SoFi

The way we handle money is quickly changing. With the rise of apps, online platforms, and cryptocurrencies, people now have more ways than ever to store and move their funds. One tool gaining attention in this evolution is the fiat wallet — a digital wallet that allows you to store fiat currencies (traditional money like U.S. dollars or euros) and easily convert between fiat and crypto.

Fiat wallets are gaining traction due to their vital role as a bridge between traditional banking and the cryptocurrency ecosystem. What follows is a closer look at what fiat wallets are, how they compare to bank accounts and crypto wallets, their benefits and drawbacks, and where they may fit in the future of money.

What Is a Fiat Wallet?

A fiat wallet is a digital account for storing, sending, and receiving fiat currencies. In addition, fiat wallets are typically integrated into cryptocurrency exchanges. This allows you to easily convert your fiat currency into cryptocurrency and vice versa, offering a seamless transition between traditional and digital assets.

Fiat currency is money declared legal tender by a government. It is not backed by a physical commodity like gold or silver but instead derives its value from the trust and confidence people have in the issuing government and its economy. The U.S. dollar is one example of fiat currency; the euro is another.

Fiat Wallets vs. Traditional Bank Accounts

While traditional bank accounts and fiat wallets both hold government issued currency, they serve different purposes.

•   Traditional bank accounts: Operate within the established financial system, offering services like debit cards, check, savings options, and loans. They are regulated, secure, and designed primarily for everyday banking needs. Transfers, however, can be slow — especially when moving money across borders.

•   Fiat wallets: Typically found within crypto exchanges and platforms, fiat wallets are designed for speed and direct integration with digital asset markets. They don’t replace a bank account but act as a staging area where users can deposit cash and instantly use it to buy or sell cryptocurrencies. This makes them less about long-term money management and more about quick access to funds in a digital transaction environment.

Key Differences Between Fiat and Crypto Wallets

A crypto wallet is a holding place for cryptocurrency keys. These keys are passwords that allow you to access and manage various cryptocurrencies, such as Bitcoin and Ethereum. Crypto wallets may be physical, meaning you write your keys down on paper or store it on a hard drive, or you may store your keys digitally. Whatever method you choose, your crypto itself remains on the blockchain.^[1]

By contrast, fiat wallets only hold traditional, government-issued money (like USD, GBP, or EUR). You can link your fiat wallet to a traditional bank account and use the funds in your fiat wallet to interact with cryptocurrency platforms. This allows you to make seamless transitions between traditional and digital assets.

Here’s a look at fiat wallets vs. crypto wallets side by side:

Common Use Cases for Fiat Wallets

Fiat wallets are commonly used as a holding place for fiat currencies before purchasing crypto or after selling digital assets. They are often integrated into or used alongside crypto platforms to facilitate the conversion of traditional currency into digital assets and vice versa.

Here’s how the process typically works:

•   Create a fiat wallet on your chosen platform by providing personal information and ID verification

•   Create a link to your bank account, debit card, or credit card.

•   Deposit money to your fiat wallet using your connected bank account or card.

•   If necessary, link your fiat wallet to your preferred crypto platform and establish a crypto wallet.

•   Follow the platform’s instructions to buy cryptocurrency coins using the money in your fiat wallet.

Once again, the cryptocurrency you buy is stored on the blockchain; the key you need to unlock it is held in your separate crypto wallet.

To sell your cryptocurrency, you would follow the crypto platform’s instructions. The proceeds from the sale are deposited into your fiat wallet. You can then transfer that money to your linked bank account or use it to buy a different coin.

Benefits of Using a Fiat Wallet

Using a fiat wallet can offer a number of advantages. Here are some to consider:

Fast Access to Funds for Trading

In digital markets, timing can be everything. Fiat wallets allow near-instant transfers within digital platforms. That can be particularly helpful for capturing sudden “dips” in volatile crypto markets, where waiting for a traditional bank transfer to clear can take several days and cause you to miss an opportunity.

Seamless Exchange Between Fiat and Crypto

Fiat wallets make it simple to switch between government-issued money and digital assets without extra steps. Instead of moving funds through banks each time you want to trade, you can deposit once into your wallet and quickly convert between fiat and crypto as market conditions change.

Enhanced Convenience and User Experience

Fiat wallets can enhance user experience in a number of ways:

•   They offer a simple interface for managing transactions.

•   Many are already integrated into major crypto exchanges.

•   They allow for quick withdrawals back to a linked account.

•   They provide access to your money at any time and from anywhere.

Potential Cost Savings

Fiat wallets may reduce costs by charging lower transaction fees (compared to repeated bank transfers) and avoiding multiple intermediary steps in the crypto buying and selling process. They may also allow you to avoid currency exchange fees.

Drawbacks to Fiat Wallets

While the benefits are compelling, fiat wallets are not without risks. Here are some to keep in mind:

•   Limited regulation: Not all providers of fiat wallets are regulated like banks, potentially exposing users to risk if a platform fails.

•   Withdrawal limits: Some fiat wallets set caps on deposits, withdrawals, or transactions, which may be frustrating to high-volume users.

•   Platform dependency: Unlike a bank account, a fiat wallet usually ties users to a single platform or cryptocurrency exchange.

•   Security risks: Although providers invest in encryption, cyberattacks and breaches are possible.

How to Choose a Trustworthy Fiat Wallet Provider

Here are some key factors to consider for when choosing a fiat wallet for cryptocurrency:

•   Reputation: Consider established exchanges and fintech companies that are known for reliability and safety.

•   Convenience: Make sure the wallet supports your local currency, accepts your desired payment method, and offers integration with your preferred crypto exchange.

•   Security infrastructure: Look for a wallet that offers strong security features like two-factor and biometric authentication and conducts regular security audits.

•   User experience: A clean, intuitive interface can make regular use much easier.

•   Speed and efficiency: Some wallets may complete transactions at a faster pace than others, offering virtually instant access to funds. That may be important if you want to keep delays to a minimum.

•   Cost: Be aware of any fees you might pay to use a fiat wallet, including monthly or yearly subscription fees, transaction fees, or currency conversion fees.

The Future of Fiat Wallets in Digital Finance

Growing interest in cryptocurrency and digital assets underscores the importance of fiat wallets and their usefulness in connecting centralized vs. decentralized finance. We’ll likely see greater integration between fiat wallets and cryptocurrencies in the coming years as fintech companies continue to challenge the traditional banking narrative.

Trends and Innovations in Fiat Wallet Technology

Here’s a look at some continuing and emerging trends in the fiat wallet ecosystem:

•   Use of artificial intelligence (AI) and machine learning to detect potentially fraudulent activity

•   Biometrics and the use of fingerprint or facial ID to unlock fiat wallets

•   Integration into a broader range of crypto and financial platforms

•   Increased focus on user-friendly interfaces and mobile compatibility

•   Improved regulatory clarity and enforcement, helping to legitimize the crypto industry.

The fiat and crypto wallet market was valued at roughly 1.17 billion in 2024 and is expected to grow to $4.68 billion by 2033, suggesting that more people will turn to both technologies for their financial needs. That may spur even greater demand for tech innovation.

