> I don't understand this. Someone is taking the risk right now.
Correct.
> Currently it's the exchanges and merchants directly, because they rely on the exchanges.
Incorrect. There is the solution: https://bitpay.com/ , which automatically does conversion for a small fee. Buyers pay in bitcoin, but sellers receives fiat money(e.g. USD). The risk is taken by bitpay, sellers always receive fixed amount in fiat money, and buyers have the window of 15 minutes to make BTC payment.
"Fiat money" is as I've seen it used a political message, used most often to assumptively introduce the idea that government-backed currency is suspect. But fiat currencies are simply currencies that aren't backed by collateral. To the extent that you believe it's a currency and not a tradable instrument that happens to have interesting barter and liquidity characteristics (right now), Bitcoin is a fiat currency as well.
> But fiat currencies are simply currencies that aren't backed by collateral.
That's the looser definition, the narrower one (from which the name comes) is that that it is currency not backed by collateral but backed by a government's designation of it (by fiat) as legal tender.
Given the absence of significant non-representative non-government-issued currencies prior to modern cryptocurrencies, the looser definition was essentially equivalent to the narrower and naming definition, so there was really no real reason to concern oneself with the difference. Now, though, especially in the context of discussions of cryptocurrencies, its probably better to stick with the narrow definition of fiat to avoid confusion and adopt a different term when something like the broader definition is necessary.
So what's the term for something shadier than fiat currency, something not backed by collateral NOR by government dictate? It should convey all the scorn directed at "fiat currency", but moreso.
About that idea, I say that its false, and relies on misunderstanding of at least what "backed by" means for a currency, and probably a strained view of what are "established laws" of economics, as well.
If a currency is "backed" by something, it means the issuer is willing to exchange it for another resource, usually at a fixed ratio. For example, a gold-backed dollar (when they used to exist) could be exchanged for a certain weight of gold. There is no such thing for Bitcoin.
Bitcoins can be exchanged for the ability to add a new transaction to the blockchain, at the very least. It might be abstract and of questionable value but there is certainly such a thing.
And this is getting a bit whimsical, but why is the gold valuable?
Gold is valuable because once upon a time the government accepted gold as a tax payment. The use of gold as money lasted for so long that people began to think that there was some kind of magic behind gold. Most of today's gold prices are based on belief in that magic.
Within the Bitcoin community, there is a strong need for a term that means "normal money, the kind that gets printed by governments, as opposed to gold, Bitcoins, stock certificates, commodities, and other fungible stores of value".
The community has been using the term "fiat currency" for that. It is, effectively, a new meaning of the word (although VERY closely tied to the older meaning). Unless you have a better term (and can persuade others to use it) you may need to accept this new meaning for "fiat currency" in order to effectively communicate with others.
'Fiat money' in derivation and use means something more and somewhat different than simply 'unbacked by other collateral'. For example, the word 'fiat' alludes to a decree – as in a legislative or military 'fiat' – that the money is valuable and should (or must) be used.
It so happens that the biggest implementation change between plain 'money' (which for a while implied collateral backing) to modern 'fiat money' was the removal of official asset backing, leaving only the government decrees that such money was 'legal tender'. And the theory of why this works relies on the traditional role of government, to enforce behaviors or collect taxes. (Academics discussing 'fiat money' use the term simply as a contrastive category, without the political-implications-of-suspicion you've seen elsewhere.)
But Bitcoin doesn't map easily into the 'fiat money' categorization, either way. No legal authority bootstrapped Bitcoin into money by decree, nor requires its use. Bitcoin is not redeemable by some issuer for some other backing asset... but by Bitcoin's design there is no issuer who could even contemplate such a policy.
And also by design, Bitcoin's limited-supply and counterfeit-resistance make it potentially self-backing, in a manner similar to gold. Gold was the traditional backing for non-fiat monies... and even though gold could circulate as currency, gold was not itself backed by other collateral. The reductionist definition of 'fiat money' as "simply currency that isn't backed by collateral" would make not just Bitcoin but also circulating gold a 'fiat money' – a fairly useless categorization at odds with historical meaning.
So is Bitcoin a 'fiat money'? I could buy the answer 'no' – Bitcoin doesn't affirmatively fit the old category or usage. I could even buy the answer 'mu' – it's so different that it neither fits nor not-fits the old category, so the question is meaningless or irresolvable. But the answer 'yes' requires both an oversimplification of the 'fiat money' term, and premature conclusions about whether Bitcoin will achieve its design goals.
"'Fiat money' in derivation and use means something more and somewhat different than simply 'unbacked by other collateral'."
No, it really doesn't. The "non-governmental money" meaning is the colloquial use that has evolved in the various goldbug/btc nutter forums (I cringe every time I see people flinging around the phrase "convert to fiat" as if it meant something), but "fiat money" means exactly what tpatcek says it does: a money that is not backed by a commodity.
"For example, the word 'fiat' alludes to a decree – as in a legislative or military 'fiat' – that the money is valuable and should (or must) be used."
The word "fiat" is not a military allusion. It is Latin. It means "let it be done", or "it shall be". It is widely used in academic literature (not just economics) to denote any situation that arises by decree. The use is quite old, and it is understood that the entity making the decree does not have to be special or powerful.
This is a case where some people read some economics literature and misunderstood the academic jargon, then started to abuse it.
Sorry, but repeated insistent assertion doesn't convince, compared to the many, many published sources which define and use it differently, and how I've observed it used over many decades, including in primarily academic/policy sources dating to before the era of internet forums.
