Skip to content
Fiat Currnecy

What is Fiat Currency?

The history of traditional currency and how Bitcoin is disrupting the system.

The Dollar: Behind the Scenes

The cryptocurrency movement has made individuals more aware than ever of the intricate workings of the physical currencies that power their everyday lives. Billions of dollars are transacted each day around the world, from cash exchanging hands and the swiping of credit cards to multi-million dollar business deals, without the parties involved truly understanding the exchanges of value occurring right in front of them.

The concept of currency evolved out of trading economies, where parties would exchange goods for other goods or services. Some of the oldest known currencies were shells, selected for their aesthetic appeal, iconographic significance, utility, or ability to be made into jewelry. Once the ability to mine and refine metals became common practice, tokens, and eventually coins, made of copper, brass, silver, and gold were frequently used as currency to pay for goods and services. These tokens did not need a state or bank to declare their value, as the value was derived from the scarcity of the material used to produce the tokens as well as the effort required to mine, haul, and refine the raw materials into coins, jewelry, and other useful objects. During the Middle Ages, in order to finance large projects or military initiatives, nobles would purchase gold and silver possessed by the peasantry, issuing notes honoring the amounts purchased. These notes could be used to pay off debts or taxes to the crown, making them functionally similar to the gold and silver coins they were used to purchase. The ability to be used to pay state expenses made the notes valuable and worthy of exchange in much the same manner as metal coins. These paper notes were effective as the governments could produce as many as necessary in order to purchase gold and silver from the populace at a fraction of the cost of producing coinage.


The era of promissory note paper money saw drastic changes to the economies of the time, creating a vessel capable of spreading wealth to more of the population. However, one of the significant drawbacks of state-backed currencies, called fiat currencies, was the ability to produce the notes at a rate disproportionate to the growth of wealth. Simply put, due to the basic principle of supply and demand, as more individuals come into greater wealth, supplies of goods dwindle, forcing merchants to adjust prices. As prices increase and more currency is needed to purchase goods, the value of individual monetary units decreases. While the solution may seem to be producing more currency, in market economies this has the adverse effect of causing inflation.

Throughout history there are many examples of major economies suffering from rampant inflation, causing the value of their currencies to bottom-out, leaving them effectively worthless. Two of the most extreme examples are Germany and Venezuela. Post World War One Germany saw such drastic inflation as a result funding its war efforts entirely through borrowing that saw the mark, the German currency, devalue at a rate of one trillion paper marks per one gold mark by 1923. Paper notes were printed in several denominations above one million marks per bill and were so worthless, citizens used the notes as wallpaper or kindling. A modern day example is Venezuela. The bolivar, the state issued Venezuelan currency, has seen extraordinary inflation as the government continues to use the economy as a means of controlling the populace. The bolivar was exchanged at a rate of approximately 630 per $20 USD in 2013 and has since shot up to nearly 200,000 bolivar for $20 USD in 2017. Due to extremely low withdrawal limits at Venezuelan banks restricting individuals to withdraw what amounts to less than $5 USD and merchants raising prices in effort to support themselves, the people find themselves in the midst of one of the most severe economic crisis of the 21st century.

Consumer Price Index Chart
Consumer Price Index

Dangers of Centralized Control

Wild swings in the value of state-backed currencies are a direct result of the centralized nature of the authorities controlling them. The Venezuelan government, for example, can decide to print additional currency at any time, continuing the cycle of rapid devaluation of the bolivar and reinforcing the widespread poverty many citizens are suffering. This comes as a result of limited oversight: when the highest authority in the state chooses to produce and inflate its currency, the people have little to no recourse, resulting in mistrust of the government and banks. Citizens, in order to have any sort of financial agency, are forced into working with independent, third-party brokers and money handlers for the majority of their transactions with no guarantee that these organizations can be trusted.

Centralized control of state currency creates a trust-based environment. As money is necessary for supporting daily life and conducting business, official channels of currency distribution and management become gatekeepers, keeping a tight grip over the individuals who require their services.

