A currency is a national, foreign and international money, both in form cash (in the form of banknotes, treasury notes, coins) and non-cash (in bank accounts and bank deposits), which are the legal means of payment.
There are multiple definitions of currency. Different scientific approaches and different historical circumstances provided the currency phenomenon with at least three popular meanings. The second currency definition is a monetary unit, that is used as a measurement of money used to express prices of goods and services, to establish the denominations of banknotes, to carry out monetary calculations and to determine the value (rate) of foreign currencies. Multiple authors believe that a currency meaning is, in a broad sense, any product that can perform the function of money when making an exchange in the domestic market or the international market.
Different approaches to the definition make it a little tricky to develop a comprehensive description of the currency phenomenon. However, most of the time, everything that is accepted as a medium of exchange is referred to as currency.
For the biggest part of the course of history, all currencies were generally divided in two groups: commodity money and fiat money. Commodity money is money that has a price derived from the value of materials used to issue the money. Fiat money is a money that has no intrinsic value and is backed by governmental obligation to maintain its value.
Contrary to popular opinion, currencies are not and were not always issued by a government. Commodity money can represent the value of widely accepted valuable materials like precious metals (gold and silver), food-related materials like salt, tea or sugar and so on. Fiat money are also able to be established solely due to the public consensus. Such situations sometimes happen within poor communities with no access to government-issued money. These communities can use outdated currencies, banknotes, etc..
However, digitalization of economy provided the new types of currency: virtual currency and cryptocurrency. Virtual currency is a type of currency that is digitally issued and is controlled by its central issuer. Cryptocurrency, on the other hand, is not controlled by any entity and is decentralized, simultaneously maintained by unlimited number of users.
National and international currencies’ symbols are officially developed and registered. Any attempt to manufacture counterfeit money is illegal.
Examples of fiat currencies are:
- Currency of India - rupees
- Currency of Russia - ruble
- Currency of Japan - yen
- International currency of the European Union - euro
- Currency of China - renminbi
Examples of commodity currencies are:
Examples of cryptocurrencies are:
Examples of virtual currencies are:
- In-game currencies like gold in World of Warcraft
- Loyalty programs’ points
- Points bought and earned on digital platforms (Microsoft points, Amazon coin, etc.)
Currently, the most used type of currency is government-issued fiat currency. United States dollar is simultaneously the most traded currency and the most used currency. Euro comes close second in the number of world payments but is almost three times less likely to be traded in foreign exchange.
Fiat currencies are traded on the foreign exchange market, which is the largest market in the world. Foreign exchange trades are mostly performed by the international banks. There are multiple factors that influence currency exchange rates. Some of them are relative purchasing power parity and Fisher effect. Economic and fiscal policies of the respective countries issuing currencies also have a large impact. Conditions of the international political relationships, market psychology and so on also influence the exchange rates greatly.