Fiat money is a form of currency issued by a government. Instead of being backed by a physical commodity like gold, fiat is backed by its issuing government. The value of fiat currencies like the US Dollar, Yen, or Euro are based on supply and demand in the market. The majority of contemporary global paper currencies are fiat.
Unlike its crypto or commodity-based counterparts, fiat is largely stable and is heavily controlled. That stability allows regulating bodies and governments to help navigate against recession and inflation. The control of fiat by central banks helps support a stable economy, because banks can better manage economic variables such as interest rates and credit supply.
Despite fiat’s regulation, inflation and recession can still occur. An additional concern is that governments could create hyperinflation by over-printing fiat currency.
The history of fiat currency in the US
Physical currency has existed since at least the 10th century. Specifically in the United States, paper currency dates back to the 17th century. Previously, US currency was backed by gold or silver. With the passage of the Emergency Banking Act of 1933, the federal government stopped allowing the exchange of citizen currency for gold. Since the official end of the gold standard in 1971, US fiat currency has been backed by "full faith and credit" of the U.S. government.
How does fiat compare to cryptocurrency and digital currency?
Fiat is government-issued and considered legal tender for financial transitions. Theoretically, more fiat can be printed at any time and there is no limit on supply. Fiat is also represented by physical bills and coins, where crypto and digital currencies are not.
Cryptocurrency is decentralized and has no governing body to control its value. For most cryptocurrencies, there is a set amount of coins that will ever exist. Crypto also isn’t a legal practice in all countries.
Digital currency is any currency that is recorded and transferred online. This includes digital representations of fiat currencies, like dollars or euros in an online bank account.