Stores of Wealth

Because traditional currencies are subject to decisions made by the centralized authority, typically a national government or bank, these currencies fall victim to the same geopolitical crises and problems faced by that authority. Governments can collapse or fall out of international favor, reducing the value of the currency on the world market and making it nearly impossible for citizens to use the currency for anything meaningful. Banks have been known to be short-sighted in investing, taking advantage of short term gains offered by dubious practices such as selling debts or engaging in subprime lending. These practices are largely to blame for the 2008 global financial crisis which resulted in the loss of billions of dollars from individuals around the globe. A centralized currency only works when the individuals using the currency trust in the authority issuing the currency, and trust on an international scale can be difficult to maintain and easy to lose.

Concurrently, decentralized currencies, such as blockchain based cryptocurrencies, operate based on immutable, tamper-proof software protocols and are verified through open, public ledgers. Because these digital currencies have no central authority and are produced through various mathematical, programmatic functions, they are not subject to the same problems and pitfalls of traditional, centralized fiat currencies. The cryptocurrency market, being entirely electronic, is influenced much more rapidly than traditional security or commodity markets, but remains largely influenced by market forces alone. Without any one authority, and existing without a central issuing bank or nation, cryptocurrencies offer secured, apolitical methods of storing wealth, enacting financial transaction, and conducting cross-border payments. The advent of Bitcoin in 2008 was the birth of a new era of economics, with currencies that don’t follow many traditional economic rules developing into an international market worth over $100 billion USD. Though this technology still remains in its infancy, there is incredible potential for economic disruption.


Article written by Anthony Muccio –  blockchain journalist and frequent contributor to Cryptocoins News. Anthony is passionate about blockchain technology and has devoted much of his time to crypto-economics writing and research. An aspiring Python programmer, his interests include data science, machine learning, and game theory.


[mk_mini_callout title=”Free Download” button_text=”Get the Ultimate Investor’s Guide to Bitcoin IRAs” button_url=”/resources/investor-guide”][/mk_mini_callout]

[Infographic] Bitcoin and Cryptocurrency in Perspective

UPDATE June 11, 2019: Image updated with June 2017 data.


Since its inception, Bitcoin has had the potential to “upset the apple cart” of traditional fiat currency. It has steadily grown in value and adaptation across the world. The first purchase made on a commercial product by a consumer took 10,000 Bitcoins. Today, Bitcoin is worth over $4,000 and its value is predicted to only keep growing. By design, Bitcoin climbs in value as more people hop on the bandwagon. It’s cap of 21 million Bitcoins ensures that it will never be subject to inflation.

Bitcoin’s creation lit a fire in the investment world. Naturally, it’s success and potential brought out a litany of entrepreneurs creating alternative coins (altcoins) which tried to replicate and improve upon the technology of cryptocurrency. There are now over 700 altcoins on the market, but only a few have been able to match the potential of Bitcoin and Bitcoin’s value.

Bitcoin remains the giant in the industry, but there’s room for growth for all cryptocurrency. As this infographic shows, Bitcoin is currently valued at over $66 billion and the total valuation of all cryptocurrency has reached $142 billion.

This infographic puts Bitcoin and cryptocurrency in perspective against all money, stock markets, and even individual billionaires like Bill Gates. It’s apparent that the marketshare of cryptocurrencies has incredible room to grow.


Imagine its value once Bitcoin surpasses gold and begins to match the valuation of the stock market. Peter Smith, CEO of Blockchain, and Jeremy Liew, renowned venture capitalist, have projected Bitcoin will reach $500,000 in value by 2030. One thing is for certain, crytpocurrencies are here to stay and we’ve only just begun to see their potential.

Take a look at our Bitcoin calculator to see Bitcoin’s past performance and how a small investment now could mean a large return in the future.

[mk_mini_callout title=”Free Download” button_text=”Get the Ultimate Investor’s Guide to Bitcoin IRAs” button_url=”/resources/investor-guide”][/mk_mini_callout]

Bank of Korea’s paper says cryptocurrencies and Fiat can develop symbiotic relationship

South Korea’s Bitcoin adoption has been on the rise ever since Chinese exchanges stopped withdrawals. While Japan has truly eaten into the Chinese trading volumes, South Korea has secured the fifth spot in terms of trading currencies by volume. The central bank and the financial legislative committee of South Korea have decided to not only adopt cryptocurrencies but also launch a cryptocurrency of their own. While the country is taking a positive yet cautious approach towards digital currencies, they are diverting the good amount of effort in studying them in detail. The result of such research is the recent paper by the Central Bank of Korea that predicts how cryptocurrencies and Fiat currencies would go on to develop a symbiotic relationship. Let’s look into the details of the paper and how they are proposing this would happen:

How cryptocurrencies would be sought after:


Cryptocurrency Art Gallery by Namecoin via Attribution Engine. Licensed under CC BY.

