Cryptocurrency vs Digital Currency vs Traditional Fiat Difference
It is not necessarily a straight path when you’re looking to tell the difference between digital currency vs cryptocurrency. Many online publications have also not helped in this regard as they use these terms interchangeably and add to the general confusion. But it doesn’t have to be that way. The incontrovertible truth is that they are not one and the same.
Although similar in some ways to cryptocurrencies, digital currencies are different. Knowing how they differ will certainly help us make better-informed decisions as we look to take a run at the market too. This guide will clarify what those differences are, how this relates to traditional fiat currencies, virtual currencies, and more.
What is the difference between digital currency and cryptocurrency?
The difference between cryptocurrency and digital currency is actually marked even though many use them interchangeably. If you are a beginner, then take cryptocurrency classes first. Next, we can continue with a working definition for both currencies after which we will look at the differences in a little more detail.
Digital currency refers to any currency or money-like asset managed, stored, and exchanged on a digital system, such as cryptocurrency exchanges. It is the electronic version of currency notes and coins and can be transformed into cash by using an ATM. It can also be understood as intangible cash which aids contactless transactions between parties.
On the other hand, cryptocurrency is a digital asset that is used as a store of value and secured by cryptography. It runs on blockchain technology, is limited in supply, and has a wide range of use beyond just buying and selling. There are a variety of cryptocurrencies. Some of the most popular are Bitcoin (BTC), Ethereum (ETH), Litecoin, Dogecoin, Cardano, etc. Cryptocurrency qualifies as a sub-type of digital currency. For more details, you can read our previous blog post cryptocurrency 101. For traders and investors we have another piece you should check out: Best cryptocurrency to invest in.
To delineate the difference between cryptocurrency and digital currency, we must examine each currency type against its features, specifications, and uses. The biggest digital currency and cryptocurrency difference is e-cash vs blockchain technology. But let’s discover all differences in detail.
Legality
There is a legal framework guiding the use of digital currencies in many countries. Examples are the Directive 2009/110/EC in the European Union, and Article 4A of the Uniform Commercial Code in the United States. Contrarily, cryptocurrencies are banned in several countries while in many others, the status is either not defined officially or the legal framework for their use is still being developed.
Bitcoin for example is a legal tender in El Salvador. As the Economist stated, the World Bank and the IMF have warned against the adoption. But according to CoinMarketCap, more countries such as Paraguay, Venezuela, or Anguilla may follow soon. And as the Wall Street Journal stated, time will tell, rather the young wild or the old gray bankers in New York will win this “war” in financial services.
While differences exist between digital currencies and cryptocurrencies, there are more marked differences between cryptocurrencies and traditional currencies. There is also a difference between digital currency and traditional currency and we will next consider this.
Digital currency vs traditional currency differences
Traditional currency is what is also known as fiat currency e.g the U.S. Dollar, Euro, Pounds, etc. It is unlimited in supply, inflationary in nature, and is the generally accepted means of exchange. The supply, though infinite, is held via bank accounts on different computers. Interestingly, even traditional currency when it is reserved in bank accounts is termed a digital currency.
In the actual sense of the world, fiat currency is the physical form of a currency and issuance is by the government or central authority and is generally considered to be stable. It is a digital currency if it is simply held on computers/ digital wallets.
Over time, fiat currencies become subject to inflation, and their value declines. In addition, physical fiat is vulnerable to theft, loss, or getting destroyed and continues to be one of the most popular tools for money laundering globally.
Differences in Digital Currency
1. Scalability
While there is growing adoption of cryptocurrencies daily, the number is still dwarfed by the number of transactions processed each day on payment systems. Additionally, the speed of transactions on blockchain shows there is still a need to scale the infrastructure with which the transactions are delivered. Scalability within cryptocurrency means the limitations of the blockchain for the processing of multiple transactions. As already described, individual transactions are collected in a block. The maximum size of a block is clearly defined in the underlying protocol. The general conditions of the block size and block generation of the protocol limit the average block generation time to 10 minutes and the maximum block size to 1 megabyte.
However, several solutions have been suggested to combat this limitation including lightning networks, sharding, and staking.
Bitcoin, like Ethereum, places great emphasis on ensuring that each blockchain records Bitcoin transactions and Bitcoin ownership at all times without any help from a central authority. However, as the number of users increases, it becomes increasingly difficult to maintain a balance between decentralization and accurate recording. Especially with regard to the day-to-day usage of Bitcoins for payment within apps, it is currently unlikely to record each payment directly, decentralized, and accurately within the Bitcoin blockchain.
