Digital Currency Vs Cryptocurrency - What’s the Difference?
For non-experts in financial matters, cryptocurrency and digital currency are essentially the same. As a result, many people use these terms interchangeably. You may have heard someone say that they are different and possibly entered into a heated debate with them. Today, we want to settle the controversy. In this article, we will show you the differences between a digital currency and a cryptocurrency.
What is a Digital Currency?
Generally, a digital currency is any kind of money in electronic form. It includes the online versions of coins and banknotes issued and regulated by central banks, which are backed by national governments. So, digital currencies cover electronic forms of traditional money like the Euro, the US dollar, the British pound sterling, and the new Central Bank Digital Currencies (CBDCs). The Sand Dollar of the Bahamas, DCash of the Eastern Caribbean Currency Union, the eNaira of Nigeria, the e-CNY of China, and the e-krona of Sweden are examples of CBDCs.
Digital currencies are used for online transactions, such as electronic money transfers and payments to e-commerce stores. They are stored in digital wallets, which are also called e-wallets. Whenever you need to hold or spend cash, you can turn a digital currency into banknotes by withdrawing the money from a supported ATM. However, a disadvantage of using digital cash is that it might be impossible to recover your funds if you forget or lose the password to your e-wallet or if the payment system will block your wallet for some reason.
In the fintech world, digital currency is a broader concept. It includes various equivalents of real money that are used by payment systems. For example, when you deposit money into a Skrill, Neteller, PayPal or other payment systems, it ceases to be fiat money and is actually converted into digital currency.
What is a Cryptocurrency?
Cryptocurrency is a type of digital currency that is accounted for by an internal decentralised system known as a blockchain. A blockchain works in automatic mode and has no administrator. All community members can access the record of transactions on it.
A cryptocurrency is limited in issue, conditionally decentralised, can be issued by almost anyone, cannot be counterfeited, and is regulated by the community of interested people. The most famous examples of cryptocurrencies are Bitcoin (BTC), Ether (ETH), and Litecoin (LTC).
By its nature or design, the amount in a cryptocurrency wallet may be known, but no one can tell who owns it. The use of encryption (cryptography) in storing, transmitting and verifying transactions is the reason why this digital currency is called cryptocurrency. Encryption helps ensure the reliability and security of cryptocurrency transactions.
Despite the fact that the main feature of cryptocurrency is its anonymity, recently more and more services are trying to have a hand in making it lose this anonymity. For example, some famous crypto exchanges require their users to pass KYC verification, and some refuse to serve customers from "unfriendly" countries due to their jurisdiction.
What is the Difference Between a Digital Currency and a Cryptocurrency?
Digital currencies and cryptocurrencies are similar in existence because they are based online rather than in physical forms. Nevertheless, they are different in the following ways:
- Issuing and control: The central banks of different countries issue and control their various digital currencies; hence, they are mostly centralised. On the other hand, cryptocurrencies are not minted by any intermediate authority; therefore, they are mostly decentralised currencies. Cryptocurrencies are developed and influenced by individuals, diverse online communities, and technologically advanced corporations in the global financial system.
- Encryption: The process of converting information or data into code is called encryption. It helps to improve data security and prevent unauthorised access to financial information. Digital currencies are not encrypted, whereas cryptocurrencies are secured by high encryption.
- Storage: Digital currencies are stored in centralised online databases developed either by central banks or FinTech companies. On the other hand, originally, cryptocurrencies were stored on decentralised networks that allowed anyone to see the amount of cryptocurrency in a particular wallet using a public register but hide the true identity of the owner.
Recently, the concept of total privacy of crypto has also been losing its relevance as popular crypto exchanges and services now ask users to go through know-your-customer (KYC) procedures. Nevertheless, if personal data protection is not a top priority for you, you can use crypto wallets to store your crypto assets and spend your digital coins. There are different types of wallets and cards from crypto exchanges. Examples include those provided by centralised exchanges like Binance and Coinbase and decentralised exchanges like Binance DEX and IDEX.
- Usage and price volatility: Cryptocurrencies can be used to pay for goods and services in countries like El Salvador and the Central African Republic where they are legally recognised as legal tender. Also, multinational companies like Gucci and Tesla accept cryptocurrency as a payment method. In addition, you can hold and use cryptocurrencies for speculative investing because their prices fluctuate due to high volatility. On the other hand, fiat currencies in electronic forms are more stable in value and can be used to pay for purchases domestically and internationally.
- Location and availability: Digital currencies are designed to be used in their issuing countries for direct domestic or cross-border payments involving foreign exchanges. But cryptocurrencies do not need the traditional exchange system and are available for use globally.
- Taxation: In the United Kingdom, the United States, and some other countries, cryptocurrency holdings are legally considered to be digital assets or property. Hence, crypto holders are required to pay taxes on the profits they make from trading or investing in them. On the other hand, traditional currencies held in digital forms are seen as money and income for which you do not need to pay any tax.