The working draft submitted by the researchers from the Bank of Korea and Seoul’s Hongik University aims to identify factors that could drive the use of a blockchain-based currency over a government-issued one. The paper clearly highlights the cost-effectiveness of cryptocurrencies and point out that it would turn out to be an attractive positive for cross-border transfers. However, while the cryptocurrency’s flagship advantages are being identified as the key factors, we cannot completely rule out the advantages of fiat currencies.

The proposed symbiotic relationship:

The authors proposed that there would likely be a symbiotic relationship if cryptocurrencies like Bitcoin gain a wider user base and good levels of adoption. For example, when the cost of using one currency rises, the other is likely to fall thereby increasing the attractiveness of the other option. While in cases where factors like speed of transfer or any other factor that influences the priority of decisions, either of the currencies might take precedence depending upon the necessity.

The authors wrote:

“High costs of using fiat currency increase the demand for digital currency. Similarly, high costs of using digital currency relative to fiat currency raise the demand for fiat currency. In a world of imperfect currencies with uncertain costs associated with the use of a currency, it is unlikely that the relative costs of using digital currency will be low enough to drive out and accordingly crowd out fiat currency entirely.”

How the findings will assist central banks:

Most of the Central Banks are currently not in a position to regulate or monitor cryptocurrency as the impact of this sphere over the existing monetary system is something beyond speculation. However, the paper gives some insight into how we can expect the future dynamics of crypto and fiat currencies to shape up. The authors believe that the results of their paper can help shape up the future of a composite monetary system across the globe.


One Coin to settle them all?

Hardcore cryptocurrency promoters strongly believe that decentralized cryptocurrency will slowly overtake the established financial system. However, the core of the Bitcoin innovation, Blockchain technology, has gained ready acceptance on Wall Street. Owing to its numerous applications, major banks are moving in on Blockchain to harvest its applications. One of the major problems that has been plaguing major banks is the vastly prevalent high settlement times. To combat the problems presented/could not be solved by legacy technological infrastructure, banks have come together for a Blockchain driven solution. Let’s look into the legacy problems and how banks are implementing ledger based solution:

The Settlement problem:


When it comes to international and inter-bank transactions, the time of settlement is high which holds up the transactions. Even the slow settlement times of credit card transactions fall under this category. Slow settlement times amount to loss of value of transactions due to holding up of the money. This would mean the loss of investment opportunities in time.

Major Banks have come together to minimize the settlement time by harnessing Blockchain with UBS spearheading the initiative. They are using Blockchain based tokens to quickly transfer settlement amounts and later cash them in.

Settlement Coin:


UBS’ Blockchain based “Utility Settlement Coin” is all set to be the next interbank cryptocurrency for quick settlements. BNY Mellon, Deutsche Bank, ICAP and Santander have backed the setup. These banks are more likely to implement it upon a shared common protocol agreed upon. More importantly the banks’ cryptocurrency tokens will be linked to fiat currencies. This would also factor in the connected Blockchain making it easy to have the conversions in various fiat currencies.

The advantages:



The advantages are centered not only around the quick transfers but also quick conversions to local fiat currencies. The banks’ cryptocurrency or tokens could be linked to established national fiat currencies (EUR,GBP, USD, YEN…) to facilitate easy conversion.

Hyder Jaffery, head of UBS strategic investment and fintech innovation commented:

“Digital cash is a core component of a future financial market fabric based on blockchain technologies. There are several digital cash models being explored across the Street. The Utility Settlement Coin is focussed on facilitating a new model for digital central bank cash.”

As today’s settlement and clearing is a process involving many institutions, collaboration is vital for alternatives to current models. Hence UBS has taken the same path for lesser settlement times.