Is there a difference between tokens, crypto-currencies, digital currencies and virtual currencies? The answer is simple and straightforward: yes, there is. Although in common parlance they are used synonymously, they are not the same thing and there is often confusion over these terms and their definitions. For this reason, at Cripto247.com we’re going to clarify the issue and below we’ll explain what each of these denominations means, what they cover, what they don’t and a few examples. Let’s see:
When Facebook unveiled its Libra project a few months ago, it was advertised as a “crypto-currency”, which caused a stir among regulators and crypto-currency referents. But experts were quick to dismiss this definition: Libra is (or will be) a virtual currency or digital currency. The reason? Its administrators are corporations, so it’s a centralized currency.
But it’s not quite that simple. While decentralization is the main ideology behind crypto-currencies, some of them can be centralized, at least to some extent. Consequently, if we’re looking for a definition, we can say that crypto-currencies are virtual or digital currencies that rest on a solid “cryptographic” foundation that makes them secure and immutable. Most crypto-currencies are based on blockchain technology.
To complicate matters further, there are also sub-categories within classic and modern (blockchain-based) crypto-currencies, for example NEO, which is a crypto-currency, while Binance Coin (BNB) is actually a token.
What is a crypto-currency?
The simple answer is that they are digital currencies, native to their own blockchain. But it’s not quite that simple.
Bitcoin (BTC) and Ether (ETH) are examples of crypto-currencies. What do they have in common? They all exist on their own independent registers: BTC runs on the original Bitcoin blockchain, ETH is used in the Ethereum blockchain, XMR exists on the Monero blockchain, and so on. All these crypto-currencies are also characterized by their ability to be sent, received and/or mined.
As their name suggests (crypto-currencies), crypto-currencies tend to have the same characteristics as money: they are fungible, divisible, portable and their supply is limited. As a result, crypto-currencies are generally intended to be used like physical money: to pay for goods and services (although adoption by retailers is still slow) or as a store of value and savings. There are exceptions, however: while Ether has all the attributes of a currency, it operates beyond its “money” function, as it is used within the Ethereum blockchain to facilitate transactions.
Then there are “altcoins”, so called because they would take the place of bitcoin, the leading crypto-currency, as an alternative. Many altcoins are a fork of bitcoin and have been developed using bitcoin’s open source protocol, such as Litecoin (LTC) and Dogecoin (DOGE), but the aforementioned ETH and XMR are also known as altcoins, albeit built on entirely new blockchains.
So how do you identify an altcoin? The answer is simple. We need to ask whether this crypto-currency (other than BTC) is based on its own blockchain. If it is, then we can call it an altcoin.
What is a token?
Tokens are digital assets that can be used in the ecosystem of a given project.
The main distinction between tokens and crypto-currencies is that the former require another blockchain platform (not their own) to operate. Ethereum is the most common platform for token creation, mainly due to its smart contract feature. Tokens created on the Ethereum blockchain are generally referred to as ERC-20 tokens, like Tether.
The purpose of tokens is also different from that of crypto-currencies, although they can also be used as a means of payment. For example, many tokens are created for use in decentralized applications (DApps) and their networks. These are called “utility tokens”. Their main purpose is to grant the holder access to the project, as in the case of the BAT (Basic Attention Token). The BAT is an ERC-20 token (meaning its blockchain platform is Ethereum) designed to enhance digital advertising. Advertisers buy ads with BAT tokens, which are then distributed to publishers and browser users in compensation for hosting and displaying the ads, respectively.
What are virtual and digital currencies, and are they synonymous?
As for 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 look at the difference in more detail, using examples.
“Digital currency” is a general term used to describe all forms of electronic money, whether virtual currency or crypto-currency (no, that’s not exactly the same thing either). The very concept of digital currency was first introduced in 1983 in a research paper by David Chaum, who later implemented it in the form of Digicash.
The main feature of digital currencies is that they exist only in digital or electronic form and, unlike the physical bills of fiat currencies (a dollar bill, a euro coin, etc.), they are intangible. They can only be owned and spent online, via electronic wallets or designated connected networks. In general, there are no intermediaries (no banks), so transactions are instantaneous and fees are minimal or non-existent. Good news: digital currencies and digital money are the same thing.
More precisely: crypto-currencies, tokens and virtual currencies are all digital currencies.
As for virtual currencies, although they are digital by definition, they are different. The European Central Bank first defined the term in 2012: a virtual currency is “a digital currency 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 cryptocurrencies would be money embedded in video games, such as tokens in World of Warcraft, payment cards in GTA Online or FIFA points in EA Sports’ game of the same name. This money generally exists within the ecosystem of the game concerned 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 subject. Therefore, on the one hand, crypto-currencies are totally distinct from virtual currencies and their meaning should not be confused, and on the other hand, both terms fall into the category of “digital currencies”.
Conclusions
Crypto-currencies, as we know them, have only been around for 10 years, while most government agencies started paying attention to them only four, five years ago, when bitcoin’s popularity began to rise along with its value. In particular, Facebook’s Libra has just caused another major stir, and some countries are forming working groups to discuss what Libra is and how it can be regulated.
Secondly, definitions of crypto-currencies tend to vary from jurisdiction to jurisdiction, and even within the same jurisdiction: in the USA alone, five different regulators define crypto-currencies in five different ways, depending on their scope. The IRS considers crypto-currencies and most other virtual currencies to be property, the Securities and Exchange Commission believes they represent securities, while the Financial Crimes Enforcement Network believes crypto-currencies are simply “money”. In Japan, the regulatory framework for crypto-currencies defines them as real estate value, and the head of Russia’s central bank once referred to bitcoin as a “currency substitute”.
That said, it’s also important to note that new terms and definitions for digital currencies are likely to emerge in the future, making it particularly important to keep abreast of current denominations.
