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Most people think that the meaning of the words "cryptocurrency" and "digital currency" are synonymous, but this is not the case at all. This article will reveal their fundamental differences.
1. What is meant by the term digital currency?
This is money that is used for calculations on the Internet. They exist only virtually and are not physically represented by anything. But at the same time, they have exactly the same characteristics as ordinary money. With their help, you can sell and buy goods, exchange for other currencies, and carry out transfers. From a certain point of view, they can be classified as a bank deposit.
2. What is meant by the term cryptocurrency?
This is one of the types of digital currency, which has almost all the same properties, but is considered more reliable, as it is based on cryptographic algorithms. The main goal is to secure data exchange. Cryptography answers the question: "How to prevent third parties from changing or destroying transmitted information?". Cryptocurrency uses blockchain technology and distributed databases. Due to this, autonomy and anonymity are achieved, so no one can control what happens in the system, for example, such a currency as decred.
3. What are their differences?
Let's highlight the fundamental differences.
Structure
Digital currency is controlled by a certain company and a network of servers, so it is a centralized system. Cryptocurrency, on the contrary, is decentralized, which means that there is no governing structure and the rules are established by the decision of the majority of users.
Anonymity
In order to start using digital currency, it is necessary to go through the verification process, for example, to fully use Webmoney, you need to upload a scanned copy of your passport.
No identity verification is required for any cryptocurrency transactions. But if the wallet address does not contain any personal information, then each transaction is recorded in the general register and can be viewed by anyone. This means that the movement of funds can be tracked.
Transparency
Digital currency is not transparent. It is not possible to view all transactions at the wallet address, this information is closed to outsiders. In contrast, cryptocurrency is completely transparent, thanks to the public blockchain you can see all transfers.
Transaction management
Due to the presence of a central control body, transactions in digital currency can be canceled, blocked or unblocked in the wallet, if there is a suspicion of their illegal origin.
In the case of cryptocurrency, it is necessary for the majority to agree to making changes to the blockchain, which is extremely unlikely. Although there were precedents.
Legal regulation
Most states have adopted legislative acts regarding digital currencies. As of today, most countries have not been able to define what cryptocurrency is, and therefore have not delineated it within the legal framework. But the realization is gradually coming that it is necessary to do this, which means that in the near future we will see the fruits of the regulators' work.
4. What are the advantages and disadvantages of digital money?
Thanks to the presence of management in the centralized system, it is possible to correct the errors that occur, for example, it is necessary to cancel the transaction. The decentralized system does not assume this.
A big disadvantage of using digital money is keeping confidential information in the same hands. It can be stolen, sold to outsiders, etc. There is no such problem in a distributed network.
5. Is it possible to combine the advantages of both types?
The organization of management of one group of people in a decentralized system can turn out to be a very good innovation. Today, there are more than 2 billion people in the world who do not have access to the traditional financial system. At the same time, more than 5 billion people own mobile phones. Therefore, projects are already being created to create a banking system based on the mobile network.
Such systems will have the advantages of cryptocurrency, namely transparency, security and decentralization, but will be subject to control and subject to certain rules.
