The world of cryptocurrency is rife with complex terminology. You will be confused by the various terms they use to describe these assets. Sometimes they are called digital currencies, whereas, other times they are virtual currencies. However, digital currencies are totally different from virtual currencies but share the same attributes.
These terms are often used interchangeably but don’t actually mean the same thing. Today we will be discussing the differences between the two.
What Is A Digital Currency?
Digital currency is a blanket term used to define any currency that is available in electronic or digital form and is transacted with the help of computers or electronic devices and wallets connected to the internet. They can be regulated or unregulated.
Unlike physical currencies like a dollar bill or a coin, digital currencies are intangible. However, they do have utility in certain scenarios, such as within gaming sites or social media networks where the online community participating in the platform can use a specifically designed digital currency to purchase goods and pay for services that are offered.
One major advantage of digital currency is that it allows for seamless and instant execution of transactions, even across borders. For example, a person located in the United States can make payments in digital currency to a counterparty living in Singapore, given they both are connected to the same network that supports the token.
There are two types of digital currencies: centralized and decentralized. An example of centralized digital currency is CBDC, which is fiat currency issued and distributed by a central bank in digital form. Meanwhile, prominent cryptocurrencies like Bitcoin and Ethereum, which operate with the help of a distributed network, are examples of decentralized digital currencies.
Pros and Cons Of Digital Currencies
What Is A Virtual Currency?
Virtual currencies are a digital representation of value that is only available in electronic form. They are a subset of digital currencies that are issued by private entities, such as a group of developers or organizations.
Unlike digital currencies like CBDCs, which have a physical relationship with fiat paper money and can be used to transact in the real world, virtual currencies are only intended for online use.
The European Central Bank (ECB) defined it as “digital money” that is issued and controlled by its developers to be used as a payment method among members of a virtual community in an unregulated environment. The Internal Revenue Service (IRS) of the United States described virtual currencies as digital representations of value that function as a “unit of account, store of value, and a medium of exchange.”
Virtual currencies have failed to take off as a payment method or medium of exchange in mainstream society, largely due to having restricted usage and other times for being speculative investment assets. Certain cryptocurrencies are also considered as a form of virtual currency despite not being strictly controlled or used by an online community.
Global regulators are seriously considering regulations for virtual currencies. In the US, the Securities and Exchange Commission is looking to bring cryptocurrency exchange platforms under its supervision. Meanwhile, regulation for stablecoins, another form of virtual currency that is pegged to the value of a fiat currency, is also under work. The IRS wants to tax capital gains from the sale of cryptocurrencies.