold standard was abolished in 1971 by US President Nixon, who definitively separated the dollar from gold.

Advantages of fiat currencies

Economic stability – countries can react more flexibly when faced with Economic change or on the brink of a financial crisis
not limited by lack of physical commodity (gold)
Growth potential – the government can increase the fiat money supply by simply printing new banknotes, thus stimulating economic growth
Greater affordability than commodity-based money
Worldwide use = suitability for international trade

Disadvantages of fiat currencies

Inflation – since the government can easily print new banknotes, the fiat currency likely suffers from the inflation
Government-bound value – relying on government stability. The worst-case scenario is that the value of the fiat currency may completely collapse.
Limited privacy – the government can quickly identify and track who, when and for which purpose one spends the currency
High fees and limits – It is ridiculous when banks set daily limits for withdrawing and spending your money. The situation is even worse for international transfers – you have to pay high fees to send money to a foreign country.

 

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