What is fiat currency? Exploring its relationship with cryptocurrencies

Fiat currency refers to money issued by a country’s government, with its value guaranteed by law. Unlike cryptocurrencies, it is not directly backed by physical assets such as gold or silver. Its value is derived from the trust of the citizens in the issuing government and the social consensus to accept that currency. This fundamental difference greatly influences the characteristics and uses of both.

Definition and Basic Concepts of Fiat Currency

The term “fiat money” originates from the Latin word meaning “to realize” or “to make real.” Fiat currency is established based on the authority and credit of the government, and its value is maintained through the shared recognition of market participants. Major currencies around the world, such as the US dollar, euro, and Japanese yen, are all fiat currencies.

In contrast, cryptocurrencies and digital assets function as decentralized digital currencies utilizing cryptographic technology. Blockchain technology enables peer-to-peer transactions without the need for a central authority. While possessing different characteristics from fiat currency, they introduce new possibilities to the financial markets.

The Birth of Stablecoins

With the rapid growth of the cryptocurrency market, stablecoins emerged as a bridge between fiat currencies and cryptocurrencies. Stablecoins are cryptocurrencies whose value is pegged to stable assets such as fiat currencies like the US dollar or euro, or commodities like gold. Examples include USDT and USDC.

This development provides stability that is absent in highly volatile cryptocurrencies like Bitcoin and Ethereum. Stablecoins offer an innovative solution that maintains the convenience of cryptocurrencies while pursuing fundamental value stability associated with fiat currencies.

Practical Roles of Digital Assets

The integration of fiat and cryptocurrencies plays several practical roles within the financial ecosystem. First, it enables low-cost, instant international remittances. Unlike traditional bank transfers, transactions based on cryptocurrencies reduce intermediary fees.

Second, access to decentralized finance (DeFi) services has expanded. By utilizing stablecoins, users can mitigate the risks associated with market fluctuations while enjoying new financial opportunities. Third, fraud prevention and traceability have been enhanced. Blockchain transparency improves the traceability of transactions.

Latest Trends in Central Bank Digital Currencies (CBDCs)

The wave of digitalization is affecting government institutions as well. Central Bank Digital Currencies (CBDCs) are a significant innovation that redefines what fiat currency is. CBDCs are digital forms of fiat currency issued by central banks.

Many institutions, including the People’s Bank of China and the European Central Bank, are conducting experimental implementations of CBDCs. This process symbolizes a transitional phase that fully integrates traditional fiat currency with cryptocurrency technology. The widespread adoption of CBDCs is expected to make cross-border payments faster and more efficient, bringing innovation to the entire financial system.

The very question of what constitutes fiat currency continues to evolve with technological advancements. The emergence of cryptocurrencies has expanded traditional notions of money, allowing more people access to the world of digital assets. As fiat currencies and digital assets become increasingly integrated, it is anticipated that the overall structure of financial markets will undergo accelerated transformation.