Digital currency is a currency that can be accessed digitally. In simple words, digital currency is an electronic form of currency. Nowadays, everything is evolving towards digitalization, from education, shopping, banking, and other industries are doing it. Digital currencies have all the innate properties, including physical money and digital money, allowing immediate exchanges that can be executed consistently for transactions across the world while being associated with compatible devices and networks.
On the other hand, cryptocurrencies, known as virtual currencies, are clearly an example of digital currency where the fact that all cryptocurrencies are digital currencies is recognized, but not all digital currencies are cryptographic. Central bank-backed digital currencies, such as the possible digital euro and digital yuan, may become a reality in the coming years. Unlike cryptocurrencies like Bitcoin and Ethereum, these coins promise less volatility and higher security. In addition, they will have the support of their respective monetary institutions, which are responsible for ensuring financial stability for cryptocurrency prices.
Recently the European Central Bank (ECB) studies the creation of the digital euro, under the concept of CDBC ( Central Bank Digital Currency). It would be a digital modality of the money of the central bank and that depends directly on the institution. From the ECB they work and it is estimated that they are about to conclude this phase in which one of the possibilities is to implement formulas based on blockchain technology, the same one used by cryptocurrencies such as bitcoin and Ethereum. Where this is well known that it would allow greater transparency and monitoring of information, transactions, and movements that are made through the multiple nodes that a chain of blocks has.
Something important to highlight is that cryptocurrencies, being created by the users themselves, their value is determined by the market. And from an objective point of view, the native cryptocurrencies of decentralized and non-permission networks, such as bitcoin or Ethereum, are not anchored to the value of legal tender, but rather are subject to supply and demand. Additionally, these are not backed by a legal entity that responds in case of technical or risk problems.
As one of the differences that a digital currency backed by a central bank would have is its almost zero volatility, and this is due in part to the fact that central banks ensure financial stability through monetary policies. On the other hand, bitcoin is a volatile currency because it operates in an immature market, unsupported and full of expectations. Although the economist points out that this may change the more the use of cryptocurrencies becomes popular. Now, let’s see what some of their differences are.
To issue a backed digital currency, the BIS lists a series of characteristics that seek to align with the financial stability objectives that govern international monetary institutions, with this the following characteristics stand out:
Avoid volatility where the conversion and value will be on par with physical money.
- Greater acceptance and availability.
- A lower cost of creation and distribution.
- Have a secure and resilient system against possible cyberattacks, system crashes, or disruptions.
- Operability between different banking systems.