Evolving Role in the Crypto Ecosystem

In the crypto world, fiat wallets are more than just on- and off-ramps — they represent the meeting point between traditional and decentralized finance (DeFi). As regulation surrounding cryptocurrency increases and adoption grows, fiat wallets may serve as the backbone for compliant, mainstream participation in the cryptocurrency universe.

The Takeaway

Fiat wallets are a niche tool that enables users to easily convert fiat to cryptocurrency and vice-versa through crypto exchanges. As technology evolves, they are likely to become an increasingly important link between traditional banking and digital assets.

For anyone exploring the digital economy, understanding how these wallets work can make it easier to move confidently between the traditional financial system of bank accounts and government-backed money and the emerging world of cryptocurrency.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

Are fiat wallets safe to use?

Fiat wallets are generally safe when provided by reputable financial institutions or regulated platforms. They typically use encryption, two-factor authentication (2FA), and other security measures to protect your funds. However, safety also depends on user practices, such as keeping login details secure and avoiding public Wi-Fi for transactions. Always choose wallets with a strong track record of safety and positive reviews.

How do I deposit money into my fiat wallet?

Depositing money into a fiat wallet is usually straightforward. Wallets typically allow transfers via bank accounts, debit/credit cards, or even payment apps. To deposit money, you typically need to log into your wallet, select “Deposit” or “Add Funds,” choose your preferred payment method, enter the amount, and confirm the transaction. The funds should appear in your wallet within minutes to a few business days, depending on the method and your bank.

Can I withdraw money from a fiat wallet to my bank account?

Yes, you can typically withdraw money from a fiat wallet and deposit it into your bank account via electronic transfer. The process usually involves linking your bank account to the wallet, initiating a withdrawal by specifying the amount and destination, and completing any required security verifications. Keep in mind that transfers may take several business days to process.

Can I use a fiat wallet to buy cryptocurrency?

Yes, fiat wallets are commonly used to buy cryptocurrency and are often already integrated with a crypto platform. Buying crypto is often as simple as selecting a cryptocurrency, choosing your fiat wallet as the payment method, and tapping “Buy.” To complete the transaction, you may need to confirm it with a passcode or biometric verification.

Can I convert crypto to cash with a fiat wallet?

Yes, many fiat wallets allow you to convert cryptocurrency to cash. This process usually involves selling your crypto through a connected exchange, then transferring the resulting fiat currency to your wallet. Once the funds are in your fiat wallet, you can withdraw them to your bank account.

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About the author

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Article Sources

1. CT.gov. Digital Wallets.

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Photo credit: iStock/tommaso79

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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We use money to pay for things all the time, yet many of us don’t stop to think about what gives it value. A paper bill or digital balance on your checking account has no real worth on its own. So why does it work? The answer lies in the fiat money system.

Fiat money is currency that has value not because it’s backed by a physical commodity like gold or silver, but because governments declare it legal tender and people trust that it will be accepted. In the U.S., fiat money is simply the dollars and cents we use every day. In the UK, it’s pounds, and in Japan, it’s yen. Below, we’ll explore how fiat currency works, how it came to be, its pros and cons, and what the future may hold as digital currencies rise in influence.

What Is Fiat Money?

Fiat money, or fiat currency, is a form of exchange or legal tender that’s backed by faith in the government, not an underlying asset like silver or gold. You can also think of fiat money as a national or regional currency. Examples of fiat currency include the dollar In the U.S., the pound in England, and the yen in Japan. Fiat money gets its value from public trust in the issuing government, the stability of that government, and the dynamics of supply and demand.

Fiat money is different from commodity money (like gold), which is tied to a tangible good’s inherent value, and digital currencies (such as cryptocurrency), which have no tangible form.

Origin and Meaning of the Term “Fiat”

“Fiat” is a Latin word that means “let it be done,” referring to an authoritative declaration or command. This term was chosen for fiat money because the money’s value is established by a government’s authority, not by its intrinsic worth or a commodity like gold. The value of fiat currency relies on public trust in the issuing government and the stability of the economy, making the government’s authority key to its worth.

Fiat Money vs. Commodity Money: Key Differences

Commodity money is a type of currency that is itself a valuable physical good, meaning it has intrinsic value apart from its use as money. A gold coin is valuable both as money and as gold. Commodity money can be used outside the monetary system. For example, silver jewelry retains value regardless of government policy.

By contrast, fiat money has no intrinsic value. A $20 bill is just a piece of money. Its worth comes from collective trust and the fact that the U.S. government requires its acceptance for payments.

A middle-ground money category is representative money, which once dominated economies. Under the gold standard, for example, paper notes were redeemable for a fixed amount of gold stored by the government. Today, however, almost all natural currencies are purely fiat-based.

Why Fiat Money Has Value

While fiat money is not backed by a tangible asset, people accept it in exchange for goods and services. This is due to a combination of legal authority, public trust, and market forces.

The Role of Government Backing and Legal Tender Laws

Fiat money is backed by the authority of the government that issues it. For example, the U.S. dollar is backed by the “full faith and credit of the U.S. government.”

Legal tender laws specify which types of fiat money are considered valid currency. American law, for example, states that:

“United States coins and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”^[1]

This definition specifically refers to physical currency. Debit cards, credit cards, and personal checks are not included, since they’re payment methods. However, they’re all tied to fiat money.

By this definition, digital currencies are also excluded. While you could technically use a digital currency to pay for goods or services, the currency itself has no backing from the U.S. government and is not legal tender.^[2]

Public Trust and Perception

Ultimately, fiat money relies on trust. People accept dollars, euros, or yen because they believe others will also accept them tomorrow. This collective belief gives the currency stability.

Trust can be strengthened by sound monetary policy, low inflation, and political stability. Conversely, when trust erodes, people may abandon the currency in favor of alternatives such as foreign money, commodities, or even barter.

Determinants of Fiat Currency Value

The value of fiat money is tied to several factors, some of which we’ve already mentioned. The most significant influences include:

•   Public perception and confidence

•   Government stability

•   Economic policies and conditions

•   Supply and demand

It’s the role of central banks to promote economic and monetary policies that are designed to lend stability to the money supply and currency valuations. In the U.S., the Federal Reserve (aka, “the Fed”) is tasked with conducting monetary policy. The Fed manages the value of fiat money primarily by controlling the money supply through three main tools: open market operations, interest rate adjustments, and reserve requirements.

By buying or selling government securities, setting benchmark interest rates, and influencing how much money banks must hold in reserve, the Fed can stimulate or slow economic activity, manage inflation, and maintain public trust in the currency’s stability and purchasing power.

Fiat Money: Past and Present

Understanding the origins of fiat currency can offer a perspective on why it’s become so important today.

Early Examples and Global Development

Asset-backed coins and paper money are believed to have first emerged centuries ago in China. This representative money caught on because people could use it to pay for goods and services — and also redeem it for its underlying commodity. Eventually, the use of physical money spread to Japan and other parts of Asia.

