Fiat Definition

Fiat is government-issued money that holds value because people accept it as legal tender and trust the issuer, not because it is backed by a physical commodity like gold or silver. Examples include the US dollar, euro, pound, and yen.

In modern economies, fiat serves the three classic roles of money: it is a widely accepted medium of exchange, a store of value that people expect to hold purchasing power over time, and a unit of account used to price goods and services in consistent units.

Where its value comes from

Fiat money’s value rests on trust, supply, and demand in the economy, and the issuing authority’s credibility. It is created and managed by a country’s central bank or treasury, which controls issuance and influences interest rates and liquidity. If trust erodes or policy falters, purchasing power can fall.

Legal tender and everyday use

Governments declare fiat to be legal tender, which means it must be accepted for debts and taxes within the country. In daily life, this is the cash in your wallet and the balance in your bank account, used for salaries, bills, and retail payments. Cross-border payments usually require conversion into the destination country’s currency.

How it is managed

Most countries run a fiat system where central banks adjust money supply and interest rates to guide inflation and support growth. This flexibility lets policymakers respond to recessions or overheating, although mismanagement can weaken the currency’s buying power.

Fiat vs. commodity money

Commodity money is tied to a physical asset such as gold. Fiat is not backed by a commodity; its worth comes from government decree and public confidence. This shift away from commodity backing allows a more flexible policy, with trade-offs in stability if confidence drops.

Fiat vs. cryptocurrency

Cryptocurrencies are generally not legal tender and do not rely on a central issuer. Supply rules are written into software and secured by a network, while fiat supply is set by central banks. Crypto transfers can be peer-to-peer and irreversible once confirmed; fiat payments usually run through banks or card networks and can sometimes be reversed. Some countries are exploring central bank digital currencies to blend digital features with state-issued money.