A key disconnect for many is how fiat currencies like dollars can “magically” convert to crypto. If you’re an expert in financial rails, you likely don’t need this article. The motivation here was based on a conversation with some folks who had questions and I’ve assumed others might as well.

Short answer: Sorry to spoil the surprise, but there’s no magic involved. When using fiat-to-crypto on-ramp services that swaps your cash for crypto, value appears when equivalent crypto lands in your wallet. It’s similar as if you trade dollars for a foreign currency at the airport. Except in this case, there’s no government backing of the funds and no guarantees of redemption or liquidity. That’s it! All done! However, for the deep dive, continue…

What Happens to Dollars Going from Fiat to Crypto?

Recall that fiat dollar value comes from government decree (fiat) rather than backed by a physical commodity like gold. For your transfer, someone swaps them and gives you cryptocurrency or tokens, like getting Monopoly money. Your dollars seem gone. But to where?

Your Scenario

You want crypto for whatever reason. You download crypto wallet software. Now your options to acquire crypto include someone just sending it to you, maybe as a gift or payment or other reasons, but you’re new to this, so let’s keep it simple. You’re going to buy crypto via a major exchange or an on-ramp service using your dollars/credit card. (Though not all banks allow this). You might purchase $1000 worth of Bitcoin or Ethereum, or $500 each at current rates. Prices fluctuate relative to your base currency which you use as your benchmark for value.

The Transfer to Crypto

Crypto on-ramp providers, such as MoonPay, Ramp, and exchanges like Coinbase, bridge traditional finance (TradFi) with blockchain networks. They convert fiat (USD, EUR) to cryptocurrencies (Bitcoin, Ethereum) using payment infrastructure. The process: user verification, fiat processing, crypto acquisition, and delivery to wallet. Think of it similarly to an airport currency exchange booth. Instead of swapping dollars for euros, you trade for digital tokens that live in a place called a blockchain. On-ramp providers don’t “mint” new crypto but as custodians/aggregators, they source from existing liquidity: exchanges, OTC desks, or reserves. Legally, they’re Money Services Businesses (MSBs) required to prevent money laundering and protect users. So they don’t magically create crypto; they source from market supplies, inventories, or for stablecoins there is minting by others.

Fiat-to-crypto conversion follows a standard workflows. Typically, you’ll have regulatory Know Your Customer (KYC) questions and Anti-Money Laundering (AML) checks. You’ll select crypto to buy; then the service fetches market prices. You pay via credit/debit cards, bank transfers, mobile (e.g., Apple Pay), or other options. Fiat funds are routed to on-ramp provider’s banks or Payment Service Providers (PSPs). This step mirrors e-commerce but with enhanced fraud detection due to irreversible nature of blockchain transfers.

Summarizing now…

Upon fiat receipt, the provider acquires equivalent cryptocurrency via:

• Drawing from pre-held reserves of their own for instant delivery.
• Executing market buys on partnered exchanges/liquidity providers (e.g., APIs to Binance/Kraken).
• Using aggregators for best rates across venues. (Essentially a swap.)

It’s really just a swap: fiat debited, crypto credited. For stablecoins, direct issuance if authorized; for BTC/ETH, etc. secondary market purchase. Crypto transfers on-chain to your wallet using protocols. Transactions are transparent on blockchain. Delivery is near-instant.

Seriously, Where Does the Money Go?

Example Time: You initiate a $1,000 bank transfer to an on-ramp provider. Funds flow per regulations and payment integrations. Here’s the journey of your $1,000…

The on-ramp provider doesn’t “create” crypto; it sources from liquidity to fulfill order:

• From Reserves: Maintains its own inventory pre-purchased with aggregated prior fiat. Your $1,000 replenishes reserves for instant wallet delivery.
  
• Real-Time Sourcing: If reserves are insufficient or for optimal pricing, buys from partner liquidity sources: Centralized Exchanges (CEXs) like Binance, Coinbase, Kraken, Over-the-Counter OTC desks, market makers, or stablecoin issuers (e.g., Circle for USDC).

For a stablecoin like USDC: Provider sends fiat to issuer (e.g., Circle) for minting/delivery. For BTC/ETH: Secondary market buy. Crypto transfers on-chain to your wallet.

Behind the scenes: On-ramp provider settles with liquidity partners, transferring fiat (including your $1,000) to their banks for crypto. Fees are retained; the principal fiat recirculates (e.g., hedging/other trades). Your $1,000 stays in traditional finance, moving between accounts.

C’mon… Where Did My REAL Money Go?

Fiat Settlements Predominate: For CEXs or OTC desks, on-ramp providers settle in fiat. When users send fiat, the provider aggregates, then transfers to liquidity providers’ banks. In exchange: Crypto goes to exchange custody or user wallet. All use fiat financial rails to comply with regulations, usually requiring segregated client funds and audited holdings.

Who Holds the Original Fiat Money?