Digital currencies can be used to make payments to e-commerce merchants as opposed to cryptocurrencies, which are not accepted as mediums of exchange in some countries. A digital currency wallet like PayPal can be used for payments at many different online stores, while Skrill and NETELLER are ideal for transactions at online gambling sites.
Furthermore, while digital currencies are not so safe because they can be frozen by e-wallets, cryptocurrencies are safer since they allow electronic money to be stored securely on blockchains. You can convert cryptocurrency to cash, but expect to pay high conversion fees depending on the exchange you use.
Will Digital Currencies Replace Paper Money?
The future of digital currency is promising. While cashless payments will dominate the coming decades, it is still difficult to say that digital currencies will replace paper money someday. Besides, some monetary agencies do not intend to replace their paper money with their CBDCs. Instead, they want to use them to boost the safety of online payments.
For example, in March 2022, the United States central bank, which is called the Federal Reserve, said that it is committed to ensuring that cash continues to be available and remains a safe payment method. The Fed categorically said that the US CBDC, which is a digital currency under consideration, will not replace paper currency.
Bitcoin is both digital and crypto. That is because it is a digital asset and a cryptocurrency by all definitions. It is the first digital coin that was developed for decentralised transactions on the blockchain. Bitcoin was launched in 2009.
Yes, a digital currency is a real money in electronic form. In other words, it is not cash or paper money. You can use it to make payments at e-commerce stores and for money transfers domestically and internationally to supported destinations.
A digital currency is backed by the central monetary agency of a national or federal government. It is popularly known as the central bank of a particular country, although it can have other names. For example, in the United States of America, it is called the Federal Reserve, while it is the Bank of England in the United Kingdom.
How you get a digital currency depends on the selling or distribution policy of the central bank that issued it. However, what is common is that you need to download the app from the online store and link a bank card or account to it so that you can make transactions.
Best Cryptocurrency Platforms
If you are looking for the safest platforms to buy, trade, or hold digital assets like cryptocurrencies, below are our top picks for you.
Open an account with Binance and get a digital wallet and a Visa debit card for fiat and crypto payments. The Binance exchange lists more than 600 cryptocurrencies. Besides, through its latest offer, users can now trade Bitcoin for free.
One of the easiest platforms to buy and sell cryptocurrencies is Coinbase. This crypto exchange offers a digital wallet you can use without having a Coinbase account. It allows individuals to earn free crypto, invest in NFTs, and make payments using its Visa debit card.
eToro brings a diverse community of people to invest better together under one platform. It supports over 60 cryptocurrencies, including BTC and ETH. Also, when you create an account on this platform, you can enjoy 0% commission for investing in your favourite stocks.
Get one of the world's fastest-growing crypto apps when registering an account with Crypto.com. You can even spend crypto with its Visa card and receive up to 5% of your payments as a reward. Buy and sell over 250 cryptocurrencies using more than 20 fiat money on this platform. It also lets you swap and earn DeFi as well as trade NFTs.
Buy 100+ cryptocurrencies, including Bitcoin, in minutes on Kraken. You can start trading with as little as US$10 on its website or mobile app. Furthermore, when you stake your assets with Kraken, you can earn up to 23% in rewards every year.
Gemini is a crypto exchange and mobile app that gives you US$7 in ETH for signing up. Through its Nifty Gateway, you can access, buy, sell, and store NFTs. Gemini offers a credit card, digital wallet, and many other products that allow you to earn rewards as you trade and invest on the platform.
Anyone can buy, sell, trade, and invest in Bitcoin when they register with Paxful. It supports more than 350 payment methods and allows users to earn extra income through its affiliate programme. Paxful is a P2P marketplace for quick and convenient trading and investing.
More than 170 businesses have gone global with the help of Mercuryo. Its wide range of fiat and crypto financial services allows the fast and easy processing of payments. Mercuryo can handle simple to complex projects, including DeFi, custodial wallets, NFTs, exchanges, and neobanks.
Get a multicurrency PAYEER account and start sending, receiving, and exchanging fiat and cryptocurrencies today. All you need to get started is an iOS or Android smartphone, so you can download the app from AppStore or Google Play. It provides payment solutions to individual and business needs.
Crypterium provides a free wallet for more than 19 cryptocurrencies, enabling you to buy BTC and ETH with your bank card. You can create your wallet instantly and get your free Visa card for ATM withdrawals worldwide. It offers up to 15.6% interest on your crypto savings accounts.
OWNR Wallet is a safe platform for managing your cryptocurrencies. It supports easy trading in BTC, ETH, LTC, and many other digital coins. You can get its Visa prepaid card and make payments for goods and services with it anywhere you go.
Digital currencies and cryptocurrencies have come to stay. As long as blockchain technology continues to challenge the existence and use of traditional fiat currencies, governments will continue to fight back with CBDCs. While the competition lasts, enjoy making safer and faster payments with digital currencies while at the same time investing in digital assets like cryptocurrencies.