We often hear cryptocurrency spoken about in comparison to fiat currency. At Alchemy Pay, we say we are a bridge between the two. Here we lay out some key characteristics and differences between the two types of currency.
Examples Dollar, euro, yen
Controlled by Governments and Banks The word ‘fiat’ is Latin, meaning decree or formal authorization. It is considered legal tender by governments around the world. A nation’s government retains influence over their currency by their monetary policy, for example, controlling the supply of the currency or their nation’s interest rates. The value of the currency is considered to be affected by the economic policy of a government’s central bank and the strength of a nation’s economy.
Fiat is issued by the government’s central banks and also is commonly created in the form of credit by commercial banks. The government retains certain rights to control their currency.
Affected by International Borders Because fiat currency is connected to a state it is subject to costs when it crosses borders such as foreign exchange fees.
Physical and Digital Form Over the past decades, civilisation has increasingly moved to the digital form of currency. Nowadays only 8% of fiat currency is physical (notes and coins). The other 92% exists in digital form.
Storage The physical form of fiat — notes and coins — can be stored by an individual, perhaps in their wallet or at home. The digital form of fiat currency cannot be stored by the individual themselves but must be entrusted to a third party, typically a bank or financial institution. It is worth noting that the bank themselves takes ownership of the money that a customer puts in their account. The bank effectively owes the customer that money.
Centralized We consider fiat to be centralized because it is controlled by relatively few groups such as commercial banks and financial institutions, central banks, and politicians.
Examples Bitcoin, ether, solana
Disconnected from Governments and Banks Apart from the case of bitcoin in El Salvador, cryptocurrency is not recognised as legal tender by governments. Crypto is not created or controlled by governments or banks. Instead, cryptocurrency is typically created by individuals who are connected via the internet on global, public blockchain networks. Cryptocurrencies are usually limited in supply or have specific rules to make it deflationary. Many of the processes that are overseen by third parties in the case of fiat, are unnecessary or can be automated in the case of crypto, due to the security and transparency of open blockchain technology.
Borderless Cryptocurrency is a global concept developed with the internet economy in mind. Just as information can cross borders 24 hours a day on the internet, so too can cryptocurrency. It is not connected to regional governments and it requires no foreign exchange fees.
Digital Form Only Cryptocurrencies only exist in digital form. Unlike fiat currencies, crypto is digitally native.
Storage Unlike the digital form of fiat currencies, an individual can maintain direct ownership of their cryptocurrencies, and doesn’t need to keep them with a third party like a bank. A cold wallet is a piece of hardware that allows an individual to keep the ‘private keys’ to their crypto. The crypto, let’s say bitcoin in this case, still remains in the cloud, on the internet, but the cold wallet holds the keys to the individual’s bitcoin. These keys prove to the Bitcoin network that the individual is the rightful owner to the bitcoin that is allocated to their wallet address on the Bitcoin network’s ledger.
A hot wallet is similar in that it contains the keys that prove ownership, but the wallet itself is on the internet and not in physical form. Because it remains on the internet it is considered more vulnerable to hackers than an offline, cold wallet.
Many people will leave their crypto on an exchange like Binance or Coinbase for the ease of trading or to transfer to fiat currency. There is still also the possibility of leaving cryptocurrencies with institutions that offer custody.
Centralized or Decentralized? Cryptocurrency is created using blockchain technology. This form of software provides a trusted, shared ledger of account that allows for more automation of transactions and requires less, or no, trusted third parties. It allows for decentralization by having network participants who spread across the globe hosting and running the network.
In some cases cryptocurrencies are a highly decentralized form of money. Bitcoin is considered to have achieved decentralization by most people. This is because there are tens of thousands of blockchain nodes and miners that govern the network across the world. This is why we often speak about decentralized finance (DeFi) in regards to crypto.
In other cases, cryptocurrencies may be only partially decentralized and intend to evolve to full decentralization. Although rare, some cryptocurrencies are run on private blockchains so they can be controlled entirely by the creators (central bank digital currencies, or CBDCs, will be privately controlled by governments, but that’s another story…)
If you are interested in learning more on this topic we suggest watching the Blockchain Infrastructure Alliance’s Decentralized Discussion between Alchemy Pay’s CEO, John Tan, and Professor Simon Johnson, the former Chief Economist of the International Monetary Fund, in which Professor Johnson describes Bitcoin as “completely and totally decentralized.”