Connect with us

News

What is a fiat currency?

Published

on

The term fiat currency is often contrasted with the term cryptocurrency. A distinction that is not always obvious at first glance, but which is based on very clear specificities. Especially in relation to Bitcoinwhose emergence and adoption only serve to highlight the failures of these central bank currencies with an imposed deterministic character. But before replacing them, the first step is to understand how they work.

The history of money goes back to the earliest days of mankind. For it quickly made possible characterize an exchange or the symbolization of a value. intended and/or reserved for this purpose. And if its current usage is to be associated with “a counting symbol used to account for a good,” then its earliest iterations go back much further than one might imagine. This implies that A form that is decidedly different from today’s fiat currencies..

Indeed, the coins we know today respond to certain very precise specificities. They are linked to a State or to a specific geographical area, such as Europe. And this is done under the direction of central banks – independent of governments – which are solely responsible for their management. In other words, for example, the European Central Bank (ECB) for the euro or the U.S. Federal Reserve (Fed) for the USD.

Fiat currency: what is it?

A fiat currency is the monetary representation created by a state, under the direction of a central bank.. And it serves primarily to provide a single, harmonized means of payment in a given territory. Its value is largely underpinned by the fact that it is imposed on the population concerned in the form of what some present as monetary determinism. That is, an individual born in a given part of the world will inevitably become a user of the currency of the government on which he depends.

Fiat currency: what is it?

From an etymological point of view, the name derives from the English “fiat”, which means “decree” in English.. It is thus a principle of operation initially linked to a royal logic. That is to say, under the responsibility of the king, or in this case of an authority that determines its management. A role now occupied by the central banks, which are in charge of monetary policy. In most cases, this means maintaining price stability, managing interest rates and protecting employment.

Money can be considered as the basis of the market economy. As part of the agents’ wealth, money is a private good. At the same time, it is a public good. The stability of the value of money is beneficial to agents and only an institution outside the private agents can guarantee its stability. The institution that guarantees the stability of money and to which the management of monetary policy is entrusted is usually independent of political power.. “

viepublique.fr – Why use a coin?

But the situation with fiat currencies is not as stable as it seems. Especially because U.S. President Richard Nixon’s decision in 1971 to separate the dollar from its value in gold. However, a relationship that only dates back to 1944, with the Bretton Wood Agreement. That is, the organization of the world monetary system around the U.S. dollar, which became the only convertible currency in exchange for this yellow metal. All of this was overturned again a few years later, with the cancellation of the fixed exchange rates between the currencies. (foreign currencies). The latter now float against each other according to supply and demand.

Reason why. it has become very difficult to speak of stability in relation to these fiat currencies.. Because even if stability seems to be effective in the country they serve, their exchange rate can vary greatly with respect to “stronger” or “weaker” currencies. But also according to the state of the international economic market and geopolitical problems.

Finally, fiat currencies must be distinguished from other types of monetary instruments.such as commodity currencies, like gold, or more recently cryptocurrencies. The latter are causing a real stir in the field, as we will see later in this article.

fiat currency, fiat money: what are the differences?

There is a difference between fiat money and fiat money, which are ultimately two sides of the same coin. But the fiduciary aspect is linked more precisely to the material expression of fiat money, i.e., in the form of banknotes or coins. In fact, the term fiduciary comes from the Latin “fiducia”, meaning “trust”. Because it is necessary to allow a simple piece of paper with no intrinsic value to be used as a representation of a real nominal value accepted by both parties to a transaction.

fiat money, fiat currency: what are the differences?

The intrinsic value of money is replaced by the. division moneyThe value of these coins is no longer determined by the amount of metal they contain, but by the user’s confidence in the value written on the coin. This is the same system that governs the fiat moneycomposed of bank bills. “

viepublique.fr – The forms of money

The origin of money the coins contained, by their weight in precious materials such as gold or silver, the true value they were supposed to represent. But this is no longer the case, to the point that some countries like Transnistria In the past, the Transnistrian government went so far as to issue coins in the form of plastic tokens, with nominal values of 1, 3, 5 and 10 rubles. And although this is an isolated case, it is a perfect representation of what a fiat currency is.

transnistrian plastic fiduciary coin
coins (rubles) of… plastic!

Knowing that there may also be fiat currencies that are not directly linked to fiat currencies.. This is the case, for example, of private currencies issued by banks, such as the Euro WIR. Just as fiat currency can be Deed – in the form of a simple accounting entry – or electronic. The latter is also the case of more than 90% of the euros circulating in a totally dematerialized form..