Silver and gold coins were the standard for payment in Europe until the first paper banknote was printed in Sweden in 1661. However, these notes were backed by a government guarantee to redeem them for gold and silver. That likened them to promissory notes, rather than a form of fiat money.

The United Kingdom, and later the U.S., used the gold standard to determine currency values. Under a gold standard system, a country’s money supply is tied to gold. A certain unit of currency is assigned a value based on a certain amount of gold.

The Move from Gold Standard to Fiat Systems

For much of modern history, nations operated under the gold standard, where currencies were tied to a specific amount of gold. This created stability but also limited governments’ flexibility during economic crises.

The turning point came during the 20th century. After the Great Depression and World War II, the Bretton Woods system established the U.S. dollars as the world’s reserve currency, pegged to gold. However, by the early 1970s, mounting economic pressures led President Richard Nixon to suspend dollar convertibility into gold. This effectively ended the gold standard and ushered the global fiat system we know today.

Here’s a look at other notable milestones in U.S. currency history:^[3]

•   1690: First issuance of paper notes in the Massachusetts Bay colony.

•   1739: Ben Franklin introduces anti-counterfeiting measures to stop the illegal reproduction of paper notes.

•   1775: The Continental Congress issues paper money to fund the Revolutionary War; lack of government backing results in a dramatic loss of value.

•   1791: Alexander Hamilton establishes the Bank of the United States to facilitate borrowing and lending for the U.S. government.

•   1861: “Greenbacks” are issued to finance the Civil War.

•   1862: Legal tender notes are issued in denominations of $1, $2, $5, $10, $20, $50, and $100.

•   1913: Federal Reserve Act establishes the Federal Reserve as the nation’s central bank.

•   1971: Nixon takes the U.S. off the gold standard.

Fiat Money in Modern Economies

Fiat money is the standard currency globally. Governments issue fiat currencies, which can be exchanged for other currencies. For example, if you’re traveling to Asia you could exchange dollars for Japanese yen or South Korean won.

The existence of fiat currencies is what powers governments and gives them the authority to direct monetary policy and the broader economy. Adjusting the money supply or interest rates, for instance, can help promote stability in times of economic uncertainty. The more volatile nature of commodities makes commodity money less attractive as a world currency.

While governments can and do maintain gold reserves, the value of the country’s currency is not dependent on that. That also allows for greater flexibility in managing and regulating currency and the money supply.

Advantages and Disadvantages of Fiat Money

Fiat currencies have many attractions, but they aren’t foolproof. Comparing the pros and cons of fiat money can help in understanding its importance and role on the global stage.

Advantages:

•   Flexibility: Fiat money allows for flexibility in managing economic policy and the money supply, potentially reducing the risk of banking disruptions.

•   Efficiency: Unlike commodity money, fiat money does not rely on scarce resources like gold.

•   Support for modern economies: Fiat money enables complex financial systems, credit expansion, and international commerce.

•   Portability and convenience: Paper bills and digital balances are easier to use than heavy coins and bullion.

Disadvantages:

•   Risk of inflation: Without strict limits, governments can over-issue money, eroding value.

•   Dependence on trust: If public confidence collapses, fiat money can quickly lose worth.

•   Potential for mismanagement: Poor monetary policy or political instability can trigger crises.

•   No intrinsic value: Unlike gold, fiat money has no fallback use if confidence collapses.

Real-World Examples of Fiat Money

If you need an example of fiat currency, look no further than your wallet. However, the dollar is just one type of fiat money in existence.

Major Fiat Currencies in Circulation

Most currencies today are fiat money. Some of the most significant fiat currencies include:

•   U.S. dollar

•   Mexican peso

•   Canadian dollar

•   Indian rupee

•   Japanese yen

•   Chinese yuan

•   South Korean won

•   British pound

•   Euro

•   Australian dollar

•   New Zealand dollar

Notable Cases of Fiat Currency Failure

There are several instances of fiat currency failures throughout history. Some of the currencies that have collapsed in the modern era include the:^[4]

•   Zimbabwe dollar (2000s)

•   Belorussian ruble (1990s)

•   Venezuelan bolivar (1990s – present)

•   Russian ruble (1990s)

•   Indian rupee (1990s)

•   German papiermark (1920s)

The collapse of the papiermark after World War I is notable because of the sheer size of the gap between its value and the dollar. In 1923, you would have needed 4.2 trillion German papiermarks to have the equivalent of one U.S. dollar.

Comparing Fiat Money With Alternatives

Fiat money is the primary means by which global commerce operates. However, a new class of digital currencies is on the rise.

Fiat Money vs. Cryptocurrencies

In recent years, digital currencies like Bitcoin have sparked debates about the future of money. Unlike fiat currencies, cryptocurrencies are managed by a decentralized network rather than any government or single authority.

Transactions made with cryptocurrencies are permanently logged on a ledger known as a blockchain. This ledger is viewable to anyone, therefore functioning as a public database. Cryptocurrencies offer a wide range of potential benefits, including faster transaction speeds, lower fees, and greater accessibility. However, they still face challenges, including price volatility, environmental concerns, and lack of regulation. Security risks and limited consumer protection are also ongoing concerns.

Stablecoins, Digital Assets, and Central Bank Digital Currencies (CBDCs)

Stablecoins are digital currencies whose value is tied to another asset. For example, a stablecoin may be pegged to the U.S. dollar. Most token issuers hold assets in reserve so that stablecoin holders can redeem them at any time. Stablecoins may be bought and sold and used as a form of payment for goods and services.

Accessibility and the potential to earn interest on holdings are fueling interest in stablecoins. However, the safety of a stablecoin depends on its backing assets, the transparency and solvency of its issuer, and the security of the wallet used to store it.

One potentially interesting development in the digital currency landscape could be the advent of central bank digital currencies (CBDC) — virtual currencies that are created and backed by a nation’s central bank.

CBDCs sound to some people like an oxymoron because cryptocurrencies, by definition, are decentralized and don’t have an authority backing them. However, more central banks are exploring the possibilities of using them.

The Future of Fiat Money

Fiat money isn’t going away any time soon, but we may see a blend of traditional systems and digital innovation in the coming years.

The Rise of Digital Currencies and Electronic Payments

The use of digital currencies as a payment method is growing. The federal GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoin) Act, which was signed into law in July 2025, opens the door to a regulatory framework that would allow the use of stablecoins as a form of payment. The Act requires stablecoin issuers to hold reserves in U.S. currency and enforces key rules surrounding transparency. It does not, however, convey government-backed status to stablecoins and prohibits issuers from marketing their coins as being backed or insured by the government.

Changing Role of Central Banks

As the number of digital currencies continues to grow, central banks are increasingly forced to pay attention. The uptick in the number of countries exploring CBDCs is evidence that governments are aware of the risks of digital currencies and are seeking ways to mitigate those risks by integrating them into payment systems.

