The concept of legal currency

Simply put, legal currency is legal currency, and its value comes from the government of the issuing country rather than any commodity or physical object. The soundness of the government ensures the value of fiat currencies, which is the key to such currencies. Most countries around the world use a fiat currency system to purchase goods and services, as well as invest and save. Fiat currency replaced the gold standard and other commodity-based systems in determining the value of legal currency.

The Rise of Fiat Currency

The origins of fiat currency China centuries ago. China's Sichuan Province began issuing banknotes during the 11th century. Initially, the paper money could be exchanged for goods such as silk, gold or silver. Finally, after Kublai Khan came to power, in the 13th century, a legal currency system was established. And historians claim that excessive consumption of this paper currency and extreme inflation led to the decline of the Mongol Empire.

Europe also began to use fiat banknotes (non-redeemable banknotes) in the 17th century, initially adopted by Spain, Sweden and the Netherlands. However, this fiat currency system did not succeed in Sweden, and the government eventually decided to abandon this system and chose the silver standard. Over the next two centuries, New France in Canada, the American colonies, and the U.S. federal government each experimented with legal paper currency, with mixed results.

In the 20th century, the United States began to return to the use of commodity-based currency on a limited basis. In 1933, the U.S. government ended the practice of exchanging paper money for gold. In 1972, under President Richard Nixon, the United States completely abandoned the gold standard and shifted to a fiat currency system. This has also contributed to the global use of fiat currencies.

Fiat currency vs gold standard

The gold standard system allows paper currency and Exchange between gold. Virtually all paper money is backed by gold held by the government. Under a commodity-based monetary system, governments and banks can only introduce corresponding new banknotes into the economy if they have an equivalent amount of gold reserves. This system limits the ability of governments to create paper money and increase the value of their currencies based on economic factors.

On the other hand, in this legal currency system, banknotes cannot be exchanged for anything else. And the government can directly influence the value of the country's currency through fiat currency and link it to economic conditions. Governments, as well as the country's central bank, have more control over the monetary system, and they can use different tools to respond to emerging financial events and crises, such as creating fractional reserve banking and implementing quantitative easing.

Advocates of the gold standard argue that a monetary system based on mass commodities is more stable because the system is backed by actual goods and values. Supporters of fiat currencies counter that the price of gold is anything but stable. In this environment, the price and value of currencies based on mass commodities as well as fiat currencies will be affected. However, under a legal currency system, the government will have greater flexibility to respond to unexpected economic conditions.

Analysis of pros and cons of using fiat currency

Economist and other financial experts are not all in favor of such a fiat currency system. Such monetary systems are hotly debated by defenders and opponents.

• Shortages: Fiat currency (not redeemable for paper currency) is not affected and limited by shortages of real commodities such as gold.
• Cost: Fiat currency (not exchangeable for banknotes) is easier to produce than commodity currency.
• Responsiveness: Fiat currencies give governments and their central banks greater flexibility in responding to economic crises.
• International trade: Fiat currency is used around the world, making it an acceptable form of currency in international trade.
• Convenience: Unlike gold, fiat currency does not rely on physical reserves that require storage, protection, monitoring, and other expensive necessities.
• No intrinsic value: Fiat currency does not have any intrinsic value. This will allow the government to create money at will, but at the same time it may also lead to hyperinflation and the collapse of the economic system
• Historical risk: From a historical perspective, the implementation of a legal currency system usually has It may lead to financial collapse, which shows that the use of fiat currency does have certain risks.      

Fiat currency vs cryptocurrency

Fiat currency and cryptocurrency have the same properties , that is, they are not supported by physical goods, and this is the only similarity between them. Fiat currency is controlled by the government and the country's central bank, while cryptocurrency is decentralized in nature, and this difference mainly stems from a distributed digital ledger called "blockchain".

 Another significant difference between the two monetary systems lies in their methods of money production. As a representative of cryptocurrency, "Bitcoin" has a limited and controlled supply, but legal currency is completely different. The central bank can issue legal currency out of thin air based on its judgment of the country's economic needs.

As a digital form of currency, cryptocurrencies have no physical counterpart and are not owned by any country, so there are few restrictions on global transactions of cryptocurrencies. In addition, cryptocurrency transactions are irreversible, making crypto transactions difficult to trace.

It is also worth noting that the current cryptocurrency market is still very small, so there is a lot of volatility. This may be the main reason why cryptocurrencies are not yet widely accepted, but it is believed that as the crypto economy grows and matures, volatility will steadily decrease.

Summary

The future of these two systems of currency It's all full of uncertainty. Obviously, cryptocurrencies still have a long way to go and will face more challenges, but they are not going away. Looking back at the history of legal tender, we can also see the fragility of this system's currency. And this may be why more and more people are turning to cryptocurrencies to complete their financial transactions (at least in some aspects).

The main idea behind the creation of Bitcoin and cryptocurrencies is to explore a new form of currency built on a distributed P2P network. The birth of Bitcoin was not to completely replace the entire fiat currency system, but only to provide an alternative economic network, and this economic network is likely to create a better financial system for a better society.