We all use currencies on a daily basis. They have a long history that dates back thousands of years.
Currency is standardized money used as a medium of exchange. What first comes to mind when talking about currencies are banknotes and coins.
Nevertheless, money has evolved in the last couple of decades, and now we’re using bank cards and digital currencies almost as much as we use physical money.
We classify currencies into monetary systems where a government provides money in a country’s economy.
By using this classification, we see that there are three types of currencies:
- Fiat money
- Commodity money
- Representative money
We also have alternative types of currencies, such as cryptocurrencies, loyalty points, game credits, and mobile money schemes.
However, there are other classifications of currencies. For instance, we can simply classify currency as banknotes, coins, and money.
Fiat money is the type of currency we use the most. It’s a legal tender backed only by the respective government(s). There’s no gold or silver behind it, and as such doesn’t have any intrinsic or use value.
It’s remarkable to hear this, but fiat money, such as dollars and euros, for example, only has value because we, the people, use it and agree on its value.
Simply put, fiat money is used because of a government decree and wouldn’t otherwise have any value.
This type of currency is issued by a central bank and dates back to 11th century China when government-issued banknotes were first used.
Today, the most used currencies in world payments are:
- United States dollar,
- Pound sterling,
- Japanese yen,
- Chinese renminbi
- Canadian dollar,
- Australian dollar,
- Hong Kong dollar,
- Singapore dollar,
- Swiss franc
As we all know, fiat money does have its share of problems. Hyperinflation is one of the biggest issues that arises from increases in the supply of paper money.
Simply put, by printing a lot of money in a relatively short amount of time, central banks erode the real value of the currency resulting in price increases for all goods.
Hyperinflation can also be caused by a loss of backing when the local currency loses its value when the country’s central bank (or the government itself) can’t guarantee its value.
The most recent example of this is the currency flux in Venezuela that started in 2016 due to the country’s ongoing crisis in the socioeconomic and political spheres.
Commodity money, contrary to fiat money, has intrinsic value as well as its value in buying goods and services. Its value comes from the commodity of which it is made.
There are many examples of commodities that have been used throughout history as means of exchange:
- Cocoa beans
When other forms of money aren’t available or are distrusted, commodities come into play. In Canada, for instance, fur traders used beaver pelt as currency instead of using a barter system.
They introduced a price list that, for example, included the cost of scissors (1 beaver pelt), 5 pounds of sugar (1 beaver pelt), 1 pair of shoes (1 beaver pelt), and 1 gun (12 beaver pelt).
In war-torn countries, cigarettes and gasoline tend to be the main currencies. As recently as 2022, in the Russian-occupied Kherson, citizens are using them to buy goods from other people.
Representative money is also called receipt money. It can be printed or digital and represents something of value. Just like fiat money, it doesn’t have any intrinsic value.
Throughout history, representative money was used as a claim on a commodity. This would be a gold or a silver certificate. They were issued by the US government from 1865-1934 and 1878-1964, respectively.
Other examples include credit cards and checks. They are forms of payment where the intent is to pay at a later date.
Parallel to official currencies, there are scores of alternative currencies worldwide. They are decentralized and, therefore, typically not regulated by governments or central banks.
They can be created by companies and organizations, but also by people. Here are two of the main ones that are also extremely popular around the world.
Digital currencies represent any money, currency, or any other money-like asset that is stored and exchanged completely digitally over the internet.
We have three types of digital currencies:
- Virtual currencies
- Central bank-issued digital currencies
The most well-known and certainly the most talked about type of digital currency is cryptocurrency. Bitcoin and Ethereum are the most popular ones, but there are now more than 20,000 cryptocurrencies and counting.
Every month, hundreds of new cryptocurrencies are launched, although the vast majority of them have limited or even dubious use cases. Many are outright scams.
Cryptos are under pressure from almost all government regulators in the world, even though they aren’t reliant on or even backed by any central authority such as a bank or government.
Because so many people have invested in crypto and so many financial institutions have adopted them, the governments are finally stepping in and assessing whether regulation is needed to protect the users.
In 2021, China, for instance, declared all cryptocurrency transactions illegal, giving a huge blow to the movement.
Virtual currencies are usually associated with virtual communities, i.e., gaming communities such as World of Warcraft.
Central bank-issued digital currencies are inspired by blockchain-based cryptocurrencies and are, as their name says, issued by central banks of various countries.
There are only five CBDCs:
- Digital RMB or e-CNY – People’s Bank of China
- Sand Dollar – Central Bank of The Bahamas
- DCash – Eastern Caribbean Central Bank
- e-Naira – Central Bank of Nigeria
- JamDex – Bank of Jamaica
MMOs have entire economies coupled with their own currencies
Branded currency is another popular alternative to official currencies. They are issued by corporations and feature their brand.
Great examples would be credit card points, airline points, game credits, and similar. Retailers use a combination of loyalty points and digital payments in one mobile wallet or card.
We take money for granted, however, it is going through a renaissance of sorts. Not only are we relying less and less on physical money, but there are also new forms of currencies cropping up as we speak.
Many people tend to think that cryptocurrencies are the future of money. Regardless, the jury is still out, and it is doubtful that they will be right as there are too many serious issues surrounding the space (environmental impact, scams, too complicated for everyday use…).