In the U.S., the Federal Reserve recently withdrew guidance for banks related to crypto assets. They also issued a joint statement with the Office of the Comptroller of the Currency (OCC) and the FDIC addressing the safekeeping of crypto-assets by banks on behalf of their customers, creating a clear signal that banks can serve as custodians of digital assets.^[5]

The Fed has also drafted several papers on the pros and cons of introducing a CBDC in the U.S. In the Board’s opinion, a central bank digital currency would represent a significant innovation and offer Americans access to a form of currency with no liquidity or credit risk.^[6]

It’s unclear whether a CBDC will materialize in the U.S., and questions surrounding the risks of CBDCs continue to be obstacles to widespread adoption.

Ongoing Debates on Stability and Longevity

Cryptocurrency’s decentralized nature puts it at risk for wide swings in valuation. Compared to the dollar or other forms of fiat money, digital currencies may see values go up or down dramatically in a short period of time. Lack of government backing means that public confidence can play an even greater role in determining which way a cryptocurrency’s price moves.

Stablecoins are structured to maintain a relatively stable value and reduce volatility by pegging themselves to fiat currencies. However, concerns remain about how to make digital currencies accessible on a broad scale, as well as their overall longevity. Numerous cryptocurrencies have been abandoned for various reasons, but the common thread among them is that they lost all or nearly all of their value. Stablecoins could depeg, moving farther away from their intended value, for a number of reasons, such as illiquidity, regulatory challenges, or tech failures.

Banks are opening pathways with crypto checking and savings accounts that blend traditional banking with digital asset management. They allow you to hold fiat money in an FDIC-insured bank account while storing cryptocurrency in a secure digital wallet. (Keep in mind, however, that crypto assets are not FDIC insured and may lose value.) These hybrid account options may entice more people to explore digital currencies and help push them to the forefront of financial systems in the U.S. and abroad.

The Takeaway

Fiat money is a form of currency, such as the U.S. dollar or the euro, that is not backed by a physical commodity like gold or silver, but is instead given value by a government’s decree. Its value is based on the trust and confidence that people have in the issuing government and its economy. Most modern economies use fiat money, allowing central banks to control economic factors like inflation by managing the money supply.

Digital currencies offer an alternative to the fiat currency system, and are attracting significant interest from governments and the public due to their potential for faster, cheaper transactions, and new financial applications. These newer currency options range from decentralized cryptocurrencies to stablecoins and CBDCs.

Staying up to date on the latest trends affecting fiat currency and digital currencies can help you make informed decisions with your money.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

Why does fiat money have value if it isn’t backed by a commodity?

Fiat money has value because people trust the government that issues it and accept it as a medium of exchange. Its worth comes from legal tender laws requiring its acceptance for debts and taxes, along with widespread confidence in its stability. Unlike gold or silver, fiat currency doesn’t rely on intrinsic value but on collective belief in its purchasing power. This is supported by strong institutions, economic productivity, and central bank policies that maintain confidence in the system.

How does fiat money impact inflation and hyperinflation?

Fiat money gives central banks flexibility to manage the money supply, which can help control inflation when used responsibly. However, if too much money is printed without corresponding economic growth, inflation rises as purchasing power declines. In extreme cases, such as political instability or uncontrolled spending, this can spiral into hyperinflation, where prices skyrocket, and money rapidly loses value. Fiat money’s reliance on government discipline makes inflation risk management crucial to maintaining trust and economic stability.

How is fiat money regulated?

Fiat money is regulated primarily by central banks, which oversee its issuance and circulation. They use tools like interest rates, reserve requirements, and open market operations to control money supply and maintain price stability. Governments also enforce legal tender laws, banking regulations, and anti-counterfeiting measures. Financial institutions also play roles in monitoring cross-border flows and exchange rates. This system of regulation ensures fiat money remains stable, trustworthy, and effective as a medium of exchange in modern economies.

Are cryptocurrencies likely to replace fiat money?

Cryptocurrencies provide decentralized, borderless transactions, but they face challenges in replacing fiat money. Most lack price stability, broad adoption, and government backing, making them less practical for everyday use. Governments also prefer to retain monetary control, which cryptocurrencies bypass.

While digital assets may complement fiat money, offering alternatives for financial portfolios or niche transactions, full replacement is unlikely soon. Instead, central banks are exploring central bank digital currencies (CBDCs), which blend digital innovation with government oversight, bridging the gap between crypto and fiat.

What happens if trust in a fiat currency disappears?

If people lose trust in a fiat currency, its value can collapse because it depends on public confidence rather than intrinsic worth. In such cases, individuals may turn to foreign currencies, commodities like gold, or even barter to preserve purchasing power. Severe loss of trust often leads to hyperinflation, economic instability, and social unrest. Governments may respond with monetary reforms, introducing a new currency, pegging value to a commodity, or adopting international support to restore stability and rebuild confidence.

Why do governments continue to use fiat money over alternatives?

Governments use fiat money because it’s stable, reliable, and flexible. Fiat currencies can be exchanged for goods and services in countries around the world. There’s no need to store large quantities of physical commodities, like gold or silver, that in the past have been used to determine the value of currency.

Governments use fiat money because it provides flexibility to manage economies. Unlike commodity-backed systems, fiat currency allows central banks to adjust supply in response to crises, growth, or inflation. It also simplifies transactions, reduces reliance on scarce resources, and supports modern financial systems like credit and banking. Alternatives, such as gold standards or purely decentralized currencies, limit monetary policy options.

What makes fiat currencies different from digital assets?

Fiat currencies are government-issued, legally recognized as legal tender, and regulated by central banks. They rely on public trust and institutional backing, ensuring broad acceptance for everyday transactions. Digital assets, such as cryptocurrencies, are decentralized, often unregulated, and rely on blockchain technology rather than government authority. While fiat money is relatively stable, most digital assets are volatile and speculative. In addition, fiat currencies integrate seamlessly into traditional financial systems, while digital assets operate outside them, offering new opportunities but also greater risks.

Article Sources

1. Cornell Law School. 31 U.S. Code § 5103 – Legal tender.
2. IRS. Digital assets.
3. U.S. Currency Education Platform. The History of U.S. Currency.
4. Gold IRA Guide. The World’s 20 Greatest Currency Failures.
5. FDIC. Agencies Issue Joint Statement on Risk-Management Considerations for Crypto-Asset Safekeeping.
6. Board of Governs of the Federal Reserve System. Federal Reserve Board announces the withdrawal of guidance for banks related to their crypto-asset….

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About the author

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Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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One of the primary benefits of blockchain-based cryptocurrencies are their decentralized design, meaning control is shared across a network of computers rather than through a central authority. This can allow for peer-to-peer transactions, as well as other potential benefits, such as faster and cheaper transactions and global payments, as well as increased financial inclusion for some.

It’s also important for crypto users to understand the risks associated with crypto assets, including their high price volatility, relatively short history, and evolving regulations. Let’s look at some of the advantages and potential disadvantages of cryptocurrency.

An Overview of Cryptocurrency

Cryptocurrency is a type of digital currency that was created and designed to be used independently of any central agency or owner. It’s decentralized, meaning it operates on a peer-to-peer network. It doesn’t need to be issued by a financial institution or government agency, although it may be in some cases.

