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  • Digital Currency vs. Cryptocurrency--What is the Difference?

    Last month, Venezuela issued a new cryptocurrency, the petro, to deal with runaway inflation rates that has left its base currency, the bolivar, in dire straits. In the year from February 2017 – February 2018, the inflation rate has gone over 6,000%. To translate that into everyday terms, a kilogram of sugar costs more than half of the minimum monthly wage!

    What is unique about the petro is that it is backed by the Venezuela’s oil reserves. In other words, it is centralized. Normally, one of the defining characteristics of cryptos is that they are decentralized. Wikipedia even defines it as “a type of digital asset that is decentralized.” Rather than a governing body approving everything, the blockchain (public transaction database) IS the approval process.

    On the heels of this, Russia has announced that it is pursuing the CryptoRuble, scheduled to roll out next year. This follows the same structure of a state-issued crypto, and further blurs the lines between digital and crypto.

    These are not to be confused with several other nations that have already adopted or implemented forms of digital currencies. In Sweden now, there are many places that no longer accept cash, leaving open the possibility of a cashless society in the future. Japan plans to roll out a digital for the 2020 Olympics. And other countries, including China, Ecuador and Tunisia, are in various phases of digital currencies.  

    The point is, as the evolution of technology and terminology continue, it will presumably only get muddier in terms of identifying a crypto versus a digital. But in general, here are three differences that generally define them:

    1.      Design. Digital currencies are centralized, usually by a central government. Everything flows in and out of one place, and is subject to approval policies set by the governing entity. Cryptos rely on collective approval through an open ledger using blockchain technology.

    2.      Anonymity. Digital currencies require user identification, such as an uploaded photo, publicly-issued documents, etc. Cryptos don’t generally require these; in fact, the very identity of the inventor of Bitcoin, though known as Satoshi Nakamoto, is a mystery. But it is also not fully anonymous. While private information stays private, the senders and receivers are publicly known, and each transaction has an audit trail.

    3.      Transaction Manipulation. Digital currency transactions all run through a central authority, which can then choose whether or not to validate transactions, as per the rules set forth by the governing body. Crypto transactions are immutable and final. Each step can be tracked and everyone can see the transfer of money, for example, but once it is done, there is no going back.