The difficulty lies in the way the proof-of-work approach works. The Bitcoin protocol is dependent on all network participants for “processing” the generated blocks. With the growing popularity of Bitcoin and the everyday use of Bitcoin, the number of blocks would increase enormously, which would increase the average time needed to complete a transaction.
To counteract this slowdown of the protocol or to speed up the protocol, even more, the size of the individual blocks would have to be increased to be able to verify more transactions within a block. However, as the block size increases, there is a danger that only a few participants — the large Bitcoin Miners worth millions — will be able to dismantle large blocks in a short period of time. As a result of this increasing focus on verification sovereignty in the Bitcoin protocol, decentralization is gradually being lost.
2. Cybersecurity issues
Although more secure than traditional payment systems, cryptocurrencies can also be subject to cybersecurity breaches. This can be mitigated by constantly updating the security infrastructure and enhancing cybersecurity measures.
3. Price volatility and lack of inherent value
Cryptocurrencies, it has been argued, lack inherent value, and this is a major problem as it will continue to cause fluctuating prices. Also, because the crypto market thrives on speculation, bad news tends to send prices hurtling. In addition, large currency holder risks, security concerns, and high-profile losses all contribute to the high volatility of cryptocurrency. This can be overcome by linking the cryptocurrency value directly to tangible and intangible assets.
4. Regulations
For different reasons, countries continue to see cryptocurrencies as a challenge. As long as the governments of countries consider cryptocurrency a challenge to their economy, regulations, and regulators will continue to severely hamper the growth and advancement of the coin.
Differences in Traditional Currency
1. Control
Control is shared between fiat holders and their banks in matters related to finances and privacy with a bank. The bank, in a case of suspected foul play, retains the right to freeze the fiat holder’s account.
2. Transaction fees
The transaction fee is the expense a business pays for processing an electronic payment for a customer’s transaction. Intermediaries raise the transaction fees that accrue to users when conducting business and this is particularly true with traditional currency unlike with cryptocurrencies when the typical charge is 0.1% to 1%.
3. Vulnerability
Over time, traditional currencies are known to undergo transactions and lose value. Physical fiat is also vulnerable to theft, loss, or getting destroyed — it can be very difficult or impossible to recover.
Is there a difference between digital currency and virtual currency?
In 2012, the European Central Bank defined virtual currency as a ‘type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.’ In 2013, the US Department of Treasury defined it more succinctly as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”.
It is best to understand digital currency as the superset that includes virtual currency, which also includes cryptocurrencies. This means that a digital currency covers a larger group when compared to virtual currencies. This group also includes monetary assets in digital form.
Digital currency can be regulated or unregulated. When it is regulated, it can be denominated in the digital form of a country’s currency issued by the Central Bank in place of its fiat currency notes. When it is not regulated, then you have a virtual currency. Instead of a Central bank, it is issued and controlled by a private issuer and is not subject to any monetary policy. It can either be centralized or decentralized and contain cryptography algorithms or not.
Because virtual currencies are not regulated, there is concern that they can become a tool for fraudsters. A US government-funded report on the ‘National Security Implications of Virtual Currencies’, published in 2015 pointed out that ‘non-state actors’, including terrorist and insurgent groups, may exploit virtual currency by using it for regular economic transactions.”
Digital currency vs cryptocurrency vs traditional currency comparison
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1. Authority for Digital Currency and Cryptocurrency
Generally, digital currencies have the backing of a central bank which is usually the Central Bank or Federal Reserve of the nation. Some countries have even started work on a Central Bank Digital Currency (CBDC) which uses distributed ledger technology. The bank retains the authority to monitor all transactions that happen within the system and can freeze accounts they deem to be guilty of violations. This is unlike it is with cryptocurrency where decentralization is the practice, and there is no need for a third party to maintain control and authority over the investors.
Winner: Traditional Fiat currency
2. Digital Currency vs Cryptocurrency Structure
While digital currencies are centralized, cryptocurrencies run on a decentralized and distributed system. What this means is that while digital currencies, like fiat, have a central authority that formulates policies and determines how the currency works, for cryptocurrencies, there is a transfer of control and decision-making from a centralized entity (individual, organization, or group thereof) to a distributed network.
For example, the government of China after banning cryptocurrencies started work on its own central bank digital currency. That’s a centralized structure in play. Unlike cryptocurrencies where transactions are conducted and kept in a network of nodes that are not managed centrally or in a decentralized system that allows users to connect peer to peer.
Winner: Cryptocurrency
3. Encryption of Digital Currency vs Cryptocurrency
Possibly the most easily observed difference between a digital currency and cryptocurrency is related to encryption. While digital currencies are not encrypted, cryptocurrencies are secured by encryption. With digital currencies, individuals have been known to lose their money and assets to hackers who find a backdoor into the system. This is unlike cryptocurrencies which are secured by cryptographic protocols.
