In the period running up to Bitcoin’s tenth birthday, reports of the mainstream financial sector’s exploration or adoption of ‘digital currency’ and ‘digital asset’ related services and products have become increasingly more frequent. In the past week, the cryptocurrency industry sat up and took notice of another such announcement:
While the content of such reports reflects positively on the traditional financial industry’s willingness to investigate and embrace technological advances, we’ve been scratching our heads over the choice of terminology of these reports.
“Digital assets and virtual currency? Could you be a little more specific please?”
Let me explain...
Who wants to be pernickety? Certainly not us. And yet, the technological, philosophical and historical differentiators between what can be referred to as ‘digital currencies’ and true ‘cryptocurrencies’ make it vital to distinguish between the two.
Kicking off with the clearest illustration of the dilemma, I ask you to think back to the first time you used a bank card at a sales point? Whether the purchase price was denoted in US-dollar, Pound Sterling or Deutsche Mark, I’m sure you can see that the ‘money’ that was exchanged was merely a digital version of the currency. The payment, on closer inspection, involved an annotation of your bank account ledger to indicate a numeral debit, (and eventually, when the transaction was settled between banks) a numeral addition to the retailer’s bank account ledger.
As no physical money (cash notes or coins) was exchanged, such a transaction could well be considered as an exchange of virtual or digital currency.
To push the point home even a bit more, when last was your salary paid in non-digital, physical money? For most of us, that was never the case.
In 2009, the first decentralised cryptocurrency saw the light with the public release of the Bitcoin Whitepaper. The utility of this currency, as stated in the title of the paper was to function as “Peer-to-Peer Electronic Cash System.”
Both the underlying technology that enables the system to operate and the economic principles it was founded upon, made it vastly different from any earlier versions of digital currency.
The Bitcoin system involves a protocol that allows users to access a decentralised system of value exchange. Bitcoin was created specifically to eliminate the need for third parties (such as banks) to verify transactions by utilising mathematical proof, by way of cryptography, instead.
CEO of Money Button and Yours.org, Ryan X. Charles, frames provides perspective on the importance of the above-mentioned elements (slightly paraphrased):
“Many people misunderstand the Bitcoin system. Bitcoin is not a software project; it is an actual system in the world. The (Bitcoin) software lets you interface with the system. The system consists of things like miners and their mining power, businesses, wallets and exchanges. Bitcoin is three things, in order of importance; economics, cryptography, and software. Economics trump everything else and comes first. The cryptography and software can be switched if needed.”
For the purpose of identification, Wikipedia suggests the following definition:
“A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrency is a kind of digital currency, virtual currency or alternative currency. Cryptocurrencies use decentralised control as opposed to centralised digital currency and central banking systems.”
And for state approaches to defining cryptocurrency, Jan Lansky’s doctoral thesis at the University of Finance and Administration in Prague, Czech Republic suggests that the following six conditions must be met:
Over 4,000 other cryptocurrencies have been created since the launch of Bitcoin. While you would be forgiven for assuming a close parallel with Bitcoin, the reality is that most cryptocurrencies show only a vague resemblance. This is why it remains of utmost importance to evaluate each crypto coin by own merit.
Evaluating criteria should include:
By now, I hope you can see that while all cryptocurrencies are digital, not all digital currencies could be considered cryptocurrencies. And, while there are thousands of cryptocurrencies claiming the name, not all necessarily meet the defining criteria or remotely measure up to the Bitcoin Standard.
CEO of Bitstocks, Michael Hudson, says it best when he declares:
“While many view Bitcoin as simply another cryptocurrency, those that understand the protocol of the innovative blockchain will see that the true value of bitcoin is not in the digital currency, but rather in the underlying system that sets it free from central control, opening the door to a new age of finance and transacting, using a secure framework that offers us exceptional security of our money and investments.”