Cryptocurrencies and digital currencies: what are the differences?

Both payment systems are evolving more and more. Although their name and usage are similar, cryptocurrencies and digital currencies are two very different types of currencies.

Since the explosion in the price of bitcoin in 2020 and the arrival of NFTs on the Ethereum blockchain, not a week goes by without talking about cryptocurrencies. The sector has gained great importance in recent years, aided by multi-billion dollar investments. But cryptocurrencies are not the only currencies whose development is fascinating.

Whether it is the Chinese e-yuan, Russia’s digital ruble project or the digital euro, dematerialized currency projects are on the way: more than 80 digital currency projects are under development. Often confused with cryptocurrencies, digital currencies, also known as MNBCs (digital central bank currencies), are very different from decentralized projects such as bitcoin or Ethereum – although they also share a few characteristics.

A detail of a 5 euro banknote. // Source: Didier Weemaels / Unsplash

Before proceeding, it is important to define cryptocurrencies and MNBCs correctly.

What are cryptocurrencies?

Cryptocurrencies are backed by blockchains, the kind of giant journals that can be used to permanently and inviolably record information, files (such as NFTs), or to confirm transactions between two people. All this information is contained in blocks, which are gradually added to the already existing chain. To ensure that the new block contains the correct information, and to ensure its inviolability, minors must validate this block before adding it to the chain.

Cryptocurrencies and digital currencies: what are the differences?
Cryptocurrencies are always backed by a blockchain. // Source: canvas

This validation operation can take place in several ways, for example by using the method of proof of work or proof of effort. In any case, this step requires a lot of investment, whether it is energy, equipment or money. It is to reward validators for their work that cryptocurrencies were invented: for every validated block, a miner receives a certain sum: for bitcoin, for example, each new block brings in 6.25 bitcoins.

Cryptocurrencies therefore come from decentralized systems (with the notable exception of stack coins). By definition, therefore, they are not issued by a central body and behave completely independently.

What are the digital currencies of the central bank?

Digital currencies are totally different from cryptocurrencies: they are, as their name suggests, issued by central banks, just like the coins or banknotes we are used to. MNBCs are similar to these banknotes or coins, but exist digitally.

Cryptocurrencies and digital currencies: what are the differences?
MNBCs are the digital equivalent of banknotes. // Source: Giorgio Trovato / Unsplash

However, these are not credit card payments. Card transactions go through intermediary networks: banks or payment systems such as Visa or MasterCard. Payments from MNBC thus go directly through the central bank rather than through commercial banks.

Thus, although the MNBD system was partly inspired by cryptocurrencies, digital currencies are not blockchain-based or decentralized. Of course, each project has its own peculiarities, which means that no one is 100% similar to others.

Digital currencies are still mostly at the project stage more or less advanced. So far, it is only in China where the local MNBC has been deployed. And the e-yuan is not yet available on a large scale, but only in certain test areas.

With regard to the digital euro, the European Central Bank announced on 14 July 2021 the launch of a ” experiment on the use of the euro only on digital media “, And which would be deployed from 2024. For all the other projects, a precise date for adoption has not yet been set.

How are they used?

The use of cryptocurrencies necessarily goes through one crypto wallet, a digital wallet. It is through this wallet that transactions will take place, whether it is to buy currencies on specialized exchange sites like Binance or Coinbase, or for all other operations.

So far, there are still few platforms that directly accept payments in bitcoin or Ethereum, which are still mostly speculative instruments more than means of payment. But there are also growing examples of companies accepting cryptocurrency payments, like Tesla. And some NFT sales platforms only accept payments in cryptocurrency.

Cryptocurrencies and digital currencies: what are the differences?
Cryptocurrencies are very different from MNBCs. // Source: canvas

As for MNBC payments, users will not notice the difference with credit card transactions or with the traditional payment apps that already exist. They should only use a dedicated app developed on purpose by MNBC. Since digital currency does not have to go through bank intermediaries, this will allow payments to be processed immediately and will not incur additional costs.

The steps would be exactly the same as for cash payment without a bank intermediary between buyer and seller. Another benefit: MNBCs would be legal tender, which is also the case for banknotes, which means sellers and merchants are required to accept payments in this form. Such is the case, for example. not with debit cards – which means that they can be rejected in certain companies or limited to a certain amount.

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