Cryptocurrency versus digital currencies: An easy primer

With the new ‘digital rupee’ set to debut in 2023, what does it mean for an already vast, crowded world of digital currencies?

Most governments have had a love-hate relationship with cryptocurrency, the new kid on the blockchain. While some willingly embrace the concept of a decentralised system of currencies, others impose outright bans on them. The Indian government has taken a unique perspective on things during the Budget earlier this year when Finance Minister Nirmala Sitharaman introduced the disruptive idea of a digital currency coming out in 2023. We know exactly how you feel–we think we understand the ever-changing world of cryptocurrency, and now the new concept of digital currency seems to be adding to the confusion. We're here to help differentiate the two.

In a nutshell

Digital currencies are ones and zero approximations of that cash you use everyday. It is still unclear how different the digital rupee will be from the money that is in your bank account with which you transact using UPI and other similar methods. It will, however,be linked to the currency of that country–in this case, India. Its purchasing power is backed by the strength of the currency in that country based on several factors.

Cryptocurrency, on the other hand, is a form of value stored on a network of computers that is decentralised and encrypted and increases or decreases in value based on its community of users. While volatile, it is not linked to any government. Instead, it resides on the Blockchain, a ledger whose code can be mined to produce more of that currency.

Decoding the jargon

On a lighter note–and this is a more obvious point–its simply called digital rupee. It is the same as the good old rupee you used to trade in for a chocolate at the local store, except that now it's digital. No strange albeit fun names like Bitcoin, Dogecoin, Solana and the hundreds more that seem to be popping up every other day. It’s simply the digital rupee, and will probably retain the ‘₹’ symbol, with some differences to set it apart from all the e-wallet currency, perhaps.

To centralise or not to centralise?

One of the major differences between digital currency and cryptocurrency is the fact that one is regulated by a governing authority in the country and the other isn’t. In this case, the Reserve Bank of India is building their own blockchain ledger system to make sure both your physical and digital transactions are legit and interchangeable. Cryptocurrency, on the other hand, is built on a decentralised framework that is not linked to the ebb and flow of governments or countries. There are pros and cons to both, of course. While digital currencies are stabler, or as stable as the governing bodies of that country, sometimes you can have extreme situations where currencies fall, much like what has just happened to the Rouble in Russia. While cryptocurrency does not have that issue, it is constantly in flux, where random tweets by Elon Musk, Snoop Dogg, or even for no particular reason, can witness dramatic rises and crashes.

The blockchains

Cryptocurrencies have been one of the major causes for the current chip shortages. This is because mining is the key source for popular currencies such as Ethereum and Bitcoin. Cryptocurrencies are born out of mining this encrypted ledger called the ‘blockchain’. Since it's an entity that does not reside with anyone in particular, it's safe and secure. The traditional digital currency resides on your e-wallet of choice, which you use to transact with. With the new digital rupee, however, according to the RBI, it does reside on a blockchain created by the RBI itself, which is unclear on the encryption used as well as the nuances on how it's built. A question that comes to mind with the digital rupee: can one mine it?

Security, investment and return

Security, investment and returns are directly interconnected, and in this case, digital currencies lead the pack, mainly because they have been in circulation for years. There are credit scores built in along with checks and balances, and safety precautions that have been honed after thousands of scams. So you know your digital money is safe with you, and you can freely use it to invest.

With cryptocurrency, there's a heavy hyper-investment factor to it, where you use your mining hardware to either mine currency or buy currencies outright. You then have to monitor them to actually earn, which could be time-consuming, given the aforementioned fickleness of these currencies. Though the returns could be tenfold of what you can expect of digital currencies, the RBI does shave off 30 per cent of all your cryptocurrency earnings as taxes.

Spending power

Cryptocurrencies have slowly been garnering favour with merchants for purchasing real-world goods and services, yet, they do not have the reach that digital currencies do. There are still several of the most successful companies on earth that do not accept cryptocurrencies, which means your digital rupee will go a longer way. When you make a transaction, digital currencies work like how they do as of today, that is, they are known only to the sender or the receiver. With cryptocurrency,the transaction is transparent and completely online on the blockchain as tokens.

Metaverse and the future

Web3 is growing and evolving in several ways, from the world of NFTs to emerging virtual and digital spaces including Epic, Meta and many others, collectively known as the ‘metaverse’.These are worlds where you can earn and spend cryptocurrencies on both virtual or real-world entities, and they even include virtual real estate. While it's still unclear how the digital rupee will fit into this concept, it remains to be seen how this unique step forward by India might be a leading effort for other currencies.

The legal aspect

Cryptocurrency scams are not unheard of, like the soon-to-be- Netflix-special featuring the Bitcoin heist of rapper Heather Morgan, and the many NFT scams that seem to be making frequent appearances. Digital currencies are stronger on a legal stance, which means they're backed and recognised by courts and other authorities. While cryptocurrencies are gaining support, they still have a long way to go. With the constant flux of currencies, concepts and new applications of the technology–such as NFTs–it becomes harder to put legalities in place.

With the new digital rupee still being conceptualised, a lot remains to be seen what this digital currency will bring to the table. While there will be a lot to praise and pick apart, no doubt, we hope this primer makes things a bit more clearer.

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