Digital currency is the electronic representation of all forms of money, including fiat, virtual, and cryptocurrency.
Cryptocurrency, the latest financial paradigm, is disrupting far more than the money system, with several use cases spanning art, music, alternative banking, and gaming. While the terms “digital currency” and “cryptocurrency” are synonymous, they have distinct meanings and properties. In this article, we will delve into the similarities and differences between both currencies and the major benefits they offer.
All cryptocurrencies are digital currencies but not all digital currencies are cryptocurrencies.
What is Digital Currency?
The term “digital currency” (or “digital money”) refers to any means of payment that exists purely in electronic form. Digital money does not have a physical and tangible form, such as a naira note or a coin, and is tracked and transferred through computerised systems.
Digital money can be adapted to suit various purposes. It is primarily used as a digital representation of fiat money, for instance, when you transfer money from one bank account to another, you are actually transmitting a digital representation of the fiat value. To possess and use digital currencies, digital wallets are required. Numerous fintech organizations that offer financial services typically provide digital wallets similar to traditional bank accounts.
The Growth of Digital Currency The rise of e-commerce and a global network of finance birthed digital currency to facilitate better payments and remittances. Digital currency slowly began to gain acceptance globally in the last few decades as governments implemented mechanisms to promote cashless policy. Banking institutions created ready tools to aid this transition with the inclusion of debit cards. Depositors could access funds and process transactions using mobile apps, short service codes, transfer codes, web-based platforms, QR codes, etc.
Today, the digital currency has evolved beyond the representation of fiat into digitally accessible money. Various types of unique digital currencies have been invented to serve specific purposes, each trying to solve a particular problem that would aid e-commerce. We now have Central Bank digital currencies, virtual currencies, and cryptocurrencies.
Central Bank Digital Currencies (CBDC) are digital forms of a country’s currency issued virtually and backed by the government as a valid means of payment, such as the recently introduced e-Naira by the Central Bank of Nigeria. CBDCs are emerging currencies across the world seeking to reduce the challenges faced with minting paper money and to bring more effective instruments for financial inclusion. CBDCs are centralised, highly regulated, unencrypted and do not promote user privacy.
Virtual Currencies are recognised as the digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. Virtual currencies, unlike fiat or cryptocurrencies, are not widely accepted. They are typically unregulated and are issued by private parties or groups of developers, such as currency in gaming environments or airline miles.
Cryptocurrency is a form of virtual currency, highly unregulated, created by private parties and open to anyone to use or participate in the process of creation on the blockchain. Bitcoin is the first and most widely used cryptocurrency, serving as a model for thousands of other decentralized unregulated currencies on the blockchain. Other types of cryptocurrencies have developed as well, including stablecoins tethered to fiat currencies (e.g. USDT) and corporation-backed coins tied to real-world assets, such as Facebook’s Diem, formerly known as Libra. Popular examples of cryptocurrencies are Bitcoin (BTC), Ripple (XRP), Cardano (ADA), and Ethereum (ETH).
How Cryptocurrency differ from Digital Currencies
1. Encryption: Cryptocurrencies are digital coins or tokens that are created using blockchain technology with ledgers that are publicly verifiable. While cryptocurrency is also a store of value, what distinguishes it from digital currency is that it is secured by encryption.
2. Decentralisation: Unlike fiat and digital currencies issued by central banks, cryptocurrencies have no central monetary authority. Cryptocurrencies, unlike dollars or euros, are not printed; they are “mined” using computers. Rather than relying on a central monetary authority to monitor, validate, and authorize transactions, cryptocurrency is driven by a peer-to-peer computer verification technique called a consensus mechanism. This verification process ensures transaction authenticity and eliminates the possibility of double-spending.
3. Transparency: Most blockchains are open source and are publicly verifiable. The flow and use of cryptocurrencies can be tracked on the blockchain ledger. However, users retain some level of anonymity, and transactions can only be traced by their unique identifiers or wallet address. This makes cryptocurrencies censorship-resistant, despite many attempts from centralised authorities and the government to shut them down.
Advantages of Cryptocurrency over Digital Currency
Similar to digital currency, cryptocurrency eases and expedites money transfers digitally. However, it enables peer-to-peer trade while eliminating the need for centralised intermediaries such as banks. While other digital currencies, such as CBDCs, can be tracked and compromise user information, cryptocurrency users’ data or privacy are at large untraceable.
Obstacles to Widespread Cryptocurrency Adoption
While cryptocurrencies have more appeal and are more profitable than digital money, some are nonetheless susceptible to hackers and fraud. Another challenge to crypto adoption is accessibility. To obtain cryptocurrency, you must use fiat money to purchase on exchanges like VIBRA Africa, unless you have mining technology or getting paid in crypto. Additionally, the cryptocurrency market is highly volatile with a significant level of risk, as you can make extremely huge gains or losses on your investment depending on the market movement.
Final Thoughts Digital currency is a significant innovation in financial technology. It overcomes the limitations of cash money and enables faster and cheaper payment processes. However, it has the attendant problems of technology, as digital money can be hacked and centralised issuance can erode user privacy. Emerging digital currencies like cryptocurrencies offer an additional layer of security, making them more difficult to hack and providing increased anonymity. While cryptocurrency is still in its infancy, it will play a significant role in the future of finance.
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