Since the rise of the digital era, many companies in the financial sector have made it possible to make payments and money transfers over the Internet. However, in 2009, the world was introduced to a commercial exchange alternative to this digital money: Bitcoin, the first cryptocurrency based on blockchain technology, which is a basis for the different generations of cryptocurrencies that we know today.
It is important to note that, thanks to the rapid acceptance of cryptocurrencies worldwide, another alternative known as “digital currencies” emerged. This article will explain the main differences between cryptocurrencies and digital currencies.
Creation
Although both currencies are digital payment alternatives, one of their main differences lies in how they are created or generated. Cryptocurrencies function within an ecosystem known as blockchain, which is decentralized and managed by a community of independent interconnected nodes in addition to being governed by its own rules for creating new units. Digital currencies, on the other hand, are created by a country’s central bank or a financial institution, and what defines their amount is the entity that issues them.
Value
Because the blockchain users create cryptocurrencies, it is a decentralized asset, so its value does not depend on an agency or financial entity but rather on the value assigned by users or the market in general (through supply and demand); however, being a “free” asset, its behavior and price can be volatile.
On the other hand, as digital currencies are centralized assets, their value is defined or backed by the current currency of the central bank that issues it, thus having a less volatile value than that of cryptocurrencies. It is worth mentioning the existence of stablecoins that are created and “anchored” to the value of a currency; however, these are not considered digital currencies because they are not issued by a central bank or financial entity.
Amounts
Blockchain users generate cryptocurrencies through the mining process, which requires decrypting a block to create cryptocurrencies, which allows the creation of a new currency; in the case of Bitcoin, its unit generation limit is 21 million bitcoins. On the other hand, digital currencies are unlimited and are issued by a central bank (according to its currency or monetary policies).
Regulation
Digital currencies are generally subject to government rules and regulations and are controlled by the issuing entity, besides being subject to specific monetary policies. On the other hand, cryptocurrencies tend to operate outside the direct control of governments or central banking, which makes them more regulated and harder to control. Although some countries currently have laws (or proposed laws) regulating cryptocurrencies, the truth is that these laws remain limited worldwide.
Technology
Digital currencies tend to use traditional accounting technology (such as centralized databases) to record operations and transactions. On the other hand, cryptocurrencies rely on blockchain technology to record and verify transactions/operations in a decentralized manner.
Responsible for security
The central bank safeguards, supervises, and approves transferences, operations, and custody of digital currencies. However, in the case of cryptocurrencies, each transfer, operation, and custody is safeguarded, supervised, and approved by each blockchain user.
Thus, the security of cryptocurrencies relies on the trust and “good faith” of its users since there is no direct or “centralized” responsibility for the transaction. In the case of digital currencies, security depends entirely on the financial institution. In this case, it is essential to highlight that Fintechs have developed different financial tools to provide more peace of mind to cryptocurrency users; among these tools, digital wallets and payment processors for cryptocurrencies stand out.
What do you think about this topic? Do you know other differences between digital currencies and cryptocurrencies?
If you are interested in Pilsenga’s products or services, you can visit our website and register on our platform by visiting the following link.