Some examples of credible 'fiat money' definitions:
Oxford dictionaries: "inconvertible paper money made legal tender by a government decree"
WordNet, Princeton: "money that the government declares to be legal tender although it cannot be converted into standard specie"
Financial Times Lexicon - "Paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver, but made legal tender by fiat (order) of the government."
American Heritage Dictionary of the English Language, 4th Ed. - "Legal tender, especially paper currency, authorized by a government but not based on or convertible into gold or silver."
The legal decree has been an necessary (and usually primary) part of the term for a long time; here's "The Shorter Oxford English Dictionary on historical principals" in 1933:
"fiat money, U.S. money (such as an inconvertible paper currency) which is made legal by a fiat of the government."
It seems you and tptacek dislike the mild slur connotation for 'fiat money' that's grown in some communities since the mid-late 20th century - concurrent with fiat money becoming the dominant form worldwide. You would like to yank the semantic rug out from under these disfavored goldbugs (and now bitbugs), by retconning/refactoring the term into something more simple, with no allusions to what they dislike.
But with over a hundred years' of use where the legal-mandate was a crucial part of its meaning, and a derivation from a word meaning 'authoritative decree', you're going to lose this, both on the matter of past meaning, and its perpetual evolving meaning – especially that the very idea of non-decree currencies is again becoming more salient.
(You're also misinterpreting fiat if you think it means any decree, as opposed to one from an authority with the power to make things so. Look it up! But that's a digression.)
Oh, god. I'm not "misinterpreting fiat"...it's a Latin word, and I gave you the translation.
Cite dictionaries all you like...you'll also notice that all but one of those definitions center on paper money or coins, which is an equally irrelevant detail, unless you mean to imply that US dollars are not actually "fiat money" if they aren't ever printed on little bits of paper.
In other words, stop being a pedant: Bitcoin isn't backed by a commodity of any intrinsic value. The value is decreed by the people who accept it for trade, and Bitcoin shares this property with all other "fiat money". I don't need to convince you of this fact, I'm just here to remind you that you all sound completely ridiculous when you use words incorrectly.
Fiat is now an English word, derived from the Latin, which does not mean the same thing as its Latin origin. But really, look it up. if you don't believe me. That's why we have dictionaries, to help people confused about words!
Dictionaries are not written by goldbugs, and while dictionary definitions vary from each other and from prevalent usage over time, when dozens of sources over 80 years all emphasize the same decree aspect, and you are in fact complaining about people widely using it that same way, then both linguistic prescription and linguistic description agree: that is in fact what it means to competent English speakers.
I fully agree that 'fiat money' also has a strong denotation of 'unbacked', because at its origin and through its history, that always been one of its qualities. But that is in addition to, and often reliant upon, the government fiat – not exclusive of the fiat.
Really, the best clue to the term's origin and traditional use was the oldest I quoted, from a non-American source 80 years ago. It describes 'fiat money' in almost exactly the dimensions that you accuse goldbugs of making-up in recent years, which suggests that instead you are making things up.
And yes, Bitcoin isn't backed by a commodity of other value, and yes, it shares that property with fiat money. If you'd simply said that – it is similar to fiat money in this particular way – you'd be on firm ground. The deception you've attempted is the idea that lack-of-collateral-backing is the defining quality of 'fiat money'.
If people using 'fiat money' in its longstanding sense sound ridiculous to you, it's your stubbornly-eccentric definition that should change.
> But fiat currencies are simply currencies that aren't backed by collateral.
Apparently the definition is open to interpretation, at least if the wikipedia article[0] can be believed:
Fiat money has been defined variously as:
* any money declared by a government to be legal tender.
* state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
* money without intrinsic value.
That's what happens when people hijack words that mean one thing and then use it to mean another; there's a transition period where confusion rules and people argue about definitions. Bitcoin is a fiat currency by the standard meaning of the word, but Bitcoin'ers don't use it that way, it's their fault for creating a new meaning in their community for the word. Fiat doesn't mean government backed, now it does to them, soon someone will add a new definition in a dictionary somewhere and the debate will rage for decades.
Well, in my comment I simply wanted to distinguish between state-run currencies and bitcoin.
> But fiat currencies are simply currencies that aren't backed by collateral
I've checked wikipedia, and one of the definitions for the term "fiat money" is "state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.". Bitcoin clearly doesn't fall under this definition. So your statement is not quite true.
Because one definition doesn't fit doesn't preclude the other from fitting. Bitcoin fits the third definition on your wikipedia page, so it is fiat currency.
How "automatically"? Seconds? Minutes? Hours? In other words, how much time passes between the customer paying X bitcoins, and those are converted into Y USD?
Instantly. Zero exchange risk for the merchant (Bitpay considers their hedging strategies as part of their core-competence-- they don't always convert to USD/Euro/GBP [1], they sometimes stay long bitcoin). All payments for the day are aggregated (in USD/Euro/GBP [1]) and sent to the merchant (as long as it's more than $20, I believe. So it's much quicker than credit cards (and don't forget money from credit cards can be automatically pulled from the merchant account up to 120 later, whereas these ones are irreversible.) [1]Note: This is why it's easier to say "fiat" when referring to national currencies. :)
Correct.
> Currently it's the exchanges and merchants directly, because they rely on the exchanges.
Incorrect. There is the solution: https://bitpay.com/ , which automatically does conversion for a small fee. Buyers pay in bitcoin, but sellers receives fiat money(e.g. USD). The risk is taken by bitpay, sellers always receive fixed amount in fiat money, and buyers have the window of 15 minutes to make BTC payment.