Liquidity providers for backed assets keep fiat in various forms, but not as static hoards. It’s actively managed in reserves, balances, and investments for liquidity, stability, and compliance. Requirements vary by type/jurisdiction, emphasizing solvency, especially for stablecoin issuers.

For fiat-backed assets, reserves are mandatory. Valid and legitimate stablecoin issuers maintain 1:1 or better backing: every USDC/USDT equals fiat or liquid equivalents. This ensures par redeemability and prevents de-pegging. Reserves are custodied. Retained fiat isn’t idle. It’s invested in low-risk, interest-bearing assets for yields covering costs, without liquidity compromise.

However, for non-backed assets, (i.e., anything a service isn’t claiming as a stablecoin), no one has to keep any backing funds. This means close to everything else. (Though things change. Real World Assets (RWAs) are not the focus here, but those have some real world backing. Right now, we’re talking about typical cryptocurrencies and tokens.)

It Still Feels Like the Fiat Money Disappeared

Doesn’t it? The sense of fiat “disappearing” in on-ramping is understandable but not quite right. Fiat doesn’t vanish. It’s custodied, managed, and invested in regulated frameworks to stabilize the crypto ecosystem. It’s just not yours anymore. You bought something with it, the same as if you bought stock with a brokerage. This bridges TradFi and blockchain, ensuring traceability, compliance, and redeemability in the case of stablecoins. Funds follow a structured path: receipt by on-ramp provider → transfer to liquidity providers → integration into reserves for ongoing management/cycling.

The illusion may come from blockchain abstraction. Post-conversion, focus shifts to transparent on-chain movements. Yet fiat stays off-chain in banking infrastructure. This boosts efficiency but hides visibility. Think of it like swapping cash for casino chips. Your dollars don’t vanish. They’re locked in the cashier’s vault. You now hold chips (crypto) that work in the casino (blockchain), but the resort (liquidity providers) safeguards your original cash for redemption. Though this metaphor only holds for stablecoins. On the other hand if you bought something else, maybe a lottery ticket. Or a collectible baseball card. It might be worth a lot. Or not. Whatever happens, the store that sold you the ticket or whomever sold you the card does not have to buy it back. The baseball card only has value in the collector ecosystem. The price is 100% market driven. The only cash opportunity is to sell to a next collector. That original provider keeps your original cash, using it for inventory/operations. If you sell these types of assets, you get only what the next buyer bids.

Let’s Make a Token

Let’s make a brand new crypto token! Let’s call it ScottsSuperToken. This is created just by me saying so; creating a Smart Contract that says, “I’ve just made One Billion of these things.” Maybe it costs $50 in fees to deploy the contract. No fiat is involved yet. They’re valueless tokens defined on a blockchain. I could sell some directly for fiat via a crypto Launchpad like Binance Launchpad or CoinList. Upon sale, fiat goes to the project treasury for development/marketing. (In this case, me!) Another way for value emergence is trading with an existing currency. For example, list it on a Decentralized Exchange (DEX) like Uniswap with a pair like ScottsSuperToken SST/USDC. To enable trading, I or early participants add liquidity to the DEX, pairing SST with a base asset like ETH or USDC in a pool (e.g., depositing 1 million SCT plus equivalent value in ETH). This creates a market price based on the automated market maker (AMM) formula, starting at an arbitrary ratio e.g., 1 SCT = 0.001 ETH. Today as I write this, that would be about $0.40, so I’d be risking $400K to start. I don’t have to do this though. I could start with very little, but it might be harder to trade due to low liquidity. Once done, a buyer/trader swaps ETH or USDC for SST. So you see, the token itself may be created out of thin air, but value emergence only happens via direct fiat purchase or trading other currencies which, at some point, were enabled by fiat. And while tokens might not legally be like stock, economically, this is really the same as buying stock.

From an economic perspective, a token’s price and liquidity are sustained by trading assets with fiat inflows (e.g., USDC, BTC from OTC, or fiat-to-ETH on-ramps). Though SST was created without fiat by just me saying so, its value anchors to demand from fiat-entering participants. Economic Reality: Fiat as the Anchor. Traders convert fiat → ETH/USDC via on-ramps (e.g., MoonPay, Coinbase), paying previous holders and creating a value chain.

I hate confusing this, but for completeness: note the if a Libertarian DeFi maximalist read all this, they might argue the value equation could flip, with DeFi dominating in a TradFi collapse. Theoretically possible, but highly improbable near- to medium-term due to structural, economic, and legal realities. DeFi remains coupled and parasitic on fiat for price discovery, liquidity, and utility. However the fiat enters the whole value flow, dollars stay in liquidity providers’ accounts. Again, it’s all similar to plain ole’ stocks.

