Fiat Currency Meaning & Definition

Key Takeaways

  • Fiat Currency refers to money issued by a government that isn't backed by physical commodities.
  • Its value is derived from trust and the stability of the issuing government.
  • Most modern-day currencies are considered fiat currencies.

Fiat Currency refers to any currency that a government declares to be legal tender for transactions but is not backed by a physical commodity, such as gold or silver.

Instead, the currency’s value comes from the trust and confidence of the people who use it, and the stability of the issuing government.

Definition & Overview

Fiat currency, from the Latin word “fiat” meaning “let it be done,” is based entirely on trust.

Unlike representative money which represents a claim on a commodity, fiat money’s value is not based on physical goods but rather the trust and credit of the economy.

Governments and central banks regulate and manage their fiat currencies, adjusting monetary policy to achieve economic objectives such as controlling inflation, stabilizing employment, and maintaining the value of the currency.

Characteristics of Fiat Money

Fiat money has several unique characteristics:

  • It has no intrinsic value: Its value is not based on physical goods but is determined by supply and demand factors in the market.
  • It is declared by a government to be legal tender.
  • Central banks can regulate and introduce monetary policies.
  • It’s not convertible or redeemable for a commodity, such as gold.

Advantages & Disadvantages


  • Flexibility: Governments can employ various policies to manage the economy.
  • Stability: Not tied to the price of a commodity which can be volatile.
  • Control: Central banks can control money supply, influencing interest rates and inflation.


  • Inflation Risk: If too much money is printed, it can lead to hyperinflation.
  • Trust Dependency: If people lose faith in a nation’s currency, it can collapse.

Comparison to Bitcoin

Fiat money and cryptocurrencies are fundamentally different:

  • Bitcoin is not backed by a central authority or government.
  • Fiat currencies are centralized; Bitcoin operates in a decentralized way.
  • Transactions with Bitcoin may be faster and might have lower fees.

Historical Context

Fiat currencies have been used for over a thousand years.

However, the modern concept of fiat money became more prevalent in the 20th century, especially after the Nixon Shock in 1971, when the US fully abandoned the gold standard, converting the US dollar into fiat money.

Article Sources

BuyBitcoinWorldWide writers are subject-matter experts and base their articles on firsthand information, like interviews with experts, white papers or original studies and experience. We also use trusted research and studies from other well-known sources. You can learn more about our editorial guidelines.

  1. Wikipedia - Fiat Currency,

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