Fiat is a Latin word meaning let it be done. It is generally used to mean a decree by an authority. The term fiat money means some authority decreed a certain type of money to be valid currency.
By definition, money is used broadly as a medium of exchange by some form of community-wide agreement. Any form of agreement – formal or informal – requires a let it be done declaration of some kind. So, in this sense, ALL money is fiat money.
However, the term creates confusion because it is now commonly used to mean one of two completely different money systems, giving the name to each in reference to a single, but different, aspect. According to the common understanding, such as information on Wikipedia,6 fiat money has two different meanings:
Fiat money means No marketplace or commodity value
For some fiat money means a money that has no marketplace commodity value – it “represents nothing at all.” Commodity or not is a discussion about one aspect of money: the token used. So making this distinction the defining characteristic of a system for today is not particularly useful. There are more accurate ways to name non-commodity money described in this chapter.
Fiat Money means legal tender
For some, when fiat is used to name a money system, it is used to mean a money system chosen by an authority and imposed by law on a community. So, it is in essence, not about the kind of money system; it is about the kind of governance – how the decision to use a particular money is made and whether using it is optional or required. For example, the US dollar is considered a fiat money, because it is legal tender and everyone in the nation is required to accept it as a form of payment. Bitcoin on the other hand, is not considered a fiat money, because anyone can choose whether to use it or not. When the decision is made cooperatively, or by a choice to opt in, then it is not considered fiat money by this definition.
Our thinking and desires about who rules – who gets to issue the fiat that makes money into money – is evolving. It is an agitated and dynamic process with a significant impact on all our lives. So, it is understandable the concept of fiat is what matters most to many. However, it’s just not the best way to name a money system, since it applies in one way or another to all money systems.