A lire aussi :   Banco de España will experiment with a digital currency

Cryptocurrency vs. fiat currency.

If there is one fact that is already established, it is that the emergence of Bitcoin has put traditional fiat currencies in check. A monetary paradigm shift the consequences of which are currently being written. The emergence of cryptocurrencies obviously puts the question of trust back at the center of the monetary debate, since there is no longer any way to materialize them. And this is all the more true if we consider that their decentralized nature, which makes it impossible to link them to an identifiable management body.

fiat currency vs. bitcoin

In fact, with cryptocurrencies it is. a new page in monetary history is being written. before our eyes. A dynamic whose starting point can clearly be identified in the historical publication of the Bitcoin White Paper October 31, 2008. With a business model that decides to dispense with any “trusted third party to offer direct and irreversible transactions that are also impossible to censor.

A pure peer-to-peer version of e-money would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main advantages are lost if a trusted third party is still needed to avoid double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.. “

Bitcoin white paper

Bitcoin, fiat currencies and inflation.

Unlike fiat currencies, Bitcoin is difficult to produce and its maximum amount is initially written into its code to be limited to 21 million units. Therefore, no one can turn the money printing machine to their advantage. The fact that the quantity of units produced (supply) is taken into account is one of the specific features of the cryptocurrency universe. For each of them is based on a monetary management (tokenomics) that is unique to it. And this data must be taken into account by investors to estimate its growth potential and effective strength.

For this reason, bitcoin is often cited as a a monetary instrument capable of resisting inflation. that plagues the traditional economy. And while it remains to be seen, it is clear that its limited quantity has nothing to do with the uninterrupted flow of dollars issued by the U.S. Federal Reserve. This is often done in an attempt to control the problem that too many dollars have been issued.

Bitcoin

IMF – “We print too much money without thinking about the unintended consequences.”

Hugh B. – 23 Apr 2022 – 13:00

As Bitcoin inflames debates on many topics, the crisis. […]

Read more

Links between cryptocurrency and fiat currency.

In summary, it seems possible to define the link between cryptocurrency and fiat currency as. two opposite realities of the same system. Because even though regulators try to oppose it, Bitcoin is increasingly being used as a currency in its own right. And it was even adopted by El Salvador as an official currency for the first time in its short history in 2021. Which is not to say that that it could one day replace the dollar. But it is clear that central banks can no longer ignore the existence of these decentralized alternatives, because of the direct competition they have over their monopoly.

A lire aussi :   Trading en ligne : trouvez les meilleurs broker, faites une comparaison

How and why convert cryptocurrencies into fiat money?

Converting cryptocurrencies into fiat currency is an exercise that should be approached with some restraint. Especially in countries where any capital gains realized are subject to 30% taxation after application of flat taxation. But this mainly affects traders whose main activity is to live off their profits in the field. And one should not confuse fiat currency and stablecoin backed by fiat currency, because for the latter the reality is very different.

Finally, the usefulness of a cryptocurrency can be very interesting in the context of money transfers abroad, regardless of the country concerned. This is because it allows perform these operations in a few seconds at a very low cost.. This is especially true when compared to cross-border transactions using fiat currencies and official intermediaries. In fact, in this case the conversion into fiat currency once the transaction is received makes it possible to escape this obscene cross-border racket.

What cryptocurrencies are for fiat glued and other stablecoins ?

But the real change taking place in the cryptocurrency industry is. the emergence of many stablecoin solutions.. The latter are giving The latter are making the regulators break out in a cold sweat.. This is because they offer access to the very currencies, in which they are backed, while escaping the control of central banks. This while allowing protect cryptocurrency investments between transactions. – or during a bear market – without having to go through fiat currency again… and potential taxes.

Knowing that the most important stable currencies (USDT, USDC y BUSD) are mostly managed by highly centralized structures, even if they remain private. In other words, they have the power to freeze the funds of their users. at any time, mainly in the context of legal proceedings. An option that does not exist in the its decentralized counterpartswhose leader remains the DAI of the DeFi protocol MakerDAO.

Therefore, fiat currencies represent. all monetary instruments issued by central banks, whether fiat or dematerialized.. That is to say, in the case of France – and more generally of Europe – the euro and all its accounting records. A sector that until now has been clearly controlled by governments. But the determinism imposed on this sector now clashes with the emergence of cryptocurrencies. And the arrival in force of stablecoins, which are backed by fiat currencies without actually being fiat currencies, will not help this distortion of borders that were previously closed to all competition.

Continue Reading

Trending

Copyright © 2017 Zox News Theme. Theme by MVP Themes, powered by WordPress.