Why virtual currencies are wrongly called cryptocurrencies?2021-03-14
Why confusion will continue to exist
Digital money is actively developing and is only on the verge of mass use. The general public has been familiar with the concept of cryptocurrency for about 10 years, and government bodies began to regulate this area only three years ago, and then because of the take-off of bitcoin. The ambiguity in the perception of digital money is clearly visible in the example of Libra, since financial regulators from different countries have not yet formed a holistic opinion about what Libra is.
The definition of cryptocurrency still differs between jurisdictions or even within them. How many regulators, so many opinions. For example, even in one US country, government agencies give different definitions to cryptocurrency, depending on their competence:
The Securities and Exchange Commission says that cryptocurrencies are securities.
The IRS defines cryptocurrencies and virtual currencies as property.
The Financial Crime Network calls cryptocurrencies money.
In Russia, officials even called bitcoin a “currency surrogate,” but we came up with a single term tree that clearly shows the differences and similarities through examples. Why are Libra and JPM Coin cryptocurrencies?
JPMorgan Chase unveiled its JPM Coin as a digital coin, while Facebook executives called Libra a cryptocurrency. Obviously, JPM Coin and Libra differ in functionality, but in both cases, crypto enthusiasts spoke out about the fact that Facebook and JPM Coin developments are virtual money, not cryptocurrencies due to the lack of decentralization. But they turned out to be wrong, because the concept of “cryptocurrency” may well include the absence of decentralization, since not all cryptocurrencies work on the public blockchain.
Cryptocurrency is a digital currency that relies on cryptography to ensure data integrity and transaction security.
Bottom line: JPM Coin and Libra can be called cryptocurrencies, since the protection of data immutability in them is based on cryptography.
Even more confusion is caused by the varieties of cryptocurrencies – coins and tokens, but we have already analyzed the differences between them, so we will immediately move on to virtual and digital currencies.
Differences between virtual and digital currencies
Initially, it seems that these terms are used as equivalent synonyms, but in fact, virtual currency is a kind of digital currency.
Digital currency is an abstract general term that is used for all forms of electronic money without exception. The term was first used by David Chaum in 1983 in his research work, which was later used as the basis for Digicash.
The main feature of digital currencies is intangibility. Such currencies can only be bought, sold or exchanged through e-wallets or designated connected networks. Digital currencies and digital money are synonymous expressions.
Virtual currencies, as noted, are a type of digital money. The European Central Bank first defined this term in 2012.
Virtual currency is “digital money in an unregulated environment, issued and controlled by its developers and used as a method of payment among members of a particular virtual community.” An example is the FIFA Points from EA Sports’ Football Sim, which are used to buy soccer cards or open packs. There is no cryptographic protection, blockchain or DLT in virtual currencies.
It turns out that a distinctive feature of virtual currencies is the absence of cryptography and the fact that their issue cannot be carried out by regulatory authorities or the central bank, while banks in different countries already use cryptocurrencies. There are many examples, from JP Morgan bank with their JPM Coin to a decree from the Venezuelan government that obliges national banks to accept El Petro cryptocurrency.
Bottom line: virtual currencies and cryptocurrencies (coins, tokens) are types of digital currencies, but not the same.