Is there a difference between a token, a cryptocurrency, a digital currency, and virtual currencies? The answer is easy and forceful: yes, there is.
Although in everyday language they are used as synonyms, they are not the same and there is often confusion with these terms and their definitions. For this reason, at Cripto247.com we are going to clarify the issue and then we will explain what each of these denominations mean, what they cover, what they don’t and some examples . Let’s see:
When a few months ago Facebook unveiled its Libra project , it was announced as a “cryptocurrency”, which is why regulators and referents of the crypto system raised the cry. But the experts quickly discarded that definition: Libra is (or will be) virtual money or digital currency. The reason? Its administrators are corporations and therefore it is a centralized currency.
However the issue is not so simple. While decentralization is the main ideology behind cryptocurrencies , some of them can be centralized, at least to some degree. Therefore, if we look for a definition, we can say that cryptocurrencies are virtual or digital currencies that are built with a solid “cryptographic” foundation that makes them safe and immutable. Most cryptocurrencies are based on blockchain technology.
To further complicate matters, there are also sub-categories within mainstream and modern (blockchain-based) cryptocurrencies, for example NEO, which is a cryptocurrency, while Binance Coin (BNB) is actually a token.
What is a cryptocurrency?
The simple answer would be that they are digital currencies, native to your own blockchain. But it’s not that simple.
Bitcoin (BTC) and Ether (ETH) are examples of cryptocurrencies. What do they have in common? They all exist on their own separate ledgers : BTC operates on the original Bitcoin blockchain, ETH is used within the Ethereum blockchain , XMR exists on the Monero blockchain , and so on. All these cryptocurrencies also have the characteristic that they can be sent, received and / or mined .
As their name implies ( cryptocurrencies in English), cryptocurrencies tend to have the same characteristics as money ( currency in English): they are fungible, divisible, portable and have a limited supply .
Thus, typically, cryptocurrencies are intended to be used as physical cash: to pay for goods and services (although retail adoption is still slow) or as a store of value and savings. However, there are exceptions: while Ether has all the attributes of a currency, it works beyond its function of “money”, because it is used within the Ethereum blockchain to facilitate transactions.
There are also the ” altcoins “, called that way because they would come to occupy the place of alternative to Bitcoin, the main cryptocurrency. Many altcoins are a fork of Bitcoin and were developed using the open source protocol of Bitcoin, such as Litecoin (LTC) and Dogecoin (DOGE), but the aforementioned ETH and XMR are also known as altcoins, despite being built on blockchains entirely. new.
So how do we identify an altcoin? The answer is simple. We must ask ourselves if that cryptocurrency (other than BTC) is based on its own blockchain. If so, then we can call it altcoin.
What is a token?
Tokens are digital assets that can be used within the ecosystem of a given project.
The main distinction between tokens and cryptocurrencies is that the former require another blockchain platform (not their own) to function. Ethereum is the most common platform for creating tokens, mainly due to its smart contract function. Tokens created on the Ethereum blockchain are generally known as ERC-20 tokens, such as Tether.
The purpose of tokens is also different from cryptocurrencies, although they can also be used as a means of payment. For example, many tokens are created for use within decentralized applications (DApps) and their networks. These are called “utility tokens”. Its main intention is to grant the holder access to the project, as with the BAT (Basic Attention Token).
The BAT is an ERC-20 token (which means its blockchain platform is Ethereum) made to enhance digital advertising. Advertisers buy ads with BAT tokens, which are then distributed to publishers and browser users as compensation for hosting and display ads, respectively.
What are virtual and digital currencies? They’re synonyms?
Regarding the second question, the answer is no, they are not. One is a much more abstract term, while the other is quite concrete. Let’s see in more detail and with examples what the difference is.
“Digital currency” is a general term used to describe all forms of electronic money , be it virtual currency or cryptocurrency (no, they are not exactly the same either). The very concept of digital currencies was first introduced in 1983 in a research paper by David Chaum, who later implemented it in the form of Digicash.
The defining characteristic of digital currencies is that they only exist in digital or electronic form and, unlike the physical banknotes of fiat currencies (a dollar bill, a euro coin, etc.), they are intangible . They can only be owned and spent online through e-wallets or designated connected networks.
Typically, there are no intermediaries (or banks), so transactions are instantaneous and little or no fee is applied. Good news: digital currencies and digital money are the same.
Specifically: cryptocurrencies, tokens, and virtual currencies, all are digital currencies.
As for virtual currencies, although they are digital by definition , they are something else. The European Central Bank first defined the term in 2012: a virtual currency is “digital money in an unregulated environment, issued and controlled by its developers and used as a payment method between members of a specific virtual community .”
An excellent example of virtual currencies that are not based on crypto would be money embedded in video games.such as World of Warcraft Tokens, GTA Online Cash Cards, or FIFA Points from the eponymous EA Sports game. This money normally exists within the ecosystem of the corresponding game and is used, for example, to unlock additional content such as new items and animations.
Unlike ordinary money, or even specific digital currencies, virtual currencies are not issued by a Central Bank or other banking regulatory authority, which explains the volatility to which they are prone. Therefore, on the one hand cryptocurrencies are completely separate from virtual currencies and their meaning should not be confused, and on the other, both terms fit into the category of “digital currencies”.
Cryptocurrencies as we know them have been around for only 10 years, while most government agencies started paying attention to them only four, five years ago, when the popularity of Bitcoin started to rise along with its value. In particular, Facebook’s Libra just caused another big stir and some countries are now forming working groups to discuss what Libra is and how it can be regulated.
So the definitions of cryptocurrencies tend to vary between jurisdictions or even within them: In the United States alone, five different regulatory agencies define cryptocurrencies in five different ways, depending on their scope.
The IRS regards cryptocurrencies and most other virtual currencies as property, the Securities and Exchange Commission believes that they represent securities, while the Financial Crime Enforcement Network believes that cryptocurrencies are simply “money.” In Japan, the Japanese regulatory framework for cryptocurrencies defines cryptocurrencies as a property security, and the head of Russia’s central bank once called Bitcoin a “currency surrogate.”
With the clarification, it is also important to say that it is expected that new terms and definitions for digital currencies will appear in the future, which makes it especially important to be up to date with current denominations.