What Is Fiat Currency?

Fiat currency is government-issued money not backed by gold or commodities. Learn how it works, where it’s used, and how it compares to crypto.

What is fiat currency?

If you’ve come across the term fiat currency while reading about economics, central banks, or cryptocurrencies, you may be wondering what it means. This guide is written for everyday consumers, investors, business owners, and students. It explains what fiat currency is, how it works, and how it differs from other forms of money like gold or digital assets.

Fiat currency: definition and meaning

A fiat currency is a type of government-issued money that is not backed by a physical commodity such as gold or silver. Instead, it derives its value from the trust and authority of the issuing government and central bank.

The term “fiat” comes from the Latin word for “let it be done,” reflecting the idea that the currency has value because the government declares it as legal tender.

Examples of fiat currencies include:

  • Pound Sterling (GBP)

  • US Dollar (USD)

  • Euro (EUR)

  • Japanese Yen (JPY)

  • Indian Rupee (INR)

All of these are accepted because people have confidence that they can be used to pay for goods, services, taxes, and debts—not because they are backed by something tangible.

How fiat currency works

Fiat currency functions as a medium of exchange, store of value, and unit of account. Its value is not intrinsic, meaning the paper itself (or digital record) has no value beyond what it represents. The system works because:

  • Governments declare it as legal tender for payments and taxes.

  • Central banks control its supply, adjusting interest rates and printing money to influence inflation and economic growth.

  • Public confidence supports its continued use and value.

For example, when the Bank of England prints a £20 note, it doesn’t represent £20 worth of gold or silver. Its value comes from the collective agreement and trust in the UK’s financial system.

Fiat currency vs. commodity money vs. cryptocurrencies

Type of Money Backed By Example

Fiat currency Trust in government and law USD, GBP, EUR, JPY

Commodity money Physical assets Gold coins, silver bars

Cryptocurrency Decentralized algorithms Bitcoin, Ethereum

  • Commodity money has intrinsic value due to the material it's made from.

  • Fiat currency has no intrinsic value but is stable and widely accepted.

  • Cryptocurrencies are decentralised and operate independently of governments, often with limited supply and blockchain technology.

Advantages of fiat currency

  • Flexibility: Central banks can adjust supply and interest rates to manage inflation and economic cycles.

  • Convenience: Easy to use, store, and transfer both physically and digitally.

  • Global stability: Widely accepted and trusted for domestic and international trade.

Disadvantages of fiat currency

  • Risk of inflation or hyperinflation if governments overprint money or mismanage policy.

  • No intrinsic value: Its worth depends entirely on public confidence.

  • Currency depreciation: Value can fall sharply against other currencies or assets in times of crisis.

Is fiat currency secure?

Generally yes, when managed responsibly. Most modern economies rely on fiat currency systems, supported by:

  • Independent central banks (e.g. the Bank of England, European Central Bank, US Federal Reserve)

  • Strong legal systems

  • Regulated banking infrastructure

However, in countries with political instability, corruption, or excessive money printing (such as Venezuela or Zimbabwe), fiat currency can lose value rapidly, eroding savings and purchasing power.

FAQs

Why is it called fiat currency?
Because its value is declared (“fiat” in Latin) by government order, rather than being tied to a physical commodity.

Is fiat currency backed by gold?
No. Most countries abandoned the gold standard in the 20th century. Fiat money is not backed by any physical asset.

Is cryptocurrency a fiat currency?
No. Cryptocurrencies are non-fiat, decentralised digital assets that are not issued or controlled by any government.

What happens if a government loses control of its fiat currency?
It may lead to inflation, devaluation, or collapse of the currency. In such cases, people may turn to alternative stores of value like gold, foreign currency, or crypto.

Real-life example

In 2008, the US Federal Reserve injected billions of dollars into the economy during the financial crisis—something only possible with fiat currency. This flexibility helped stabilise the economy but also raised concerns about long-term inflation. In contrast, under a gold standard, such monetary expansion would have been impossible.