Consider the following, in context of mediums of exchange used in India:

1. Bitcoins

2. Cheques

3. Demand draft

4. Coins

5. Notes

Which of the following can be considered as fiat money?

Solution

The term fiat money or fiat currency is generally associated with a classification of money that has been authorized for use by a country's government. • Statement 1 is Incorrect: Bitcoin is a cryptocurrency. Cryptocurrencies are not legal tender, they have not yet been recognized as a valid form of currency by the Government of India. • Statements 2 and 3 are also Incorrect: Although cheques and demand drafts are often used in banking transactions, they do not fall in the category of fiat money because they can be rejected as the mode of transaction. • Statements 4 and 5 are Correct: Coins and notes are fiat money because the value of the currency notes and coins is derived from the guarantee provided by the Central Government on these items. Every currency note bears on its face a promise from the RBI that if someone produces the note to RBI or any other commercial bank, RBI will be responsible for giving the person purchasing power/value equal to the value printed on the note.