What Is Fiat Currency?

In the crypto world, we often refer to plain old non-digital money with the term “fiat currency.”

The English word “fiat” means “declaration” or “pronouncement.” The implication is that fiat money has no inherent value. It is valuable only because the government declares it to be.

Historically, the word “fiat” has been used disparagingly by those who opposed abandonment of the gold standard for national currencies. Under the gold standard, paper money represented ownership of a share of the government’s store of gold. People liked knowing their money was backed by gold. When governments left the gold standard, they said, the paper money had value only because the government said so – by fiat.

Today, fiat currencies have value not because the government says so, but because of their buying power, which is based on supply and demand. National banks help support the value of money by holding reserves and implementing monetary policy, but they don’t directly dictate the value of their currency.

Cryptocurrencies are not backed by commodities like gold or silver, so technically they, too, are essentially fiat currencies. Like paper money, they derive their value from supply and demand. 

Nonetheless, the word “fiat” is well-entrenched as the crypto community’s way of referring to government-issued money.