Crypto enthusiasts and traders have adopted numerous expressions that beginners might not understand. You can often read abbreviations such as hodl, fud, FOMO, and fiat on crypto-related forums and social media groups. While most of them are only tied to this industry, the word fiat actually has nothing to do with cryptocurrency terminology. It’s an expression used on an everyday basis by financial experts to label government-issued money. 

That being said, the expression is very convenient for use on the crypto market. It gives people an easy way to differentiate between digital currency and real-world money by calling currencies such as USD, EUR, AUD, CAD, and other state-issued currency fiat money or fiat currency.

The expression has become immensely popular thanks to the crypto market, and you can hear traders talk about converting crypto to fiat or taking fiat profits all the time. However, as a word, fiat is much older than cryptocurrencies and the current financial market.

Let’s take a look at the etymology of the word fiat, explore its numerous use cases in the English language, and learn how fiat money works.

Hand holding AUD bank notes

Etymology of Fiat

The expression fiat is pronounced ˈfaɪət and dates back to the Bible’s book of Genesis. This is where the word was first documented to be used, as part of God’s commandment “let there be light” or fiat lux, as it translates into Latin. 

Ever since its first use in the Bible, fiat as a word has carried enormous authority and power. In western Europe, especially in Britain, the term was used during the 17th and 18th centuries to signify the seriousness of an official commandment backed by state institutions and the king. When Britain became a parliamentary monarchy, the king and queen passed their “divine authority” to parliament and the government. As the government became the supreme carrier of authority, fiat became associated with official government orders and laws and regulations.

In the 19th century, fiat became more associated with financial laws and regulations. For instance, businesses and people who went bankrupt were described as “fiat in bankruptcy.” This meant that a business was officially bankrupt and unable to operate as an active participant in the market. 

The most famous expression that includes the word fiat, fiat money or fiat currency, was also created at some point in the late 19th century to signify state-issued currency. This was important for creating a unified market system in sovereign states such as the UK. 

Before the invention of fiat money, people paid for goods with either commodity money like gold, silver, and precious metals or with other goods in a barter economy. Introducing fiat currency made it much easier to put a fixed price on goods and services, which was very important for creating a self-regulating, free market, where the price of a product at one vendor couldn’t be much higher or lower than that same product at another vendor. This wouldn’t have been possible without fiat currency.

Use Cases in the English Language

Besides fiat money as the most popular use case for fiat in the English language, Thesaurus and Wiktionary also list multiple other synonyms and use cases for the word.

The most popular synonyms are: authorization, command, decree, dictate, edict, permission, mandate, ordinance, endorsement, sanction, and ukase.

Popular examples of fiat use cases include:

  • Royal fiat.
  • Presidential fiat.
  • To rule by fiat.
  • A government fiat.
  • Judicial fiat.

The word is clearly associated with power from authority and symbolises the unchangeable characteristic of something that is fiat. A royal fiat is obviously a royal order or decree, the same as a presidential or government fiat. Example sentences such as “To rule by fiat” illustrate the definition of fiat as authority and official commandment. 

Fiat Money and Cryptocurrency

Fiat money is more than a century old, but the expression itself became really popular when cryptocurrencies entered the mainstream in the last decade or so. Crypto holders needed a straightforward way of differentiating between cryptocurrency and traditional currencies. The expression fiat currency is ideal for differentiating between the two asset classes.

Fiat money is essential for the crypto market because the value of digital currencies such as Bitcoin (BTC), Ethereum (ETH), and other cryptos is always shown in fiat currencies like US dollars or Euros. When trading cryptocurrency, brokers tend to calculate their gains and losses in fiat currency. Also, when you want to spend your crypto gains on products and services beyond the crypto market, you need to cash out your digital tokens into fiat money

The global banking system doesn’t recognize cryptocurrencies as a legitimate financial asset in the same range as fiat paper money. That’s why crypto traders always need to convert their coins to fiat currency if they want to spend them at stores that only accept fiat money. The situation is slowly changing, with more and more crypto payment cards getting launched and thousands of retailers accepting cryptocurrency payments. 

However, fiat money is still far more popular, especially because it’s backed by governments and central banks. Fiat currency is also far less volatile than cryptocurrencies because governments control inflation, hyperinflation, and deflation. 

A key difference between fiat money and gold is that fiat currency doesn’t have any intrinsic value. It’s only valuable because central banks and governments guarantee its value and use it as a means for providing market liquidity and exchange and recognize it as legal tender. It’s important to note that some fiat currencies such as USD were first based on the gold standard. However, the US government later removed any gold backing from the US dollar and a similar move was made by governments around the world. 

A Few Ending Words…

There’s no way to participate in the cryptocurrency market without dealing with fiat money, so it’s a good idea to understand where the expression comes from, how it’s used, and why fiat currency is essential for the functioning of the crypto market.