Blockchain has for years acquired a fairly high-level complexity regarding the encompassing terminology that’s used in its description. Many of the words and definitions in the blockchain sector can seem overwhelming at first, and to make things even more complicated, many times these definitions or words will require a previous understanding of financial sector-related terms to further grasp their true concept. One of the biggest misconceptions and seemingly the biggest understandings within cryptocurrency is related to the understanding of the terms “digital currency”, “cryptocurrency”, and “virtual currency”. The 3 terms may seem identical, but are actually rather unique to one another and represent a different definition in its entirety.
Prior to delving deeper into this concept, it should be noted beforehand that only the 3 aforementioned terms/concepts will be explored and denoted. The aforementioned terms are additionally completely separate and unique from one another. Virtual currencies, digital currencies, and cryptocurrencies are all not directly related to blockchain within the exact same vector. They each maintain a relation or association to the concept or idea of blockchain in their own regard rather than a singular hemisphere.
Concepts and definitions of things such as “tokens”, “asset-backed blockchain assets”, or “coins” are unrelated; those terms and many others are much more subjective and based upon geographical location to really determine the true definition of what is being mentioned. In the case of digital currencies, virtual currencies, and cryptocurrencies, there is traditionally a narrow lens through which a definition can be formed, and subsequently from which utility can be extracted in a similar manner. They are much more explicitly defined and understanding their terms will assist in not only developing your own understanding of blockchain technology and cryptocurrency but also allowing for your expression and ability to talk fluently to others about decentralized technologies to advance in a unique manner.
Digital Currency: An Umbrella Term
Digital currency should be the first definition explored when it comes to exploring different classifications of what is deemed “currencies”. This is mainly because of the generally large overview that the term really covers; the term digital currency is more of an umbrella for many different factors, subsequent ideas, and concepts within the financial atmosphere. For example, although we haven’t discussed what cryptocurrencies are just yet, digital currency is composed of a much more broad foundation of deterministic finance, whereas cryptocurrencies are finitely packed into a category based on a set of different criteria or parameters.
When people say they want to buy digital currency, it can mean purchasing a wide range of different currencies. A rough definition of digital currency would relatively state that any sort of financial transaction, value, or payment that is sent through a technological landscape can be deemed a digital currency. So that applies to online bank transactions, credit card payments, PayPal, and so on. Within digital currency, for example, cryptocurrency would be in some regard a form of digital currency. Although cryptocurrency is much more complex and finitely defined, it can still be considered a digital currency considering by its natural definition, digital currency is simply any form of value transferred online.
The idea of digital currency is only limited to the following categorization: technological implementation. Any form of money or transaction that is completed in a technological landscape will in some form be classified as a digital currency. If USD is transacted through an online bank send, that particular USD is considered digital currency. If after you buy Bitcoin, you send it from one bitcoin wallet to another, you are essentially buying digital currency.
Digital currencies are classified as such dependent on their tangibility mainly. For example, a US Dollar bill, or any fiat currency for that matter, is not considered to be digital currency, inherently. This doesn’t mean that it can never be digital currency though. It’s a bit paradoxical, but think of it like this; if I were to give you a dollar bill and some coins by hand, that would not be deemed digital currency. However, if I were to deposit that dollar bill and the remaining coins into my bank account and then send the converted value to your bank account, that would be deemed digital currency.
Things such as bank notes or checks are not deemed digital currency until they are converted technologically. At that point, they can then be considered to be digital currency.
Any currency that is transactable online can be deemed digital currency; once that currency is finally transacted online, it is then deemed as a digital currency. Digital currency should possess the core functionality of any traditional currency; the ability to be sent, received, stored, and so on. If that functionality is portrayed in a digital setting, such as an online bank portal, the money that is sent digitally is then considered to be digital.
Cryptocurrency is a bit more detailed and niche specific than simply digital currency. Many different currencies can be classified as a digital currency; all that is required is functionality in a technological setting. However, with cryptocurrency, you have a very specific set of requirements that you need to hit in order for such a classification.
The “crypto” in cryptocurrency stands for the ability to be transacted cryptographically through some form of a protocol. The exact protocol that’s required is entirely dependent upon the said cryptocurrency, however, the main classification of currency as being “Cryptocurrency”, is its ability to be transacted in a cryptographically secure manner. By employing encryption, a value can be stored and transacted all in a digital landscape.
Encryption is the process of taking a set of data, in this case, transaction data (Senders, receivers, dates, times, and quantities), and placing it through a process where the underlying data is mixed and matched in a way that is only decipherable through either 1.) Diligently trying to uncover what is being expressed, or 2.) Complex computers running cryptographic “algorithms” to solve the complex data that has been compiled as a result of the encryption.