Cryptocurrencies are powered by blockchain technology, which is something of a foundational technology on which cryptocurrencies exist. Blockchain itself is more or less a distributed ledger that acts as a record-keeper for transactions, and that is likewise duplicated and spread across computers around the world.

Its distributed, or decentralized, design is largely what gives the blockchain network transparency. If one person makes a change to the ledger, all of the other distributed copies will note the discrepancy. The data on each “block” is also validated by users on the network. That is typically done via “mining” or “staking” methods.

Broadly, cryptocurrency transactions are done through peer-to-peer transfers, typically without the need of a third party. The record of those transactions is then stored on the blockchain, and the data or information validated by the network.

As noted, privacy and transparency are key features of cryptocurrencies, though the specific levels of each depend on the specific blockchain or cryptocurrency in question. Blockchain networks’ decentralized nature simultaneously gives crypto holders and users a level of privacy (they may not be publicly identifiable based on the information on the blockchain) and transparency (via verified transaction history viewable on public blockchains).

Main Advantages of Cryptocurrency

There are some clear advantages to cryptocurrency.

Decentralization and User Control

One of the benefits of crypto is that it can be used to make payments or exchange value between two parties. This can be done independently of any third-party, making the transaction about as straightforward as it can get. It’s similar to handing a dollar bill to a friend on the street.

Protection Against Inflation

It’s possible that some cryptocurrencies may be used as a potential buffer against inflation. Because monetary inflation can occur when central banks and governments print more money (increasing the supply), things that are more scarce tend to appreciate in value. Mineable cryptocurrencies could be an example of that. The Bitcoin protocol, for example, is designed to keep Bitcoins relatively scarce regardless of what happens with monetary policy.

Recommended: Bitcoin Price History: 2009 – 2025

24/7 Market Access and Global Reach

Cryptocurrencies can be bought or sold at any time, day or night. Every day of the year. Stock markets, like the New York Stock Exchange (NYSE), are only open on weekdays during the regular business hours of 9:30am to 4:30pm ET. During nights, weekends, and on holidays, most traditional financial markets are not open for business.

Some of the only things that could interrupt a person’s ability to buy or sell cryptocurrency would be a power outage, internet outage, or centralized exchange outage.

Security and Privacy

As noted, because cryptocurrencies are rooted in cryptography and blockchain security, decentralized cryptocurrencies tend to make for secure forms of payment. As such, the relative security of cryptos may be one of the biggest benefits for users.

Crypto security, in large part, is determined by hash rate. The higher the hash rate, the more computing power is required to compromise the network. Bitcoin is generally considered to be the most secure cryptocurrency, as it tends to have a higher hash rate than other networks.

Note, though, that using a crypto exchange is only as secure as the exchange itself. Many incidents of crypto hacking involve exchanges or wallets being hacked or users becoming victim to crypto scams, such as phishing scams.

Accessibility and Financial Inclusion

Some of the benefits of cryptocurrency extend to people who don’t have access to the traditional financial system. Due to its decentralized nature, one of the benefits of cryptocurrency is that nearly anyone with access to the network can participate in that system.

There are millions of people today who are “unbanked” or “underbanked,” meaning they have little to no access to the traditional financial system. With crypto, however, the only thing those people theoretically need to make transactions is a smartphone. (Though it’s worth noting that Bitcoin mining is banned in China, and that there may be other local rules and regulations to take note of.)

Lower Transaction Costs and Fast Transfers

Crypto transactions can be made easily, generally at a low cost, and in a relatively private manner. Using a smartphone app, hardware wallet, or exchange wallet, almost anyone can send and receive a variety of cryptocurrencies.

Some types of cryptocurrencies can be purchased with cash at a Bitcoin ATM. A bank account isn’t always required to use crypto, so it’s possible that someone could buy Bitcoin at an ATM using cash, then send those coins to their digital wallet or phone. This may be a huge advantage for people who might lack access to the traditional financial system.

Easier Global Transactions

Cryptocurrencies have no sense of national borders. An individual in one country may send coins to someone in a different country, typically without any added difficulty. With some traditional services, getting funds across international borders may take a long time and come with hefty fees. Cryptocurrency may allow users to engage in peer-to-peer transactions from anywhere in the world.

Transparency Through Blockchain

Privacy can be a benefit of cryptocurrency, but crypto isn’t always as private as some people might think. Blockchains create a public ledger that records all transactions forever. The fact that it’s public is what helps ensure transactions are secure, since any changes to the blockchain need to be verified by the broader network. While this ledger only shows wallet addresses, if an observer can connect a user’s identity to a specific wallet, then tracking transactions becomes possible.

Most crypto transactions are considered pseudonymous because of this factor. It’s worth noting, however, that there are ways to minimize the chance of a wallet owner’s identity being revealed. Crypto users may put their assets in multiple wallets, for example, rather than one, and Bitcoin notes that Bitcoin addresses should only be used once.^[1]

Advantages of Cryptocurrency Mining and Staking

Cryptocurrencies utilize “mining” or “staking” to validate their respective blockchain networks and produce new coins or tokens, and that may provide some benefits to participants. For one, those processes help ensure that a blockchain network remains viable and secure. Mining and staking also create economic opportunities for participants in that they may earn rewards.

Further, some cryptocurrency projects take measures to become more efficient or resource-intensive.

One example: “The Merge,” which involved Ethereum moving from a proof-of-work model to a proof-of-stake model, effectively ending mining operations, and instead, adopting a much more efficient operating model. The ability of cryptos to change things up in a big way, and on a widespread, operating level, means that it has another advantage over traditional systems.

Key Disadvantages and Risks of Cryptocurrency

There are benefits to crypto, but there are also some potential drawbacks to consider.

Extreme Price Volatility

Crypto values change fast. That may make some holders uncomfortable, especially if they hope to use crypto as a store of value, or to make a purchase.

Your purchasing power could evaporate in hours, or even minutes, in some instances. Though it could also increase, too. It’s extremely volatile, and that’s the point.

So, while the industry as a whole has seen incredible growth over the past decade, it’s important to keep in mind that markets ebb and flow.

Learning Curve for Beginners

Given that crypto is an evolving space, there can be a steep learning curve for beginners, though that may change as more financial institutions adopt crypto services.

The crypto industry is reliant on many technologies and different types of blockchain services to function. Those technologies often aren’t intuitive, and may require some background research to get a grasp on them.

And once you do have a hold on them, then you need to learn about the different types of crypto, how and why they work.

Limited Long-term Track Record

Crypto has not been around very long. Bitcoin, the first established cryptocurrency, was only introduced in 2009. Compare that to some other financial instruments, which have been around for centuries, in some cases, like loans or bonds.

As such, how and why crypto is used could change. It’s still an evolving technology. Again: Important to keep in mind.

Scalability and Network Congestion Issues

There may be questions as to how well some blockchain networks can scale, or handle an increasing number of transactions as time goes on. Some networks do experience congestion problems, or slowdowns, when many users are trying to utilize it in one way or another.

