CryptoCurrency Vs. Digital currency Is Fiat Currency Still The Most Valuable?
January 10, 2019
The era of currencies came into being from the early ages of history evolving from the Barter system to current day electronic currencies.
This 21st century has seen many evolutions as well as revolutions in finances, and digital currency usage. People have gone cashless leaving their homes with only a smartphone that carries digital wallets, and they even leave behind the plastic money resting in the drawers.
Current age is seeing money in various forms from digital currency to cryptocurrency and in between sits virtual currency apart from the most common—fiat money or popularly known as paper money. Let us see a rundown on the assortments of popular nonphysical monies we are using in the 21st century.
What is Digital Currency?
The monetary system that you use to exchange value and commit trade over the internet is commonly known as Digital Currency system. This system usually involves the standard currencies legalized by the various governments and financial authorities, but digital currency exists in the form of electronic money and has a presence over the internet as a counterpart of their physical form—fiat money. Such systems facilitate smooth, fast and borderless transactions.
Digital money has made it easier for people to transfer money to other parties and make purchases even without carrying cash. You would not fear that your hard-earned cash will be thieved or lost as you have everything stored in a digital wallet (account) which you can carry in your smartphone quite easily or in the form of chip-enabled plastic cards. Use of digital currencies is not restricted to any particular region and transcends all the geographical barriers.
An example would be buying a car. If you pay a quarter of the amount in cash and the rest is deducted every month from your bank account automatically in installment, the former is fiat money while the latter is digital money transferred without supervision on a fixed date via digital transaction from your bank account to the car dealer’s account.
The digital currency that you transact is attached to the money available in the bank accounts or the credit cards. If you have sufficient balance in your bank account or a bank-affiliated card, you can transact it in the form of digital currency.
What is Cryptocurrency?
Cryptocurrencies are the latest version of digital currency that has no physical existence at all. They are created and consumed over the internet. The concept of cryptocurrencies is based on the encrypted technology of blockchain that generates a high level of security for the users. In the current time, this is being claimed as the most reliable and robust form of currency that has been formulated by the researchers so far.
The central principle that falls beneath the research for the development of cryptocurrencies is that everyone was on the lookout for something reliable, transparent and secure that would make it convenient for people to carry out digital transactions. Numerous complex algorithms and protocols go into the creation of cryptocurrencies; such protocols also remove the third party involvement that otherwise attracts extra charges and makes the transactions more expensive with the conversion rates and various commissions to process the transactions. Everything from science to math with computer technologies is blended to create cryptocurrencies and make them work.
The best part of the cryptocurrencies is that it uses a decentralized blockchain ledger process, which implies that no single person has the authority to supervise or govern the transactions and a rule of consensus is employed during each operation. Also, the complete data is stored in a cloud-based public ledger that is accessible to all the participants. The consensus rule compels to forge at least 51% of the system to break the security system that is plausibly impossible for the hackers.
What is virtual currency?
We cannot move further without talking about virtual money. This is also a type of digital money that does not have any affiliation with fiat money, is created by its developers on the internet within a confined system and is not backed by central authority governing laws or finances. Virtual money can also be transacted and stored electronically.
The currencies that are used in video games or any game over the internet, which are used within the boundary of that game and do not hold any value in real life are an instance of virtual currency. Such virtual currency is created within the game, used for transactions in that game and makes sense only for that game. Virtual gifting via these currencies has picked up a craze in recent years in the gaming business.
Cryptocurrencies are a subset of both virtual and digital currencies, however not all virtual currencies are decentralized, but they definitely fall under the umbrella of digital currencies. Hence, digital currency sits on top of virtual and cryptocurrencies.
Cryptocurrency vs. Digital Currency – What are the fundamental differences between the two?
Cryptocurrencies are also a type of digital currencies technically, yet there is a significant difference between the two. The factors that can help to differentiate between them are the way they are designed, operation and are governed.
1. Governance and Centralization
Digital currencies are centralized in nature whereas cryptocurrencies are decentralized in process. This significant difference also makes the cryptos an option more preferable as compared to its counterpart. Any fiat currency—physical or digital—is controlled by the government or a financial institute or both. So, a third party involvement in each transaction attracts certain fees. Cryptocurrency, on the contrary, is entirely free of any such authority. The system backed by blockchain takes care of the transactions through encryption, hence making cryptocurrency a decentralized money.
You will have to provide valid legal documents while transacting using digital currencies, but you are spared from doing so while you transact utilizing cryptos as the concept. Still, all the transactions can be tracked as the details are stored in a public ledger that is visible to all.
2. Legal stamping
It is a human inclination to look for a legal seal in each financial transaction, and digital currency is supported by the financial institutes such as banks which gives confidence to people. Contrary to this, Cryptocurrency receives no support from a government or any financial institute, and there are still too many nations in the world where the government does not recognize cryptos legally. Cryptocurrency is only on the internet and has authorization from the practitioners, blockchain theorists and the system itself along with the developers, basically all private support.
