Digital currency vs cryptocurrency: What the row is all about

Digital currency vs cryptocurrency: What the row is all about

NEW DELHI: With reports of the government seeking to prohibit private cryptocurrencies in the country through a Bill in the upcoming winter session of Parliament and create a framework for an official digital currency to be issued by the Reserve Bank of India (RBI), it is imperative to understand the difference between the two. While all cryptocurrencies can be termed as digital currencies, the reverse is not true. We explain why.
Main difference: Cryptocurrencies are managed by a computer algorithm, while digital currencies are backed by an authority
Now, digital currencies exhibit properties similar to other currencies, but do not have a physical form like that of banknotes and coins. You can receive, transfer and/or exchange digital currency for another currency. It can be used to pay for goods and services, in an online store, for example.
When it comes to digital currency, the issuing authority is of prime importance. For example, it usually refers to the electronic form of fiat money issued by governments. In India, like regular fiat currency, it will be the Reserve Bank of India that will issue digital currency. RBI said in July it was working towards its own digital currency and the Central Bank Digital Currency (CBDC).
“A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade. Private virtual currencies sit at substantial odds to the historical concept of money,” RBI deputy governor T Rabi Sankar said.
The digital currency will be backed by the government, with the seigniorage accruing to the sovereign. A seigniorage is the difference between the value of the currency and the cost of printing it. The government will earn higher seigniorage in a digital currency as the transaction cost (as against printing of notes and coins) is much lower.
“Essentially, the simplest example of Digital Currencies is CBDCs or Central Bank Digital Currency, which aims to ease and facilitate transactions across borders. Unlike cryptocurrencies, digital currency does not require encryption, and users are required to use secure and unique passwords in order to protect their digital wallets from hacking or theft,” explains blockchain writer Shruti Kaushik.
Then what are crypto currencies?
Cryptocurrencies like Bitcoin and Ethereum are basically pieces of computer code that are not managed by any authority. Creation, as well as use, is maintained through a distributed ledger, typically a blockchain, that serves as a public financial transaction database. So cryptocurrencies typically use decentralized control where there is no presence of a third party to have authority over the investors.
“Cryptocurrencies (a subset of digital currency) are independent of any coalition or central authority and are determined only by strong encryption. Like Bitcoin and Ethereum; they are decentralized in nature and offer anonymity to the uses holding them in their accounts,” added Kaushik.
“One of the most significant differences between digital currency and cryptocurrency is the underlying technology. Digital currency is a digital format of fiat money whereas cryptocurrencies are built on the blockchain. Cryptocurrencies are not under the control of any single entity. Digital currency, however, is under the direct control of the central bank,” Edul Patel, CEO & Co-founder of Mudrex, A Global Crypto Investing Platform, told Times of India.
Fluctuations
Since cryptocurrencies like the bitcoin are not managed by any authority like the RBI in India, or the US Federal Reserve in the US, its price fluctuates drastically, and wildly swing in value. The value gyrates wildly based on how many people are eagerly buying that currency. For example, Bitcoin traded at $20,000 in December 2017, dropped to as low as about $3,200 a year later, and currently trades at $57,211.70. Hence, there is no stability in the value of these cryptocurrencies. Then came in stablecoin as an attempt to overcome this problem. Stablecoins are linked to an asset like the U.S. dollar that doesn’t change much in value. As a result, the price of stablecoins fluctuates very little, unlike high-profile cryptocurrencies like bitcoin and ethereum that are prone to sudden ups and downs. The first stablecoin, created in 2014, was Tether where users receive one token for every dollar they deposit. The tokens can then be converted back into the original currency at any time, also at a one-for-one exchange rate.
Encryption
Anyone with an online bank account can store and use digital currencies. It is a form of e-cash. For cryptocurrencies, the underlying technology is blockchain, which store the virtual currency in ‘wallets’ with a high degree of cyber security. To trade cryptocurrency, you need to first have a bank account and digital currency in it. You will have to exchange the digital currency via an online exchange to get cryptocurrency for the corresponding value.
“Digital currency is an electronic representation of currency notes and coins that can be kept in a digital wallet. If necessary, the digital currency can be converted into cash in hand by withdrawing cash from any ATM or bank. It is intangible cash with a two-party open-source contactless transaction flow… When we pay for a products or services with our bank account or digital wallet then we are using digital currency when we withdraw cash from an ATM the digital currency is converted into physical cash. Cryptocurrencies, on the other hand are a form of value storage that is protected by encryption. These are created with cutting-edge blockchain technology. It is built with advanced blockchain technology to ensure a smooth transaction flow. They are also known as digital coins. Bitcoin, Ether, and Dogecoin are just a few examples of digital coins. All of these crypto coins are privately owned or created, and most countries have not yet regulated them,” said Kshitij Purohit, lead currency at CapitalVia Global Research.
Transparency
Digital currency transactions are only available to the sender, receiver and banking authorities. Moreover, the central bank or the issuing authority decides what information can be shared. But all cryptocurrency transaction details are in the public domain and can be accessed on the blockchain.
Transaction fee
There is a transaction fee with digital currency every time there is payment through the digital wallet. But there is no system of transaction fee in dealing with cryptocurrencies. Blockchain technology helps to reduce the expense as well as no extra commission for the third party agents.
“Transfers via cryptocurrency are more viable when doing inter country remittances. Crypto can also be used to do large payments, which is usually limited while using digital currencies,” said Patel.
How do public crypto currencies differ from private cryptos?
The Cryptocurrency Bill seeks to prohibit all private cryptos in India with certain exceptions to promote the underlying technology. However, since the details of the bill are not yet known, the difference between public and private cryptocurrencies has been left open to interpretation. Some say that all tokens other than Central Bank Digital Currency will be banned, while others suggest that all cryptos that do not have a public ledger to track transactions can be banned.
“There are more than 11,000 cryptocurrencies that are traded across different exchanges. All of these cryptocurrencies are created by individuals, developers and companies, and hence are private crypto. However, there remains an ambiguity as to the definition of private and public crypto currencies. The central governments are coming up with their own digital currencies which can be determined as public cryptos. However, these are not built on the blockchain, and hence cannot be called cryptocurrencies,” said Patel.
“In layman’s terms all cryptocurrencies are private in the sense that they are not controlled by a single entity or government. However, on the other hand in the cryptocurrency, the terms “private” and “public” refer to the level of privacy provided by cryptocurrencies. In private crypto, the distributed ledger leads to system transparency. That is, you can see everything that is going on throughout the ledger. This means that we will be aware of any transactions and the wallet addresses involved in them as they pass through this network. In public crypto the transactions made over such networks can be tracked or linked to wallet addresses, and their amounts can even be calculated. They offer ways for users to remain anonymous, but only to the extent of possibly not revealing your original name. A trace can still be used to configure the wallet address associated with you,” says Purohit.
An example of cryptocurrencies that do not have a public ledger to track transactions is Monero. Such cryptos are banned in many countries. Bitcoin, Ethereum and other popular cryptos have a public ledger.



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