Fiat currency is a type of currency that is declared by a government to be legal tender, meaning it is recognized as an official medium of exchange within a particular country or region. The term "fiat" comes from Latin and means "by decree" or "let it be done."
Key characteristics of fiat currency include:
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Legal Tender: Fiat currency is authorized by the government and must be accepted as a form of payment for goods, services, and debts within the country.
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Lack of Intrinsic Value: Unlike commodity-based currencies (such as gold or silver), fiat currencies do not have inherent value based on a physical commodity. Their value is primarily based on the trust and confidence people have in the government and the economy.
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Central Authority Issuance: Fiat currencies are typically issued and regulated by a central authority, such as a government or central bank, which has the power to control the supply of money, set monetary policy, and maintain stability.
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Legal Protection: Fiat currencies enjoy legal protection, meaning it is illegal to refuse them as payment or to create counterfeit versions.
Fiat currencies are widely used around the world today. Examples of fiat currencies include the United States Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), and many others. The value of fiat currencies can fluctuate relative to other currencies due to factors such as economic conditions, inflation, interest rates, and market forces.
It's important to note that the term "fiat currency" is used to differentiate it from currencies that are based on a physical commodity, such as a gold standard where the currency's value is directly linked to a specific amount of gold.