The world is moving strongly towards the use of cryptocurrencies and digital currencies in daily transactions, after it has become a strong market that competes with its paper counterpart.
Questions are being raised about the identity of the difference between cryptocurrencies and digital currencies … Are they the same or are there differences?
Clearly, there are important points that combine the two currencies, the most important of which is the use of blockchain technology, which requires access to these currencies through computers and mobile phones only, because they only exist in electronic form.
On the other hand, there are fundamental differences between these two currencies, related to the method of issuance, circulation, risks and uses.
Cryptocurrencies are one of the aspects of digital currencies that appeared in the money markets nearly 10 years ago, and have emerged strongly during the last three years, and among the most prominent models are Bitcoin, Ethereum, Binance Coin, Cardano, and Dogecoin.
These currencies are not subject to official regulation, as they are not issued by central banks like other currencies.
Rather, it is obtained through what is known as a mining mechanism that relies on solving complex accounting equations by sophisticated computers and is also used to manage and control the creation of new currency units.
This process includes data validation and transaction records added to the public registry using blockchain.
On the other hand, digital currencies are issued by central banks and are subject to the regulation of countries according to their monetary policy and consistency with financial policies, and it is called the central bank digital currency (CBDC).
Within the framework of the central organization, the digital currency shall have an electronic record to represent the default form of the country’s paper currency, and be similar to the paper currencies that carry a distinctive serial number, to prevent forgery or allow traceability.
Alberto Muñoz Cabanes, Professor in the Department of Applied Economics and Statistics at the National University of Distance Education (UNED), notes that one of the most striking differences is the amount that can be released.
Cabanes notes in a note published by the Spanish bank “BBVA” that digital currencies can be issued by central banks without borders, according to the data of the economic performance of each country.
“While cryptocurrencies have a predetermined cash cost, for example, Bitcoin issuance will not exceed 21 million units.”
The total value of the world’s cryptocurrencies, which number more than 5,300 currencies, is close to about two trillion dollars.
Cryptocurrency trading appears to be highly volatile between high and low in a large range within a short period of time, due to its dependence on the price determined by supply and demand only and not supported by official government agencies, which reflects a high level of risk, according to Natalia Espanyol, an economist at BBVA.
Espanyol points out that digital currencies will not be subject to the same matter because their price is related to the economic and political performance of countries, and is subject to what is known as legal tender, that is, it is the recognized means of settling public or private debt or fulfilling a financial commitment, unlike cryptocurrencies, which are forbidden to deal in many countries of the world.
Legality of activities
Cryptocurrencies face several criticisms related to their ease of use in illegal activities such as drug trafficking, money laundering, and the penetration of international sanctions, in addition to poor infrastructure.
Because it is not issued by any central authority, some consider it immune to government interference or manipulation, and others treat it as a hedge against inflation.
Whereas, digital currencies that are subject to a distinct sequence and central control can track their employment activities, and monitor illegal transactions.
In general, the Bank for International Settlements (BIS) has defined a package of characteristics for central bank digital currencies, including that the amount transferred is the value obtained upon receipt, its acceptance and availability for all types of online and offline transactions 24 hours a day, seven days a week.
And to have a low cost and almost zero in the moments of creation and final distribution of money, with a safe and flexible system at all times against potential cyber attacks, system failures or disruptions.
Among the characteristics of digital currencies is that they are operable between different banking systems, while being strong and legal thanks to the support of the central bank.
The central digital currency train begins
Several central banks have begun preparing markets to receive official, centrally secured official cryptocurrencies, in order not to leave the arena for cryptocurrencies issued by private companies and institutions.
Cambodia, the small Southeast Asian country, was the first to lead the world in launching the digital giant, under the name “Bakung”.
Last April, China announced the launch of a blockchain-backed digital currency, with an ambitious plan to expand the use of the digital yuan and reduce the amount of physical currency available in the market.
The People’s Bank of China (central bank) said early this month that it is testing the possibility of using the digital yuan for cross-border payments, and the digital yuan has been piloted since last year in several cities in China.
And there are major economies such as India and Pakistan preparing to explore a similar step, and the Bank of Japan has begun experiments to study the feasibility of issuing its own digital currency.
While the British authorities announced the possibility of issuing a new digital currency, the British Treasury Secretary, Rishi Sunak, said that it might be called “Britcoin”.
The Bank of England confirmed that the new currency, if passed, would be a new form of digital money for households and companies to use in conjunction with cash and bank deposits, rather than exchanging them.
On the European Union level, German Finance Minister Olaf Schultz called for the launch of a common European digital currency, and that Germany will support in the form of building work that the European Central Bank is doing with the aim of creating a digital euro.
He stressed that Europe needs innovative and competitive solutions for payment processes.
In mid-February, the President of the US Federal Reserve, Jerome Powell, said that the Federal Reserve is studying the issuance of a digital dollar, stressing that this project is considered one of the priorities for the Fed, but at the same time he does not want to accelerate the project, but rather he will be cautious.
The US Treasury Secretary, Janet Yellen, previously said that digital currencies may lead to faster and cheaper payments, but there are many issues that must be studied, including consumer protection and money laundering.