Explained: The difference between cryptocurrency and digital currency

Finance Minister Nirmala Sitharaman announced during her Budget 2022-2023 speech that digital assets, which includes cryptocurrencies and non-fungible tokens (NFTs), would attract a 30 per cent tax on any income from their transfer. The announcement left most crypto and NFT investors wondering about the future of their assets, but industry players mostly saw this as a positive announcement. Taxation of any form meant that cryptocurrencies would not be banned in the country, however, that does not automatically mean regularisation either. It remains to be seen what steps the government decides to take on cryptocurrencies in the country.

Now, the finance minister also announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon. Called the CBDC, or the Central Bank Digital Currency, RBI’s digital currency has been in the works for several months now and as Sitharaman said, it is going to be introduced in the next financial year.

“Introduction of a central bank digital currency will give a big boost to the digital economy. Digital currency will also lead to a more efficient and cheaper currency management system,” Sitharaman said.

The announcement of the CBDC just after taxation was announced for digital assets confused a lot of people into thinking that the CBDC would/should also be taxed. However, that is not the case at all. Digital currencies are not digital assets like cryptocurrencies or NFTs. Essentially, digital currencies are electronic forms of currency issued by the government while cryptocurrencies are a store of value that is secured by encryption. The digital wallets that people started using, particularly over the pandemic, can hold both digital currency and cryptocurrency but they are really not interchangeable.

Digital currencies, the electronic form of fiat money, can be used in contactless transactions between parties – like paying electronically from your bank account to someone else’s. All online transactions involve digital currency, once you withdraw that money from the bank or from an ATM, that digital currency gets transformed into liquid cash.

Cryptocurrencies, or digital coins, is a store of value that is secured by encryption. These digital coins are all privately owned and created (using advanced blockchain tech) and have not yet been regularised in most countries.

Now, digital currencies do not need encryption, but all users need to secure their digital wallets and banking apps with strong passwords and biometric authentication wherever possible to minimise chances of hacking and theft. The same applies to debit and credit cards which are key to these digital currency transactions.

Cryptocurrencies are protected by strong encryption and to be able to trade in crypto, users need to have a bank account with money in it and this digital currency can be exchanged via an online exchange to get cryptocurrency of the corresponding value.

When it comes to regulation, digital currencies are backed by a central authority, in India, which is going to be the RBI, which regulates both liquid cash and digital currency transactions. In the case of cryptocurrencies, it is a decentralised system and is not regulated by a central authority. However, all crypto transactions are recorded in a decentralised ledger that is available for all.

On the stability front, digital currencies are stable and easier to manage when it comes to transactions because they are widely accepted in the global market. Crypto, on the other hand, is very volatile with rates rising and falling almost regularly.

Digital currency transaction details are available only to the people involved in it, the sender and the receiver, and the bank. Crypto transaction details are available to the public via the decentralised ledger.