There are known strict legal formulations in the deployment of digital currency while no such stringent legal framework administers the cryptocurrencies. It might dent the usage of Cryptocurrency in daily life in the future when the adoption goes worldwide for cryptos.
Security gives an edge to the Cryptocurrency over digital fiat money.
As a central authority controls the digital currencies, their exchange can be tracked easily by them, and if required the transactions can be canceled by the authorizing body whenever needed like in case of fraudulent business and adultery. However, cryptocurrencies are regulated by blockchain communities and system and the transactions once carried out cannot be altered, canceled or reverted.
There are specific codes and encryptions to regulate your transactions in cryptos so that you can do your business with enhanced security. As mentioned earlier, a minimum of 51% hacking is needed in the system to manipulate the public ledger, which is virtually not possible. Being controlled by a moderator, the digital currency has seen problems of money laundering, black marketing, and many frauds, which is seemingly rare in case of Cryptocurrency.
4. Trust Factor
Digital currencies are controlled and backed by legalized institutions and governments, which see through all the transactions and the trust of the users lie upon them and the digital system behind such funds. In cryptocurrencies, the confidence is on each involved user but any third party. The trust is not at stake for this reason. Identity theft is not an issue with cryptocurrencies. Users only provide essential identity needed while digital monies need all the confidential personal information like name, residential address, phone number, and similar such information.
The lack of transparency in digital currencies makes cryptocurrencies a more favorable option than the former. A user is not able to see the details of the transaction, and all the information about it is highly confidential. On the other hand, cryptocurrencies are much transparent in nature. All the stakeholders can check the transaction details, and you will be able to get an idea of how everything is going on at every instance of transactions.
Blockchain system uses multilevel encryption methods, which are tough to break, and the ledgers are public. So, none of the transaction is hidden from any of the participants.
All the digital transactions need a user to validate their identity with name, address, and sometimes phone numbers. The banks and FIs need all kind of personal demographics of the account holders and wallet users. It has resulted in identity theft in many instances because such private and confidential information can outflow to the fraudsters and hackers with just a users’ database leakage. So, data we share during a digital transaction is vulnerable and prone to theft.
While buying a product from any e-retailer, the user has to avail their information, which is readily available to the merchant and can be used later for forgery. On the contrary, cryptocurrencies based transactions do not demand users’ sensitive data but the wallet address which is nowhere related to your physical address or carries sensitive personal data.
7. Various Influences
In the digital currency system, the central authority decides the inflation rates, the value of a currency, various involved fees, and exchange rates. Such institutions have to take care of the benefits of an ordinary man and which is in a way, beneficial. Fraudsters are answerable to them, and illicit activities are handled in the legal court. Without any governing regulator, cryptocurrencies have also seen frauds. Such systems might not take care of the weaker sections as FIs do with fiat and digital fiat currencies.
The governing bodies can pump money into the market in the name of investment, bailouts and other similar money generating methods. There are only so many cryptos in the market that the worth is known to the public openly. The wealth in the form of digital money keeps on changing with ebbs and flows. So, there is no precise way to tell the amount of money in the market whereas cryptocurrencies are only limited and have no hidden form like their counterparts.
Many other market conditions like the bankruptcies seen in 2008 for many finance giants and demonetization shake the roots of faith of the citizens in digital currency, which seemingly would not influence the flow of cryptos.
Is Fiat currency still the most valuable money?
The entry of cryptocurrencies in the economy has pumped up the speculations if fiat money is going to vanish sooner or later. There is no hidden truth that cryptocurrencies shook the throne of fiat and digital money. The monopoly of the electronic form of fiat money no longer exists in the economy. The innovation cryptocurrencies have brought in the finances with transparency and hold on the transparency cannot be ignored.
However, cryptocurrencies have a long route to travel and mark a seal in the daily life of a commoner especially in the developing countries owing to the lack of systems, infrastructure, and education. The fear of adaptation and change is human nature. These are the main hindrances for cryptocurrencies to spread their wings in the economy.
Apart from adaptation, the FIs would not let it go so easily; otherwise, these institutes would sit idle, worse shut down. The role of governments is also crucial in the current day money business which will be marred if fiat vanishes from the map of the economy.
Cryptocurrencies are based on the blockchain, which is a promising technology as per Gartner and Blockchain does hold the potential to change the world. Although fiat currency has lost its sheen when standing by the side of cryptocurrencies like bitcoin, Ethereum, and Litecoin but fiat is going to stay for a long run as cryptocurrencies have their challenges.
The traditional definition of money states that “Money is as money does” and so the cryptocurrencies are fitting right in this definition. Money has moved from the value-based concept of representative money to a faith-based theory. So, it is only a matter of time for cryptocurrency to garner enough faith by the people for day-to-day use and it will be mainstream.
With a lot more debate about which is the best, digital currency or cryptocurrencies is doing the rounds, it becomes tough to ascertain which one is more favorable.
More and more people have moved towards digital currency in the 21st century and certain researches a few years back has shown that net worth of fiat money is approximately only in single digit and more than 92 % of the total currency in the world is digital. So, there can come a moment when both the digital fiat and cryptos will survive together in the global economy with harmony. Can it?