Bitcoin fever is creating some confusion about the terminology used to refer to these currencies. This type of currency is sometimes called cryptocurrency, sometimes virtual currency, and sometimes digital money. However, these three terms are not interchangeable .
This can cause quite a bit of confusion, such as when the media assured that the Bank of England was preparing a cryptocurrency when in fact it is a virtual currency . In other cases, we are not mistaken, because Venezuela is indeed preparing its own cryptocurrency . Let’s look at the differences.
Digital is (practically) everything
Digital money is generally any means of monetary exchange that is done electronically . When you transfer money from one bank account to another, you are using digital money. When you pay with a card in a store, too.
In other words, when a payment or money transfer is made without a physical exchange of coins or bills, digital money is used. Almost all the money in the world is digital, and cash is only about 8% of the money in circulation.
So when someone talks about digital money, they should just talk about money. Money is digital day in and day out. The vast majority of wage earners in the world are paid and paid in digital money. Digital money is money .
Virtual, there is some .
Sometimes we talk about virtual currency. Virtual money only exists digitally. For example, many video games have an internal currency with which you can buy items . This money, which is used in the game, is virtual money.
There can also be virtual money that is not the main character of the video game , such as some currency created by companies or fans that tried to replace the current physical money with a new currency that is far from the control of central banks. An example is E-gold, which closed due to legal problems.
By definition, all virtual currencies are digital. Since they do not exist physically, there is no paper money for them, they must be 100% digital. Therefore, all virtual currencies are digital, but not all digital currencies are virtual (an example is the euro bank account, it is digital, but not virtual).
Cryptocurrencies, a subset of the above
Digital and virtual money have been with us for decades, but cryptocurrencies are more recent. Cryptocurrencies, such as Bitcoin, are a type of virtual currency that has no specific issuer , is protected by cryptography and, in principle, its consistency can be protected by massive and distributed verification by their users.
Consequently, cryptocurrencies are virtual and digital money. But unlike other virtual currencies, they are not centrally managed, but are distributed and based on cryptography to avoid manipulation by any of their participants.
We can conclude that all cryptocurrencies are virtual currency and digital money, but not vice versa . Talking about digital money, you can talk about any currency in the world (euro and dollar including), but when you talk about virtual currency, it may not be a cryptocurrency, but a currency with a specific issuer. We hope that in the future the terms will be used correctly and there will be no misunderstandings.
It is important to emphasize that cryptocurrencies are created by users themselves, and their value is determined by the market. And from an objective point of view, the own cryptocurrencies of decentralized and permission-free networks, such as bitcoin or etherium, are not tied to the value of legal tender, but depend on supply and demand. In addition, they are not backed by a legal entity, which is responsible in case of technical problems or risk issues.
One of the distinguishing features of a central bank-backed digital currency is its near-zero volatility, and this is partly because central banks provide financial stability through monetary policy. Bitcoin, on the other hand, is an unstable currency because it operates in an immature market, is unsupported and full of expectations. Although the economist points out that this may change as the use of cryptocurrencies grows in popularity. Now let’s see what some of their differences are.
To issue a secured digital currency, BIS lists a number of characteristics that strive to meet the financial stability goals that international monetary and financial institutions regulate, with the following characteristics being highlighted:
- Avoid volatility, where conversion and value will be on par with physical money.
- Greater acceptance and availability.
- Lower cost of creation and distribution.
- Get a secure and fault-tolerant system against possible cyber-attacks, system failures or malfunctions.
- Interoperability between different banking systems.
Also worth mentioning are digital currency projects supported not by central banks, but by corporations subject to regulation, such as Libra , now Diem , a cryptocurrency project supported by Facebook . “There are other types of solutions that seek to combine the innovative features of cryptocurrency networks with greater guarantees for users,” Espanyol explains.
These types of coins are backed by the asset reserve of the organization that issues them and may be less risky than cryptocurrencies as a means of payment. “However, we must keep in mind that, given the novelty of these proposals, the authorities are currently analyzing and, if necessary, adapting financial regulations to make this decision,” explains the BBVA economist.
“this type of solution, when it has a global reach and a large number of users, poses serious problems for financial stability because of its systemic importance.”
Characteristics of digital currencies
To launch a digital currency backed by central banks, referred to by the acronym CBDC, the Bank for International Settlements (BIS) lists up to 14 characteristics that make this type of currency a platform that meets the financial stability goals that govern international monetary policy. According to the BIS, the main features of CBDC are:
Conversion and value will be the same as with physical money, and volatility will be eliminated.
They will be accepted and available for all types of “online” and “offline” transactions 24/7.
Its cost will be low and almost zero at the moments of creation and final distribution of money.
They will always be a secure and resilient system to possible cyber-attacks, system failures or malfunctions.
They can work between different banking systems.
We’ll talk about secure and legal currencies thanks to the support of the central bank.
In search of digital currency supremacy
The race for digital currency leadership has already begun, with both Europe and China looking to take the lead and prevent unregulated cryptocurrencies from taking over the world of digital payments. “These digital currencies respond to the interest of central banks to keep pace with the times, to ensure that they are fit for purpose and function. Many central banks are studying the impact of CBDC issuance on the financial system, while others have chosen to issue the instrument and are in development.