When reading articles on cryptocurrencies, especially on bigger tech sites that are only covering a story or two about crypto every week, you will often run into a term used as a synonym for them: digital currencies. This is not an accurate definition as digital currencies and cryptocurrencies are not the same.
So, let’s start how these two are different and what is their relationship (hint: cryptocurrencies are a type, a subset of digital currency).
Digital currency is a type of currency available only in digital form, not in physical (such as banknotes and coins). It exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership.
Examples include virtual currencies and cryptocurrencies or even central bank issued “digital base money”. Like traditional money, these currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game or social network.
Digital currency is a money balance recorded electronically on a stored-value card or other device. Digital money can either be centralized, where there is a central point of control over the money supply, or decentralized, where the control over the money supply can come from various sources.
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.
Cryptocurrencies are a type of digital currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger.
Differences between digital and crypto-currencies
As we already wrote above, cryptocurrencies are type of digital currency with some important differences.
Digital currencies are centralized, run through a centralized network with clear rules and regulations by certain people and institutions. Cryptocurrencies are run by network nodes scattered around the world in a decentralized manner with rules and regulations being imposed by social consensus and community voting.
One of the most important things every financial institutions will require you to do is to prove your identity. All users of digital currencies must go through a detailed “know-your-customer” process, provide legal documents and photos for identification purposes. Buying, investing and any other processes with cryptocurrencies do not need require any of that. Nevertheless, cryptocurrencies are not fully anonymous. Though the addresses don’t contain any confidential information such as name, residential address, etc., each transaction is registered, the senders and the receivers are publicly known. Thus, all the transactions are tracked.
One of the major features of digital currencies is the high confidentiality of data and users behind accounts and wallets. You cannot choose the address of the wallet and see all the money transfers.
Cryptocurrencies are completely transparent, from their inception to their (eventual?) end. Everyone can scan or download the blockchain and see any transactions of any user, since all the revenue streams are placed in a public ledger.
Digital currencies have clear rules and regulations when dealing with issues. Central authority can cancel or freeze transactions upon the request of the participant or authorities or on suspicion of fraud or money-laundering.
Cryptocurrencies are regulated by the community. It’s very unlikely that the users will approve the changes in the Blockchain, although there were some precedents such as the hack of The DAO. However, the amount of money was significant, and the decision was uncertain.
Most countries have some legal framework for digital currencies, i.e., Directive 2009/110/EC in the European Union, or Article 4A of the Uniform Commercial Code in the US. We cannot say the same about cryptocurrencies at the moment. In most countries, their official status is not defined, some have banned them and some have decided to treat them in a same fashion as regular currencies. The establishment of the legal framework is only in the process.