Since the dawn of global tokenization, one can hear people referring to crypto coins as "digital currencies" (another, less common variant is “virtual currencies”) And while all the parties involved usually understand each other, it doesn’t mean they are correct in using these terms interchangeably.

Are cryptocurrencies and digital currencies the same thing? Although both terms are often used instead of one another, it's essential to understand that there are significant differences between them. The short story is that all cryptocurrencies can be viewed as digital currencies, but not all digital currencies are necessarily cryptocurrencies.

And the long story? Well, let’s discuss it in this article.

 

Cryptocurrencies and digital currencies – what's the difference?

 

To better understand the similarities and differences between cryptocurrencies and digital currencies, let's first define these terms and then consider their most distinctive characteristics.

 

Defining cryptocurrencies and digital currencies

 

A currency can be defined as a universally accepted medium of exchange used to pay for transactions involving goods and services. It serves as a store of value, enabling individuals and businesses to conduct economic activities.

Considering the above, a digital currency is a type of currency that exists in electronic or digital form. To be more precise, it is an electronically recorded and transferred form of money, which includes both traditional currencies stored online and “pure” digital currencies with no physical counterpart. Digital currencies share major characteristics of traditional currencies, being a medium of exchange and a store of value. However, unlike physical cash or coins, digital currencies operate in the digital domain.

And then there are cryptocurrencies. A cryptocurrency could be described as a type of digital currency that utilizes cryptography for security and operates on a decentralized network, typically based on blockchain technology. Unlike traditional currencies (both in their physical and digital forms), cryptocurrencies do not rely on central authorities like governments or banks to regulate peer-to-peer transactions. Instead, they utilize consensus mechanism among network participants to validate and record transactions, offering transparency, immutability, and often (but not always), limited supply for certain cryptocurrencies like Bitcoin.

 

Correlation between cryptocurrencies and digital currencies

 

Cryptocurrencies and digital currencies are related yet distinct concepts within the realm of financial technology (FinTech). Basically, they can be described as a general concept (digital currencies) and a specific concept (cryptocurrencies), meaning that all cryptocurrencies may be considered digital currencies, while not all digital currencies qualify as cryptocurrencies.

This is because digital currencies may take many distinctive forms. Hence, when talking about digital currencies, one may refer to:

• Cryptocurrencies are decentralized digital currencies that use cryptography for secure transactions and operate on blockchain technology (e.g. Bitcoin, Ethereum, etc.)
• Digitally stored traditional currencies. These are digital representations of traditional, government-issued currencies like the US Dollar or Euro, stored electronically in banks or online payment systems (e.g. US Dollars stored in a person’s PayPal account)
• Stablecoins are a specific (and so, worthy of being distinguished as a separate item) type of cryptocurrency designed to have a stable value, often linked to reserve assets like fiat currencies, aiming to reduce the volatility common in other cryptocurrencies (e.g. USDT, USDC, etc.)
• Central Bank Digital Currencies (CBDCs). CBDs are digital versions of a country's official currency issued and regulated by the central bank, offering a government-backed form of digital money representation (e.g. Digital Rupee launched in India, Sand Dollar utilized in the Bahamas, etc.)

It's important to note that this list isn't exhaustive. The concept of digital currencies covers a wide range of various interpretations and emerging forms of digital value representation.

 

Digital currencies and cryptocurrencies: Similarities

 

Since we’ve already determined that the concept of “digital currencies” includes cryptocurrencies as well, it may be odd to look for differences and similarities between them. Therefore, let’s establish one thing: in this section, as well as the next one, when we’re talking about digital currencies, we mean all other types of digital currencies that do not include cryptos.

With this in mind, let’s talk about the major commonalities between the two categories under discussion:

• Electronic form – Both digital currencies and cryptocurrencies exist in electronic or digital form, allowing for online transactions and storage.
• Medium of exchange – Both serve as a medium of exchange, facilitating transactions for goods and services.
• Store of value – Digital currencies and cryptocurrencies can retain value over time, acting as a store of value for users.
• Global accessibility – They can be accessed and used globally, making cross-border transactions more efficient.
• Technological dependence – Both rely on advanced technologies, with digital currencies often using electronic payment systems and cryptocurrencies employing cryptography and decentralized networks.
• Transaction efficiency – Digital currencies and cryptocurrencies enable faster and more efficient transactions compared to traditional payment methods.

 

Digital currencies and cryptocurrencies: Differences

Despite these similarities, several key differences set virtual currencies and cryptocurrencies apart. Here are some of them:

1. Centralization vs. Decentralization:

• Digital currencies – Many types of digital currencies other than crypto are typically centralized and regulated by governments or financial institutions, which oversee transactions and policies.
• Cryptocurrencies – Cryptocurrencies operate on decentralized networks, governed by a consensus mechanism among participants, eliminating the need for central authorities.

2. Security mechanisms:

• Digital currencies – Digital currencies often rely on traditional security measures, such as encryption and authentication protocols, to ensure secure transactions.
• Cryptocurrencies – Cryptocurrencies utilize cryptographic techniques and blockchain technology to achieve a higher level of security, offering transparency and immutability and eradicating mediums in peer-to-peer transactions.

3. Anonymity:

• Digital currencies – Transactions made with digital currencies may require user identification and are subject to government regulation, potentially compromising user privacy.
• Cryptocurrencies – Cryptocurrency transactions can be more anonymous, as users' identities are not always directly linked to their crypto wallet addresses, providing greater privacy.

4. Volatility:

• Digital currencies – Digital currencies are often pegged to traditional fiat currencies, aiming for stability and reduced price
• Cryptocurrencies – Except for stablecoins, cryptocurrencies, especially major ones like Bitcoin or Ethereum are known for their high price volatility, attracting both investment opportunities and risks.

5. Adoption:

• Digital currencies – Digital currencies are more widely accepted and integrated into existing financial systems, with various online payment platforms supporting their use.
• Cryptocurrencies – While gaining traction, cryptocurrencies still face limited mainstream acceptance, and their adoption as a payment method is balanced by their usage for other purposes, such as smart contracts

6. Regulatory oversight:

• Digital currencies – As digital currencies are centralized and often tied to governments or financial institutions, they are subject to regulatory oversight and potential government interventions to prevent money laundering and other forms of illegal usage.
• Cryptocurrencies – Cryptocurrencies, being decentralized and independent of any central authority, may operate in a gray regulation area, with some countries embracing them while others impose restrictions.

 

Bottom line

So, at the end of the day, are people referring to cryptocurrencies as “virtual” or “digital currencies” right? Well, yes and no. On one hand, when you see an apple, you may call it “a fruit”, and you won’t be wrong – apple is, indeed, a type of fruit. In the same way, cryptocurrencies are, indeed, a form of digital currency. However, just as there are many fruits other than apples, there are plenty of digital currencies that are not cryptos.

In other words, while cryptocurrencies fall within the scope of digital currencies, the latter is a broader term that also includes various specific non-crypto forms of digital value representation. Despite serving a similar purpose, they are different in terms of regulatory oversight, security mechanisms, centralization specificity and so on.

Besides, different types of digital currencies can be obtained at various places. If you’re looking for digitally stored traditional currencies or CBDCs, you’ll have to deal with banking institutions or specific digital payment platforms. Meanwhile, you can buy cryptocurrencies, including stablecoins, on any crypto exchange you trust. The choice is yours!

Disclaimer: Our content does not constitute financial advice. It is only intended for informational and educational purposes.