Finance Minister Nirmala Sitharaman’s announcement of taxing digital assets at 30% came with another statement: RBI’s plans to start its own digital currency. Known as the CBDC (Central Bank Digital Currency), it has been in the works for several months and, as claimed by Sitharaman, will lead to a more efficient and cheaper currency management system.
But what is Digital Currency, and how does it differs from Cryptocurrency?
Digital currency is the digital version of fiat currency that you can carry in your wallet or get at an ATM. It’s the same currency backed by a government agency (the Reserve Bank of India in the case of Indian currency) and may be traded for real money. On the other hand, Cryptocurrency is not backed by a central figure but instead relies on the purchasing power of its customers. Technically, they are ‘mined’ chunks of code controlled by a digital ledger called blockchain to ensure transparency at each point of their journey. Although coins such as Bitcoin and Ethereum have become household names and Cryptocurrency, in general, has grown exponentially amidst an emerging metaverse, they are digital assets that can be traded with or without any legal framework.
Cryptocurrencies are backed by a computer algorithm, whereas governments back digital currencies.
Let’s understand this difference from 5 viewpoints for Cryptocurrency vs Digital Currency:
The most significant distinction between digital currency and Cryptocurrency is who controls the monetary worth of your coins. In the case of digital money, the Reserve Bank of India or the Federal Reserve of the United States, or any central authority, has control over it. However, there is no one issuing authority in the case of cryptocurrencies. Cryptocurrencies are usually developed as a piece of code that may be mined for issuance. A distributed ledger is used to track both creation and use. They distribute value to a network of users.
Cryptocurrencies are decentralized, whereas digital currencies are centralized.
Also Read: Top 5 cryptocurrencies in India 2022
Digital currencies are electronic monies that do not require specific encryption technology and deploy no special cyber security measures. On the other hand, cryptocurrencies are supported by blockchain technology, which provides increased cyber security. While it is true that some crypto wallets have been hacked, the level of cyber security precautions done before using cryptocurrencies usually is higher.
Transparency is one central area where cryptos excel. The complete history of transactions between the two parties is visible and immutable while trading in cryptocurrencies. A decentralized ledger records all blockchain transactions visible in the public domain. However, in the case of a digital currency issued by a central bank, the centralized issuing body selects how much information it wishes to divulge. Only information pertaining to that transaction will be sent to the recipient or sender of digital currency. The decentralization of data depends on the authority and technology involved.
While official digital currencies have a relatively stable value and are thus simple to hold and use worldwide, cryptocurrencies have a far more volatile value. The price of a cryptocurrency unit might fluctuate by as much as 50% to 70% in a single day. As a result, fiat digital currencies are more stable, whereas cryptocurrencies are recognized for extreme volatility and danger.
Most nations, including India, have investigated the legality and acceptance of cryptocurrencies. Most traditional frameworks do not attribute any significance to these because any regulating organization does not endorse them. However, given the rapid increase in the number of depositors and various use cases of blockchain today, as well as the upcoming metaverse, where cryptocurrencies are the only payment method, some discussion about the legality of cryptocurrencies is bound to occur sooner rather than later. For the time being, countries worldwide are sticking to their own fiat currencies.
So, these are some of the differences when you think about Cryptocurrency vs Digital Currency.
Feature Image Credits: CNBC