You might have heard the term “digital currency” in passing recently and conflated it with the escalating popular phenomena known as “cryptocurrency,” which is, of course, all the rage in the world of investment finance just now. But to do this is to commit a definitional error because, indeed, as you might’ve already guessed, the two are assuredly not the same.
Recognizing that they aren’t synonymous, let’s take a closer look at these two virtual currency types, specifically how they compare and how they differ. A digital currency is broadly defined as a digital or electronic form of money stored in a distributed database that exists solely on the Web. Within this database, which shouldn’t be confused with the blockchain, electronic files are kept within a stored-value card and then later redeemed for value in some kind of online transfer.
It can be accurately stated that cryptocurrencies are digital currencies in the sense that they are, in fact, virtual. But they differ substantially from other virtual-based currencies such as central bank digital currencies, like those in China, and e-Cash. All digital currencies, including crypto, exist primarily in cyberspace and do not usually render themselves in physical form, but not all of them are managed by their producer. It’s worth remarking, however, that there are units of physical Bitcoin in circulation. But these coins contain a special key that must be accessed virtually on the blockchain ledger to redeem their value.
The benefit to almost all digital currencies is their transaction speed. As of today, the most common digital currencies aren’t issued by a central banking authority such as those sponsored by a government. This simplifies the process of completing tasks like making an international transfer. The IRS and SEC generally hold that digital currencies are only representations of value and not currencies in and of themselves. Rather, according to these government bodies, they are designated as property assets. Digital currencies are consequently not subject to the same kind of regulation as fiat money that’s traded on the foreign exchange markets.
While you can argue that cryptocurrencies are a subcategory of digital currencies, the major difference distinguishing the two is that digital currencies are centralized, with a single issuer, while most cryptocurrencies are decentralized across the blockchain, which is hosted by a network of computers across the globe. A digital currency, in other words, has more similarities to paper fiat money because it is sourced to a single distributor, less likely to have a supply limit, and isn’t backed by anything of value, such as precious material or the blockchain ledger.
Expert analysis of the diverse cryptocurrencies by SoFi unveils that “cryptocurrencies can act like real money—in a sense, they are real money—but they take a digital monetary form and are not managed or governed by any central authority. “ So, while both digital currencies and cryptocurrencies are fundamentally digital, the key point to remember is that cryptocurrencies lack specific governance by a singular authoritative body, while digital currencies are controlled and manipulated by their founding organizations. Another distinguishing feature of digital currencies, because they do not exist on the blockchain, they are commonly regarded as non-transparent. This means that, concerning their transactions, there is no specific chain of records on the blockchain ledger.
Digital currency ultimately implies a broader category that encompasses cryptocurrency. The important takeaway to observe here is, as the lines continue to blur between virtual currency and physical money we use every day, digital currency differs from cryptocurrency insofar as there typically exists no centralized issuer for crypto.