Today it is very easy for individuals and organizations to create their own digital currency. Notwithstanding the benefits or risks that this may bring, one of the problems surrounding this phenomenon is the growing confusion about the terminology of money. Kimberly Rosales, with her vast knowledge in the world of different types of currencies, comes to evacuate the doubts by explaining the differences between digital money, virtual money, and cryptocurrencies.
In particular, the terms digital money, virtual money, and cryptocurrencies are being used interchangeably, but these three concepts are not interchangeable. It is important to understand that a digital currency is not always a cryptocurrency, and, conversely, cryptocurrencies and virtual currencies are always digital currencies.
A digital currency is issued and generally controlled by its developers and used and accepted among members of a specific community that recognizes its validity. Digital currencies can include a multitude of common products, such as gift vouchers, airline reward points, cashback for credit card purchases, among other possibilities.
Rosales clarifies, “These digital monies share a similar trait in that they are a medium of exchange that operates as a currency within its own context; however, they do not have the attributes of a real currency unless issued by a central bank, such as the Ecuadorian digital dollar.”
A curious fact is that cash represents approximately 8% of the money in circulation, so everything else corresponds practically to digital money. On the other hand, virtual currency is usually the term used for currencies used in online games, such as Clash Royale or League of Legends. These only have value within the game and provide an incentive to spend more hours playing the game so that you can exchange these coins with other players or make in-app purchases within the application you are playing in.
“In a broader context, these currencies are a medium of exchange within a virtual world. They are also associated, in certain cases, with Internet platforms and are only used by members of a specific virtual community,” the expert explains.
Some examples are RappiCréditos or Exito Points. These virtual currencies have value, but that value is linked to a virtual economy platform, and the currencies do not exist in physical form.
Finally, a cryptocurrency is based on the principles of cryptography to provide a secure medium of exchange. Generally speaking, this is not backed by a central bank, government, or commodity, but because they are based on Blockchain technology this can be used as a currency of exchange and store of value.
They are often set up on a decentralized network between people (peer-to-peer) and are illustrated particularly well by Bitcoin (BTC). Cryptocurrencies are a form of digital currency but differ in that they are not denominated in an official currency and are not controlled by a centralized authority as virtual currencies are.
Digital and virtual money have been around for decades, but cryptocurrencies are more recent. Cryptocurrencies, such as BTC, are a type of virtual currency that does not have a specific issuer, that is cryptographically protected, and that in principle, their consistency can be protected by a massive and distributed verification of their users.
Therefore, cryptocurrencies are virtual and digital money. But unlike other virtual currencies, they are not centrally controlled but distributed and based on cryptography to prevent manipulation by any of their members.
It can be concluded that all cryptocurrencies are virtual and digital money, but not vice versa. When we talk about digital money, we can be talking about any currency in the world (the euro and the dollar as well). When we talk about virtual currency, we may not be talking about a cryptocurrency, but a currency with a specific issuer. The idea is that the terms are used correctly in the future and that there are no misunderstandings.
