The distinction between Fiat Money and Digital Currency is razor-thin. The fact that some people currently transact with electronic money supports the theory that digital currencies are poised to entirely replace fiat currencies due to their vast prevalence.
Given the significant hostility from regulators around the world, it will take some time before they make their way into the mainstream. Even as the globe comes closer to a cashless society, few people understand the differences between fiat and digital currencies or cryptocurrencies.
What is Fiat Money, and how does it work?
Fiat money (or fiat cash) is money that has been declared legal tender by a government. Fiat money is a type of currency that is issued by the government and regulated by a central bank.
The value of fiat currencies like the US dollar, pound, euro, and naira is determined by market forces of supply and demand. Because they are not linked to any physical reserves, such as commodities, such currencies are always at risk of becoming worthless owing to hyperinflation.
There is no fundamental value to fiat money. Its value is determined by public trust in the currency’s issuer. Around 1000 AD, China was the first country to introduce fiat money. It was created as a substitute for commodity and representative money.
What is Digital Currency, and how does it work?
A digital currency is one that is solely available in digital or electronic form, rather than in physical form. Digital currencies are intangible, and they can only be possessed and traded through computers or electronic wallets that are connected to the Internet or specified networks.
Digital currencies can be thought of as a superset of virtual currencies and cryptocurrencies because they come in so many different forms. A cryptocurrency is a type of digital currency that use cryptography to secure and authenticate transactions as well as govern and control the generation of new currency units.
The most widely used cryptocurrencies are Bitcoin and Ethereum. Cryptocurrencies are classified as virtual currencies because they are unregulated. There are numerous advantages to using digital currencies, including the ability to make timely payments and decreased transaction fees.