Fiat Currency

By Julia Cook
Published Jun 2, 2022 and updated Jul 4th, 2022

Fiat currency is a legal tender that is issued by a government, person or institution and given value by them without having any resources to back them up.

Although fiat currency lacks intrinsic value, it holds value because others perceive it as holding value. As such, its value fluctuates on the basis of supply and demand just as with any other commodity. So too, it’s paper representation and coins are not of equal value to the tender that they represent.

Some other forms of currency

Commodity money

Commodity money is a currency that has intrinsic value that is independent from its purchasing power. Although people usually think of this as being coins that were made of gold or silver, many earlier societies used other media of exchange such as shells, salt, spices, silk, cowries, yams, livestock, and grain

Representative currency

AS with fiat currency, representative has no intrinsic value. But it is backed by a commodity such as gold, silver or fiat currency and usually represents that currency in the form of either paper or coin money.

The gold standard

This is a monetary system whereby all of a country’s currency is backed by gold. There are no longer any countries that are fully backed by the gold standard, as most countries determined that an inflexible currency would stifle economic growth. Switzerland was the last major country that backed out of the gold standard in 2000. For instance, it is estimated that 20% of the Russian Ruble is backed by gold, 15% of the United States Dollar and 5% of the British Pound.

Cryptocurrency

Cryptocurrency is a digital currency that is encrypted on a blockchain and therefore decentralized. As with traditional currency, its primary use is as a medium of exchange, although sub-types of altcoins such as tokens can be used for other functions on their particular dApp.