Definition ∞ Fiat tokenization is the process of representing traditional fiat currencies, such as the US dollar or Euro, as digital tokens on a blockchain network. These tokens are typically pegged 1:1 to the underlying fiat currency and are backed by reserves held by a centralized entity. This mechanism enables the benefits of blockchain technology, like faster transactions and programmability, to be applied to conventional money. It bridges traditional financial systems with decentralized infrastructure.
Context ∞ Fiat tokenization is a critical area of development and discussion in the digital asset space, particularly with the rise of stablecoins and central bank digital currencies (CBDCs). Regulators are increasingly scrutinizing the reserve backing and operational transparency of fiat-backed tokens to ensure consumer protection and financial stability. The future involves greater integration of these tokenized assets into mainstream financial services and cross-border payment systems.
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