The concept is from the days of the classical gold standard.

Suppose you had gold marks and paper marks circulating. Since the two types had different properties, it was basically two types of money, with one paper mark worth approximately the same as a gold mark. The money printers tried to expand the paper marks as much as possible. If they printed too much, the value would diverge. That could be fixed with removing paper money for instance. But when the value diverged too much, the central bank just decided to proclaim that they were the same: A mark is a mark is a mark. In practice, they said (wrote in law) contracts specifying gold marks, could be paid with paper. This is the fiat part. Those laws exist still, but are now irrelevant as the paper money is circulating, and eventual remaining gold money is hoarded.

The point for governments is that their paper money is used, meaning held (which is the source of the value). Their  problem with gold is the same as with foreign paper money. So in addition there are restrictions of other forms of money, for instance you can not hold them, there are taxes on them, cost to create deposit accounts in foreign money and so on. The original fiat (proclamation) is now irrelevant, but replaced with forced cost of transactions in all other money types than the local paper money. (These days of course extended with bank deposits).

So as long as no government has declared that bitcoin is the money that should be used in the land, bitcoin is not fiat.