That’s something crypto users should keep in mind, as it’s possible that these issues could create some problems at some point, such as processing delays.

Security, Hackers, and Scams

As discussed, the crypto space does have security risks to be aware of. There are scammers and hackers in the space, and while the blockchain ledger, in of itself, is in many ways considered highly secure, it’s also possible that some of them could get around certain security safeguards on some networks or crypto platforms, such as accessing wallets to pilfer holdings.

While it’s likely that platforms and crypto holders will get better at keeping bad actors at bay over time, it’s still a good idea for anyone who owns or is otherwise in the crypto sphere to remember that nothing is ever 100% safe.

Uncertain and Evolving Regulations

The rules and regulations surrounding crypto are quickly changing. While crypto was once considered sort of the “wild west” of finance, governments and regulators are introducing guard rails. For instance, as of 2025, a host of new rules and regulations have come into play. Do your best to stay abreast of regulation changes.

High Energy Consumption and Environmental Impact

Crypto mining is resource intensive, and sucks up a lot of energy. That can have an environmental impact, which may be important to some people who are hoping to reduce their carbon footprint. This may evolve over time, but again: Something to keep in mind, and likely worth further researching if you’re concerned about the environmental impact of crypto.

Irreversible Transactions (No Refunds or Cancellations)

Another thing to remember about crypto is that it isn’t like cash or a credit card. If you engage in a transaction, there’s no take-backs. You can’t get a refund (well, it’s possible, but don’t count on it) or cancel your transaction. You won’t have the backing of a large financial institution, either, to help in most cases.

Risk of Data Loss or Losing Access to Wallet

It bears repeating: You need to keep track of your wallet and private keys. If you lose access to your crypto wallet or lose your keys, it’s possible you may never get back in, and you could effectively lose your holdings.

Centralization Risks (Power Concentrated Among Few Holders)

Industries tend to collapse and become more centralized over time, and some note that this is already being seen with Bitcoin, to a certain extent, as it becomes less accessible to those with fewer resources. It’s happened in just about every industry you can imagine. It could also happen in the crypto space. It’s difficult to say what that could mean for crypto users or holders at this point, but again, something to be aware of.

High Participation Costs for Some Networks

Some cryptos and their respective blockchain networks have high associated costs. That is, you may pay high gas fees for executing transactions, or other related fees or costs. While that will depend on the specific network, users should know that it’s possible they’ll need to pay, in some instances, for using a crypto’s network, and that it may be more than anticipated.

Evaluating Different Cryptocurrencies

With so many cryptocurrencies on the market, figuring out which, if any, are the right one for your financial situation could require some homework. Here are some factors to consider when evaluating different cryptocurrencies.

Key Factors to Assess Before Choosing a Cryptocurrency

Before getting granular and assessing one crypto versus another, there are some broad things about the crypto space to keep in mind.

For one, crypto is still a young technology or instrument. The rules are changing, the technology is evolving, so it’s important to stay current with the crypto industry at a higher level, as well as with each cryptocurrency you’re considering buying, holding, or selling.

Weighing the Pros and Cons of Each Cryptocurrency

Some cryptos can be designed specifically for certain projects or uses. Some cryptos, for instance, are designed to work with metaverse projects or games, and can be used to help create in-game assets or tokens.

That’s all to say that each crypto is different, and each has its pros and cons. For instance, some cryptos are much more widely used than others. But they may also have higher associated costs.

Bitcoin and Ether transactions costs can range from a few cents to several dollars or more. Other cryptocurrencies, like Litecoin, XRP, and others, might be able to be sent for less. Payments for most cryptos settle within minutes, and some within seconds. Conversely, wire transfers can cost significantly more, and often take three to five business days to settle.

(Be aware that while SoFi members will soon be able to buy, sell, and hold a selection of cryptocurrencies, such as Bitcoin and Ethereum, other cryptocurrencies mentioned may not be offered by SoFi.)

NFTs and Other Tokens: Special Considerations

NFTs, or non-fungible tokens, are another type of instrument in the crypto space, and may or may not be “cryptocurrencies” as we think of them. Effectively, NFTs are not interchangeable with each other, each is distinct. So, Bitcoins are not NFTs because one Bitcoin is virtually indistinguishable from the next.

Conversely, one NFT is connected to some other asset, such as a piece of art, a legal document, or the ownership rights to something. It can’t be copied, as there cannot be two deeds to a house, for instance.

The point is, NFTs are similar, but not exactly the same. There may be other tokens in a similar vein.

Essential Considerations for New Crypto Holders

If you’re just getting started with crypto, here are some things you should consider.

Understanding Personal Risk Tolerance and Goals

Cryptocurrency can, as discussed, be a part of a whole financial plan, system, or strategy. But how, if, and why someone adds them to their broader financial portfolio will depend on an individual’s own goals and risk tolerance.

Security Best Practices and Private Key Management

You’ll also want to make sure that you’re confident in your ability to keep your crypto safe. You can’t rely on a third party to keep your crypto under lock and key (in some cases), so it’ll be up to you to manage your wallet and keep your private keys, well, private.

You also don’t want to lose your private keys, because it may be impossible to get back into your wallet in some cases if you lose it, effectively locking up your assets forever.

Staying Informed About Market and Regulatory Changes

Also as discussed, the crypto space is evolving. Things are changing rapidly, and that includes which cryptos exist, which don’t, and the rules governing them. You’ll want to do your best to keep track of changes to the crypto markets, and consider how those changes might affect your financial plan.

Avoiding Common Scams and Mistakes

Finally, remember that the crypto space is filled with scammers and bad actors. Keep your head on a swivel, and remember that some things are too good to be true. Similarly, there is a learning curve with crypto, and it’s likely you’ll make some mistakes along the way. Do your homework, think through what you’re doing, and try to learn from mistakes you may make.

The Takeaway

Ease of transactions, accessibility, and blockchain security are among the most important advantages of cryptocurrency. Many cryptos are designed to have unique advantages, even if they don’t have widespread use or adoption yet.

Of course, there are potential flaws as well, volatility being a major risk factor. As with anything, though, those interested in buying, selling, and transacting in crypto would be wise to do their research before getting involved in the crypto market.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

Is cryptocurrency really worth it?

Cryptocurrency can be worthwhile and may have potential benefits for those who wish to buy, sell, or hold assets, or conduct peer-to-peer transactions. It does, however, have associated risk, such as price volatility. As such, crypto users or holders should do their homework before getting in the market.

What is the biggest downside of cryptocurrency?

While subjective, it’s possible that the biggest downside of cryptocurrency is that its value tends to be highly volatile. So, you may use it as a store of value, but it may rapidly lose value. Conversely, it’s possible it could gain value, too. In that sense, it’s unpredictable.

How do I weigh up the pros and cons of each cryptocurrency?

Many cryptocurrencies are similar, but most are their own, unique projects. As such, researching how they each work, what their intended use is, and what the potential drawbacks are for each crypto is a good place to start when weighing pros and cons.

