Do prisoners use fiat paper money?

Of course not.

In an article posted at Mises.org way back on June 3, 2009, Chris Casey explains:

Since money is banned in prisons, the historical use of cigarettes by prisoners as money avers that money requires alternative value (i.e., value apart from its use as money) and proves that our present system of fiat currency (and fractional-reserve banking) is eventually doomed.

Prisoners exchange cigarettes for sex, drugs, gambling, and the killing of other inmates (all other recreational activities being provided free of charge by taxpayers). The cigarettes hold alternative value through their direct consumption (smoking). . . .

Fiat money does not exist in prison. Prisoners do not dye sheets of paper green and attempt to circulate them as money. No inmate would accept this as money, not even if the penal equivalent of a Bretton Woods agreement existed between the toughest gangs.

Why is it that criminals continue to use real money in their transactions? Because they have not been fooled otherwise. . . .

Incredibly, it is those outside of prison who are truly institutionalized.