Winner: Cryptocurrency
4. Digital Currency vs Cryptocurrency Transparency
While a digital currency transaction (e.g a credit card purchase) is transparent, cryptocurrencies bring transparency to a whole new level. Because cryptocurrencies are built on blockchain technology, each user is assigned a public address that is completely open, so anyone can view their holdings and transactions at will. This is an unprecedented level of transparency and it’s only possible with a cryptocurrency.
Winner: Cryptocurrency
5. Anonymity when using Digital Currency or Cryptocurrency
Most digital currency accounts require you to complete a user identification. This will often include a passport photograph of yourself and certain other identifying documents depending on your country’s public authorities. Cryptocurrencies on the other hand though transparent guarantee anonymity. Of course, all transactions are tracked but the system doesn’t require any personal identifiers before transactions can be completed.
Winner: Cryptocurrency
6. Digital Currency or Cryptocurrency for Security reasons
Between digital currencies and cryptocurrencies, cryptocurrencies are considered more secure due to the cryptographic protocols that undergird their use in transactions. Your cryptocurrency is kept in a digital wallet. This is accessible with a private key that is unique to every user. As long as the private key is kept securely, your cryptocurrency remains safe.
Winner: Cryptocurrency
7. Regulation of Digital Currency and Cryptocurrency
Digital currency and cryptocurrencies are less regulated than traditional fiat currency. Regulators around the world have issues finding a common approach. Therefore, each country is different. Usually, buying and selling of cryptocurrency is not often regulated, unless a third party (exchange) is involved as KYC (know your customer) is always required. On the other hand, ICOs (initial coin offerings) are heavily regulated already. Especially the differentiation of security and utility tokens are key when it comes to regulations.
Winner: Digital currency
8. Digital Currency and Cryptocurrency Transaction Fees
You incur fees every time you make a transaction on your digital wallet. this can quickly become problematic if you make a lot of transactions. It’s even worse when you use payment systems like Paypal for online transactions as you’re subjected to heavy transaction charges. With cryptocurrency, these transaction fees are effectively removed as blockchain technology eliminates the need for a third party to receive commissions.
Winner: Cryptocurrency
9. Manipulation of Digital Currency vs Cryptocurrency
Currency manipulation is happening all the time, especially in the field of fiat currencies. Authorities buy or sell foreign currency to shift patterns of trade in their favor. Manipulating a cryptocurrency is almost impossible. The only way to do so is by offering a fake token. Blockchain technology makes it impossible to manipulate a cryptocurrency without someone realizing it immediately.
Winner: Cryptocurrency
10. Issuance of Digital Currency and Cryptocurrency
Issuance of a currency is very individual. Digital and traditional fiat currencies are issued by the government. Only a central authority can issue a digital currency. On the other side, we have cryptocurrencies. They are issued by communities of blockchain users. Only a virtual currency can be issued by an individual. Hense is not the safest and therefore, not very popular.
Winner: Virtual currency
11. Legal Aspect between Digital Currency and Cryptocurrency
The legal aspect between a digital and a cryptocurrency is very clear. A digital currency is always regulated by the legal aspect of each country issuing it. The contrary is cryptocurrency. Legal aspects vary from country to country. Some countries have no laws on cryptocurrencies, while others try to regulate or even ban them.
Winner: Digital currency
12. Value of Digital Currency vs Cryptocurrency
The value of a digital currency is fairly constant and can be easily dealt with in the global market. This value is regulated by the central bank through the banking system and financial institutions. In the case of cryptocurrencies, however, valuation is based on the scale of community involvement (like the user demand, limited coin supply, and currency’s utility). Cryptocurrencies are popular for their volatility as their value has been known to fluctuate rapidly and continuously.
Winner: Digital currency
Which is better, traditional currency, cryptocurrency, or digital currency? Final points
In this article, we explained the difference between cryptocurrencies, digital currencies, and virtual currencies. Although all of these are electronic money and cannot be held physically, people use them for internet-based transactions.
The dynamic nature of internet currencies is one of the primary reasons it is often difficult to tell the difference between digital currency vs cryptocurrency, and others. However, they are distinguished by features.
If you are looking for something that guarantees privacy but is still transparent, then cryptocurrency is better for you. If the goal is a private currency that can only be used in some quarters, then the virtual currency is your best bet but if you want something physical, and tangible, then the traditional currency is your best choice.
If you have more questions, or you’re up to creating your own digital currencies, then please don’t hesitate to book a free consultation. Furthermore, you can follow us on , Linkedin, Facebook, or as well.
Originally published at https://imiblockchain.com on March 30, 2022.