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About the author

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Article Sources

1. Bitcoin.org. Protect your privacy.

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Photo credit: iStock/insta_photos

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

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SOCRYP-Q325-079

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Stablecoins are digital currencies that are designed with the goal of maintaining a fixed, or stable, value. They are structured to function much like fiat currencies, but exist instead on the blockchain. This brings with it several benefits in terms of accessibility, usability, and speed.

There are multiple types of stablecoins, each defined by the mechanism used to maintain the one-to-one value peg to their respective fiat currencies. With broader institutional adoption of stablecoins only just beginning, however, there are still risks to consider with these relatively new digital currencies.

What Are Stablecoins?

Stablecoins are digital coins that maintain a stable value. Most stablecoins are pegged to popular fiat currencies like the U.S. Dollar, Chinese Yuan, or the Euro. Some are pegged to commodities, like gold, too.

How Stablecoins Differ From Other Cryptocurrencies

In theory, a stablecoin could have its value linked to just about anything. However, stablecoins pegged to a fiat currency are the most common. As such, when someone uses the term “stablecoin,” they are most likely referring to fiat currency coins.

In terms of value, the most stable cryptocurrency will, by definition, be a stablecoin. Some of these coins see their values fluctuate by small amounts, but they tend to correct back to their normal value in short order.

If there is any volatility in the value of a specific stablecoin, it’s likely much less than that seen in other types of cryptocurrencies.

The Purpose of Stablecoins in the Crypto Ecosystem

Stablecoins have a variety of potential use cases, but the main idea behind stablecoins is to create a cryptocurrency that is not subject to the volatility experienced by other cryptocurrencies, like Bitcoin and the many hundreds of altcoins. That, in some shape or form, could provide a sense of stability to the crypto ecosystem.

Key Benefits and Drawbacks

Stablecoin transactions tend to be faster, more efficient, and cheaper than conventional payment or money transfer systems. They may allow financial institutions that leverage them to offer lower fees in certain instances as well.

More broadly, stablecoins’ low cost and accessibility to those with internet access or a smartphone may allow unbanked or underbanked groups broader access to financial services, assuming they reside in an area where these cryptocurrencies are permitted. These coins also benefit from the security of blockchain technology.

Stablecoins could also be used as a store of value, as they are often pegged to a currency or commodity.

Conversely, as for drawbacks, stablecoins also don’t have the same consumer protections in place that traditional banks do. Users will need to hold their stablecoin balance via any number of crypto storage methods and the cryptocurrency wallet of their choice.

There could also be a potential lack of transparency regarding their reserves of stablecoins. Auditors must verify that reserve requirements are met, and it’s important to know that these third-party groups are reputable, as well. In other words, it can sometimes be difficult to know whether the company behind the coin actually holds one dollar for each dollar-backed stablecoin.

Why Stablecoins Matter in the Digital Currency Landscape

A stablecoins become more common in the crypto and financial spaces, it’s important to know why, exactly, they matter.

Addressing Volatility in Crypto Markets

As noted, they can play a stabilizing role in the broader markets. They’re stable, as much as a cryptocurrency likely could be. That doesn’t mean that they’re immune from volatility, of course, but stablecoins are designed to be, well, stable. As such, they can provide a sort of ballast in terms of volatility to the larger crypto space.

Use Cases and Real-World Applications

One of the primary use cases and applications of stablecoins, as of 2025, is that they can help enable fast and cheap global remittances, or cross-border transactions.

Traditional bank transfers typically take anywhere from three-to-five business days and can cost anywhere from a few dollars to dozens of dollars. International transfers tend to be the most expensive.

Stablecoin transactions can be confirmed within minutes, or less, and at very little cost. Two people with stablecoin wallets can transact with each other from anywhere in the world at any time without the need for a third-party intermediary.

Additionally, stablecoins could be used in other areas, such as running payroll for international work, or even as something that could dampen volatility in crypto markets, as they tend to maintain a fairly level valuation.

Market Growth and Adoption Trends

Looking forward, it’s likely that stablecoins will continue to grow in terms of usage and adoption in the broader financial space. Within 18 months, total issued stablecoin value more than doubled to $250 billion from $120 billion between early 2024 and mid-2025^[1], and also, more and more companies are looking to adopt or launch stablecoins.

As of September 2-25, 13% of financial institutions around the world use them, and 54% of those that do not plan to adopt them within a year.^[2]

The 4 Types of Stablecoins

Generally, there are four types of stablecoins: fiat-backed, commodity-backed, crypto-collateralized, and algorithmic stablecoins.

1. Fiat-Backed Stablecoins

Some of the most widely-used stablecoins today use a centralized model and back new token issues with fiat currency at a one-to-one ratio. U.S. Dollar Coin (USDC) and Tether (USDT) are examples of this type of coin.

2. Commodity-backed Stablecoins

Some stablecoins are backed by other assets, like gold. The overall functions remain the same, but the value is tied to the current price of gold, with physical gold used as collateral.

3. Crypto-collateralized Stablecoins

Some other stablecoins that use a decentralized model, like DAI, have grown in popularity in the crypto community. Rather than maintaining their stable value through fiat reserves, users can lock up cryptocurrency as collateral for borrowing DAI on the Maker DAO platform.

There are also a growing number of decentralized lending platforms that allow users to deposit DAI or other stablecoins and earn interest. Network consensus, rather than a centralized team, governs DAI (similar to how Bitcoin works), which maintains a value equal to one U.S. dollar.

4. Algorithmic Stablecoins

Decentralized algorithmic coins are a newer technology and differ from the other types of stablecoins in that they don’t involve any type of collateral backing. Instead, they rely on smart contracts to maintain their price.

Comparing Stablecoins Strengths and Weaknesses

The different types of stablecoins are designed for different reasons, and therefore, can serve different purposes. In other words, they may each have strengths and weaknesses, depending on what a user wants to do with them.

So, depending on what a user wants or hopes for out of a stablecoin, those strengths or weaknesses may revolve around a specific coin’s relative stability, its risks related to regulation and centralization, its liquidity, and perhaps even its specific complexity.

Factors Influencing Stablecoins Price Behavior

Getting more granular, there are a lot of things to understand as to how stablecoins’ value is maintained.

How Stablecoins Maintain Price Stability

Stablecoins use a variety of means to maintain their price stability, and that includes various forms of collateralization, as discussed, which means they’re “pegged” to or “backed” by various forms of fiat currency, crypto, or commodities. Smart contracts, housed on blockchain networks, automatically keep stablecoin supply in check by executing trades or burning coins, which evens out with dynamic demand, and keeps values relatively stable.

Algorithmic Price Controls and Protocols

For stablecoins that maintain their value via algorithmic price control mechanisms, the process is similar. An algorithm creates or burns (destroys) coins to maintain a certain level of total coins that reaches a level of equilibrium with supply and demand. That algorithm, accordingly, maintains the stablecoins’ value. Again: Similar to smart contracts, but slightly different.

