What is the difference between a cryptocurrency and a digital currency?
First of all, it must be said that even traditional fiat currencies are now used mainly with digital tools. But since they are not natively digital, they do not have all the characteristics that a native digital currency can have.
The native digital currencies issued by the same central banks that issue traditional fiat currencies are called CBDCs, i.e. Central Bank Digital Currencies.
These are nothing more than digital versions of traditional fiat currencies.
In other words, from a financial point of view they are fiat currencies to all intents and purposes, and they differ from the traditional ones only in terms of the technology with which they are issued, exchanged and managed.
A CBDC, however, does not even need to be based on blockchain. Indeed, it usually isn’t, because by blockchain it is meant a decentralized distributed ledger based on a chain of blocks, and the ledgers on which the central bank digital currencies are based are not decentralized at all.
By now it should already be clear that digital currencies are not cryptocurrencies at all, and in fact they don’t even have much to do with real cryptocurrencies.
But they do have something in common, namely part of the technology on which they are based.
Traditional currencies, for example, are not issued in a single ledger. Surely those issued directly by central banks are recorded in the balance sheets of the same banks, but for example those issued by commercial banks as credit to their customers are recorded separately.
Moreover, there is not even a single ledger of all transactions, because for example, transactions that take place by physical exchange of banknotes may not even be recorded at all.
The central bank digital currencies, on the other hand, have a single ledger on which all issues and transactions are recorded. From this point of view – but only from this point of view – they are more similar to cryptocurrencies than to traditional currencies.
In fact, by law, all electronic transactions in fiat currency must be managed by an intermediary that verifies the identity of the subjects involved, and most likely this will be the case also for CBDCs.
In other words, electronic transactions in fiat currency are not, and cannot be, anonymous, so much so that the only way to perform truly anonymous transactions with fiat currency is to use physical banknotes.
In theory, even with CBDCs it might be possible to make anonymous exchanges directly between users, i.e. without intermediaries, but it is not very likely that central banks will allow this.
Indeed, the fight against cash that is rampant all over the world reveals that central banks are much more interested in preventing the anonymous use of fiat money.
On the other hand, cryptocurrencies, whether they are based on blockchain or other types of distributed ledgers (such as DAG), differ from fiat currencies in both these respects.
In other words, they are born anonymous, and allow anonymous use with direct exchanges between users without intermediaries. Furthermore, they are decentralized, and therefore cannot be controlled by anyone.
In reality, there are also private digital currencies that are not decentralized, and which are often improperly called cryptocurrencies, but this distinction is not sufficiently clear to divide real cryptocurrencies from those that resemble them.
For example, XRP runs on a decentralized ledger, but a large number of tokens are still in the hands of the company that created it, Ripple. Moreover, USDT runs on Ethereum, and its tokens are almost all in free circulation in the markets, but the collateral to guarantee its value is totally controlled by a single entity, Tether.
Yet both XRP and USDT are commonly called “cryptocurrencies”.
The situation is therefore slightly complex, although in theory the distinction should be clear: cryptocurrencies are decentralized, and therefore anonymous, while if they are not decentralized they are only digital currencies.
Digital currencies in turn can be divided between private currencies, issued for example by companies (such as Libra), or public currencies, such as Venezuelan Petro, although it would be better to define them “state” in order to avoid confusion with decentralized public cryptocurrencies.
What is certain, however, is that the technology developed for the first time in 2008 by Satoshi Nakamoto, who created the first cryptocurrency (Bitcoin), is proving to be so much better than traditional fiat currencies, that the central banks themselves are considering implementing it also in the currencies they manage, although these are not cryptocurrencies at all because they are not decentralized.