Fiat currencies are government-issued legal tender, such as the US dollar or the European euro. These currencies are not backed by a physical commodity like gold or silver, but rather by the government's promise to accept them as payment for taxes and other obligations.
Fiat currencies are the most common form of money in the world and are used for the majority of transactions. They are issued and controlled by central banks, which manage the money supply and set monetary policy to achieve specific economic goals.
One advantage of fiat currencies is that they are relatively stable. Central banks can use monetary policy tools, such as interest rates and quantitative easing, to maintain stable prices and avoid hyperinflation. This makes them a reliable store of value and a convenient medium of exchange.
However, fiat currencies are also subject to government control and manipulation. Central banks can print more money to stimulate the economy or to pay off debt, but this can lead to inflation and loss of purchasing power. Additionally, governments can impose capital controls, such as restrictions on the amount of money that can be sent abroad, which can limit individuals' financial freedom.
Other ways of banking include the use of digital or cryptocurrencies, which are decentralized, digital forms of money that use blockchain technology for secure and transparent record-keeping. These currencies are not issued or controlled by any government or central authority and are not subject to inflation or capital controls. However, they are highly volatile and not widely accepted as a form of payment yet, making them less practical for everyday use. This is beginning to change though, one example being El Salvador adopting Bitcoin as legal tender.