The use of digital wallets flourished as technology evolved in the past decade. Governments all over the world encouraged people to switch from traditional wallets to digital wallets as they were convenient in many ways. Their popularity peaked during the pandemic because of their contactless benefits. Then, with the advent of cryptocurrency, the use of digital wallets increased even further. All this happened quite rapidly for most people to keep up their pace and resulted in some confusion about these two types of currencies.
People began using digital wallets to hold both digital currency as well as cryptocurrency. And often we find them using the terms interchangeably. However, they differ.
1) Digital Currency Vs Digital Coins
Digital currency refers to the electronic form of fiat money issued by governments. They are used for contactless transactions between parties, like when you make an electronic transfer of an amount from your bank account to someone else’s. When you pay from your bank account or digital wallet, which stores value corresponding to the actual fiat money, via an electronic transfer mechanism for a product or service, you are using digital currency. When you withdraw money from an ATM, the digital currency is turned into liquid cash.
Cryptocurrency, on the other hand, is a store of value secured by encryption. They are often referred to as digital coins. There are several digital coins like Bitcoin, Ether and Dogecoin. All these crypto coins are privately owned or created and are not yet regulated in most countries. These are created using advanced blockchain technology.
Digital currency does not require encryption but users need to secure their digital wallets (banking apps) with strong passwords to minimise the risk of theft or hacking. Users also need to secure their debit/credit cards with passwords. They can use any of these means to transact digital currency from their bank accounts.
Cryptocurrency is protected by strong encryption. To trade cryptocurrency, you need to first have a bank account and digital currency in it. You will have to exchange the digital currency via an online exchange to get cryptocurrency for the corresponding value.
3) Regulatory Authority
As digital currency is the electronic form of fiat money, it is always backed by a centralised authority. In India, the Reserve Bank regulates the rupee and all digital currency transactions are monitored by authorities. The cryptocurrency is based on a decentralised system and independent of any centralised regulation. But all transactions are recorded in a decentralised ledger that is available to everyone to see.
Digital currency is usually stable and it is relatively easy to manage its transactions because of wider acceptance in the global market. Cryptocurrency is highly volatile and just gaining traction. Not many companies have started accepting payments in it.
Details of digital currency transactions are only available to the sender, receiver and banking authorities. All cryptocurrency transaction details are in the public domain by virtue of a decentralised ledger.