The Role of Arbitrage and Redemption in Stabilization

Crypto arbitrage, or the act of buying and selling the same stablecoins to try to profit from price differences, along with redemption, or trading in a stablecoin for its equal value in fiat currency, may help level price differences across coins. In effect, these two market factors or mechanisms, in conjunction with algorithmic or smart contract-powered price controls, can help keep a stablecoin’s value steady.

Importance of Transparency and Auditing

Each stablecoin is different, and there can be varying levels of transparency, and auditing associated with each stablecoin. Those differences can make a difference in terms of demand for a specific coin. If a stablecoin A is less transparent or somewhat riskier than stablecoin B, for instance, which would you prefer to use?

Reserve Quality, Transparency, and Auditing

A stablecoin’s reserve can also play a role in influencing its value and behavior. We’ve discussed how some stablecoins are backed by commodities or fiat. If a stablecoin is backed by a low-quality or low-value commodity, such as dirt, while another is backed by gold, that can create some divisions.

Further, there is likely to be some regard for how those reserves are tracked or audited, and how a stablecoin’s value matches up with its underlying reserve. All of that can come into play for stablecoin users.

Regulatory Environment and Evolving Legal Frameworks

The rules are changing around stablecoins, and each country will have its own way of dealing with them. That can and will also have an effect on supply, demand, and values.

Market Confidence, Track Record, and Reputation

There’s been a long-standing issue in the crypto space surrounding scams and rug-pulls, and that can give some users pause when deciding to utilize one coin versus the next. Accordingly, market confidence, track record, and reputation related to a specific coin are important factors.

Liquidity, Adoption, and Technical Reliability

Further, how widely used and reliable a stablecoin is perceived to be can also be important. Stablecoin holders will want to know that they can get their money back — that is, liquidate their holdings if and when they choose to do so — without much effort or friction.

Common Risks and Failure Scenarios

It’s possible that stablecoins could lose their value due to depegging, which is when the price of a stablecoin moves more substantially away from its pegged value. This could result from loss of confidence in the stablecoin or its reserves, panic selling, operational failures, and other factors. There are a number of things that could go wrong, and with the crypto space still evolving and still less regulated than the financial space, users should know that risks exist.

Stablecoins and Their Relationship With Traditional Finance

We’re still in the early stages of stablecoins’ integration into the broader, traditional financial space, and it’s evolving right before our eyes. But there are some use cases to be aware of, such as using DeFi blockchain technology to make loans, and more.

Stablecoins in Financial Trading and DeFi

Stablecoins are becoming a necessary component of the decentralized finance (DeFi) space. Holders can make transactions like peer-to-peer lending — where people make direct loans to each other via blockchain — with stablecoins.

Some users might prefer this option to other cryptocurrencies, which could hurt their rate of return if the price goes down. A stablecoin’s steady value may also add an element of confidence to financial arrangements.

Integration WIth Existing Financial Systems

Stablecoins and crypto are again being increasingly adopted by traditional and long-standing financial institutions. As such, they’ll likely become further ingrained and integrated into the broader financial space.

Centralization vs. Decentralization Considerations

One thing that attracts many users to the crypto space is its decentralized nature, which may allow them to access financial services more easily — from their smartphone or computer — and with fewer and lower fees.

Stablecoins could become more centralized as they’re adopted by bigger players and further integrated into the financial industry. However, this could also allow these groups to offer lower fees in some cases and increase accessibility since fewer intermediaries, if any, may be needed for transactions.

Regulatory Oversight and Compliance Challenges

There have been new rules and regulations floated to help smooth the path for stablecoins’ wider adoption in the financial space. The GENIUS Act, specifically, tasks the Treasury Department to encourage stablecoin innovation and adoption, and lays out which existing laws and regulations that they may be subject to. This is all still being worked out, but in the U.S., it is a change in how the federal government has, in the past, viewed most cryptocurrencies.^[3]

Practical Applications of Stablecoins for Businesses and Individuals

There are numerous potential applications for stablecoins.

•   Cross-border payments and remittances: Money, in its numerous forms, is designed to store and transfer value. Stablecoins can do the same, and perhaps with less associated costs. It can be expensive to make international payments or transfers, but it’s possible stablecoins could provide an alternative.

•   Treasury protection in high-inflation economies: It’s possible that stablecoins could provide some protections from inflation since they’re often backed by treasuries, particularly in places where inflation is a very serious problem. While we’ve had issues in the U.S. related to inflation in recent years, some countries have much higher rates of inflation, and stablecoins could provide ways to alleviate it.

•   Payroll solutions for remote teams and contractors: As discussed, stablecoins may prove useful in facilitating international payments. That could be a boon for business owners operating remote teams, or working with international freelancers or contractors.

•   Ecommerce and settlement: Stablecoins could prove a viable alternative to simple fiat currencies, like U.S. dollars, in certain cases to facilitate other types of purchases.

•   Addressing volatility in crypto markets: As mentioned, stablecoins may serve as a ballast in the crypto markets, lowering overall volatility.

•   Promoting financial inclusion for the unbanked and underbanked: There are a significant number of “unbanked” individuals in the U.S., or those who either choose not to use traditional banking services, or otherwise can’t access them. Stablecoins could bring those people into the fold, or prove a way for them to access the financial space.

The Future of Stablecoins

The future of stablecoins is still up in the air, but they do have momentum.

Emerging Trends and Innovations

Stablecoins are trending, as more and more financial institutions are starting to use them to facilitate transactions, and some will likely issue their own. As that happens, innovation will occur, as well, as users find new use cases or other ways to take advantage of stablecoins going forward.

Potential Impact on Global Finance

We don’t know what’s going to happen, but stablecoins could potentially have a significant impact on global finance. If they do prove successful at offering a quicker and more accessible payment system that can be used worldwide, the implications are wide-ranging.

The Takeaway

Stablecoins are cryptocurrencies that are designed to keep their value stable in relation to another asset — most commonly, an existing fiat currency, such as the U.S. dollar. Issuing these coins on a blockchain may help remove certain barriers to entry associated with traditional, legacy financial systems at large. It also has the potential to provide greater access to financial services to those who may not otherwise have the opportunity to participate in the world of finance.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

What is the most stable cryptocurrency?

Theoretically, any stablecoin should be stable; most of them see their values fluctuate very little on a daily basis. The decentralized and algorithmic stablecoins have experienced somewhat more volatility than the centralized coins, historically.

What are some examples of stablecoins?

There are numerous stablecoins on the market, including DAI, Tether, Binance USD, USD Coins, and Paxos.

Can stablecoins offer protection from inflation?

It’s possible that stablecoins could provide some protections from inflation since they’re often backed by treasuries, particularly in places where inflation is a very serious problem.

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About the author

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Article Sources

1. McKinsey & Company. The stable door opens: How tokenized cash enables next-gen payments.
2. EY Parthenon. Stablecoins: adoption, optimism and regulatory clarity.
3. U.S. Department of the Treasury. Treasury Seeks Public Comment on Implementation of the GENIUS Act.

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