BL Explainer

Explainer: Digital currency vs cryptos – how are they different?

Venkatesha Babu Bengaluru | Updated on November 25, 2021

The Centre’s plans to ban cryptocurrencies but introduce an official, digital currency. There is some confusion on the differences between the two – there are at least six key variances between official digital currency and cryptocurrency. While all cryptocurrencies could be considered digital currencies, not all digital currencies need to be official sovereign backed currencies. For instance, the virtual currency used in say, an online game, is also a form of digital currency, not backed by a central bank but governed by the game creators. Apart from that, the other key differences are: 

Issuing authority 

Offical digital currencies are issued by the central banks of a nation-state that oversees the banking system in that country. For instance, in India, like regular fiat currency, it will be the Reserve Bank of India that will issue digital currency, when mandated by the government. Similarly, in the US, it will be the Federal Reserve. However, in the case of cryptocurrency, there is no single issuing authority. Cryptocurrencies are usually developed by teams as a piece of code used for issuance through ‘mining’. Creation, as well as use, is maintained through a distributed ledger. They transmit value across a decentralised network of users. Thus while digital currencies are centralised, cryptocurrencies are de-centralised. 

Encryption and underlying tech 

There is little encryption that happens in official digital currency and no special cybersecurity measures. Anyone with a regular online bank account, for instance, can store and use digital currencies. Think of this as a form of e-cash. However, blockchain is the underlying technology used in most cryptocurrencies and, usually, these are stored in ‘wallets’ with a high degree of cyber security. 

While it is true that some of the crypto wallets have been hacked, generally the degree of cyber protective measures taken beforehand are more in the case of cryptocurrencies. 

Stability and fluctuation 

While official digital currencies are largely stable in value and thus easy to own and use in the global market, cryptocurrencies can wildly swing in value. In a single day, the price of a unit of cryptocurrency can vary as much as 50 to 70 per cent. Thus, fiat digital currencies provide more stability, while cryptocurrencies are known for their high degree of volatility and consequent risk. 

Transparency 

One key area where cryptos score is transparency. In this case, the entire history of transactions between two parties can be seen as it is done on blockchain and is immutable (cannot be changed). However, in the case of central bank-issued digital currency, it is the centralised issuing authority that decides how much information it wants to share. The receiver or sender of digital currency will receive information only related to that transaction. 

Cost of transaction 

In the case of digital currency, the issuing authority or the centralised controller can levy transaction fees each time the currency is debited or credited. The blockchain technology used in cryptocurrencies ensures that such expenses are minimised as there is no commission for third parties. This is especially useful when cryptocurrency is used to buy or sell, high-value assets. 

Legal framework 

In most countries, there is some kind of legal framework and protection around official digital currencies. However, when it comes to cryptocurrencies, that is not the case; in several parts of the world, it is still a grey area. Except for El Salvador, which decided to use Bitcoin (currently the most popular cryptocurrency) as legal tender, cryptocurrencies are in unchartered territory with their legal status not clearly defined. 

Published on November 24, 2021

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