So It’s Like Exchanging for Foreign Currency

No. It’s not. Well… I mean, sort of, but not really…

Let’s take USD as an example. Exchanging USD for crypto (e.g., SHIB, ETH. whatever) via an on-ramp feels like swapping dollars for euros at an airport booth. But structurally, legally, and economically, it’s fundamentally different. The Foreign Exchange (FX) analogy works for process (fiat → target asset → wallet) but breaks on backing, risk, utility, and finality. Fiat-to-crypto swaps for non-stable assets lack any backing or redemption guarantee. Your dollars pay the previous owner via the on-ramp, but the crypto can drop to zero with no buyback at par. Unlike FX exchanges, where foreign currency is centrally backed and reversible at near-spot rates, crypto is irreversible, blockchain-only, and purely market-driven with total loss potential. (Supposedly excepting stablecoins.) The process mirrors FX (fiat → intermediary → asset), but the outcome is speculative investment, not stable currency conversion. As for the currency itself, exchanges maintain accounts in multiple currencies at their banks, similar to how an import-export company manages multi-currency banking. Therefore, it’s not like crypto which relies on secondary markets for transfers.

For those thinking, “Wait, fiat currencies are not always stable. While far more stable than non-backed crypto, they can and do fluctuate, depreciate, or even collapse due to inflation, policy, or crises, look at some countries where they hold bitcoin for value” that would be correct. However, Fiat has central control and legal tender status. You can always spend a dollar as a dollar. Crypto has no floor. It could be worthless tomorrow, even if your fiat was safely transferred. Even in Venezuela or Zimbabwe, those using BTC to avoid hyperinflation have to convert to fiat for local needs. Most trading volume gets paired to ETH or a stablecoin. Then, besides the tools of central banks, there’s actually laws. Bottom Line: Fiat isn’t perfectly stable, but it’s orders of magnitude less risky than non-backed crypto. (And yes, yes… I get it. There are some that could argue what I just said is completely wrong… that it’s really all the same and fiat will one day be a lot worse than Bitcoin when the world’s financial system takes its next big hit.) But we’re trying to compare/contrast for understanding the difference here, not make philosophical prognostications based on crypto-maximalist ideology.

The Illusion and Risk of Liquidity

Not all crypto assets are equal when it comes to liquidity or underlying value. Stablecoins and tokenized real-world assets (RWAs) have a tangible reference point; a reserve or collateral that ties them to fiat or real-world value. Their liquidity depends on how redeemable that backing remains. (Still, these things live in the “real” world.)

But most cryptocurrencies and tokens don’t have that safety net. Their liquidity is purely market-driven. It exists only as long as there’s a buyer willing to pay something for it. If confidence fades or exchanges delist an asset, its market can evaporate overnight, leaving holders unable to convert back to fiat at any meaningful rate.

This is a subtle but critical difference: liquidity is not the same as solvency. A token can appear “liquid” while its market depth is thin or dependent on speculative demand. For stablecoins and RWA tokens, liquidity is anchored to audited reserves or regulated custodians. (Again, “supposedly.” If an issuer fails through incompetence or fraud, this ‘truth’ might not hold up.) For most other crypto assets, it’s faith-based. Basically a collective agreement that can dissolve as quickly as it forms.

The on-ramps bridge systems, but once across, value stability depends entirely on what you hold and how real its liquidity truly is. This should be understandable because it’s effectively the same as the stock market. (It may be different in terms of legal aspects of ownership and risk, but we’re talking about where money actually “goes” here.) Here’s the nuanced answer: In both crypto and stocks, once you’ve exchanged fiat for an asset, your dollars don’t “sit somewhere” waiting to be redeemed. They’re gone, transferred to the seller or issuer in exchange for your new asset. What remains is the market’s willingness to pay someone else fiat for that asset later. If demand dries up, you can’t exit. This is not because the fiat vanished, but because it’s now in someone else’s hands.

The difference:

• In regulated equity markets, that fiat flows to a company (in an IPO or secondary offering) or another investor. The system is traceable and governed.
• In crypto markets, the fiat may have gone to an exchange’s treasury, a liquidity pool, or another trader, but it’s not “lost,” just reallocated. The disappearance is economic, not literal.

Once fiat enters the market, it no longer “backs” your asset. The asset’s resale value depends on someone else putting new fiat in when you want out.

Wrapping Up

I’ve tried to describe this several times in different ways. Repeating the core idea one last time now: When you buy crypto (or any asset, really, and again excepting stablecoins) your original fiat doesn’t sit somewhere waiting for you to cash back out. It’s been exchanged. In that moment, your dollars move into someone else’s account: a seller, an exchange, or a project treasury. What you hold now is an asset whose future value depends on whether someone else later wants to give you fiat for it. Repeating the one exception: stablecoins, designed to peg to another asset (e.g., USD).

Hopefully this clarifies some of cryptocurrency’s similarities to other assets, even though there are also obvious and subtle differences. But this article isn’t about those many issues, it’s just meant to help clear up issues about how the transfer from TradFi to crypto can happen. Transferring fiat to crypto or back has several moving parts and might be a little complicated, but there’s nothing magical about it. It’s just another business workflow.