Things that are classified as cryptocurrency have to in some way employ encryption. The purpose for encryption is to hedge against counterfeiting and also enable immutability which is a process that is emphasized with most cryptocurrencies.
Blockchain or Equivalent Technological Utilization
A currency can be classified as a cryptocurrency subjectively by utilizing blockchain technology. This does not mean that to be considered a cryptocurrency a currency has to employ a form of blockchain technology, however, this is the most apparent instance for the best form of encryption and immutability capability.
Also, within the mainstream community although technically not every single currency has to employ blockchain in order to be deemed a “cryptocurrency”, most of the ones recently uncovered will. Either that, or they will employ a unique or representative form of blockchain; this ranges and can be things such as DAG or “tangle” technology (As is present with IOTA; IOTA is not a blockchain, but still employs a cryptographic “tangle” protocol to maintain a cryptocurrency).
P2P and/or Distributed Framework
This is subjective based upon your understanding and interpretation of what a cryptocurrency is, however, in the general mainstream the ideology of P2P is usually present and needed in order to fulfill a qualification of being a cryptocurrency. In the case of the current mainstream rendition of “cryptocurrency”, in order for true classification as such, a currency needs a Peer-to-Peer (P2P) foundation or a decentralized infrastructure as to not have to engage with a third party middleman in the core function of the currency.
Now, this doesn’t necessarily mean that the currency never can interact centrally; in fact, there are quite a plethora of different cryptocurrencies that are becoming more and more centralized as we speak, however, the concept of not needing a central middleman for its functionality is essentially behind the entire premise of what a cryptocurrency is.
The lowest level of classification in terms of currencies and payment methods for the ecosystem of the internet & technology is “virtual currency”. Virtual currency is an extremely broad sector when it comes to terminology; it groups together regulated, unregulated, technologically-associated, or non-actually intrinsic value-based currencies that can be used in a digital environment. As it stands, the United States regulatory structure acknowledges “virtual currency” in a subjective light that the remainder of global entities do not, which is a light that determines any form of “value” transacted through the internet but is not recognized by a government body as a regulated currency. As you can tell, this is a fairly generic classification and not tailored to what the remainder of the globe interprets explicitly as “virtual currency”, which is rather just any form of currency that moves on, through, or from the internet.
General Computerized Transactability
Something is classified as a virtual currency if it can be transacted through a computerized instance. With that in mind, things such as in-game currencies that don’t have any external value amongst the remainder of the world are categorized as being “Virtual Currency”. Let’s say you’re playing a game and in this game for each level you beat, you’re rewarded something like “Bonus Points” that you can spend on in-game items. This is considered to be a virtual currency.
Distinguishing the 3: Differences and Similarities
With the now detailed understanding of what is classified as a digital currency, cryptocurrency, and virtual currency, it’s easy to then distinguish differences between them all. At the most finite/detail oriented level, is cryptocurrency: cryptocurrency can only be classified as such upon maintaining a form of cryptographic process, which is very specific. Meanwhile, digital currency can be classified as currencies that maintain some sort of real-world value that can be transacted globally at any time. Lastly, virtual currencies, employ the most generic identification criteria. By simply emulating value, you can deem something to be virtual currency; it doesn’t actually need to be applicable to the everyday financial/monetary system.
Now the important distinction of all 3 terms: cryptocurrency is both a digital currency and a virtual currency. Digital currency is not a cryptocurrency or virtual currency. Virtual currency can be digital currency and can also be cryptocurrency. Take a second to absorb that information.
Let’s look at more specific examples now since we can infer which is which now: Bitcoin is considered a cryptocurrency, a digital currency, and a virtual currency. The United States Dollar (USD) is not a cryptocurrency and not virtual currency, but is a digital currency due to the fact that it can be transacted technologically (Via online bank transfers, PayPal, and so on). An in-game currency that you earn based on how well you perform in a video game is considered to be virtual currency, but is not recognized as a digital currency, or as a cryptocurrency based on the sole fact that no cryptographic process is required to implement it and it carries no transactionary value when placed outside of the video gaming sphere.
Now, keep in mind, this entire industry is in its infancy. There are different parties that will refer to the aforementioned terms in completely different lights; some will refer to assets as something they are not exactly due to inexperience or lack of understanding, but it’s mainly because at the moment there isn’t a very explicit standard to abide by when it comes to these terms. As a result, it’s simply important to look at classifying vocaulary terms such as the aforementioned with a grain of salt, and with the understanding that not everyone understands the concepts as they are most commonly referenced. Additionally, different geographical regions will understand some terms differently or with different ideologies than others. At one point, “digital currencies” and “cryptocurrencies” were the exact same thing; since then, however, as is prevalent, things have changed.