Digital currencies: how are they different from cryptocurrencies and what are the advantages of their use?

After Julio Velarde, the president of the Central Reserve Bank of Peru (BCRP), informed during the first day of the CADE Executives that in the country projects for the administration of a digital currency in the future are being addressed, it is opportune to establish the differences between this electronic money and the popular cryptocurrency. So far, according to a report by Bloomberg Economics, there are six nations that have their own virtual currency, while another 46 are evaluating the possibility of joining the list.

“As a result of the pandemic, it has become very noticeable that several South American countries are out of date in terms of digital currencies. The use is, above all, to carry out transactions immediately and in real time ”, says Jairo Acha Salazar, investment and exchange trader, who also explains the strengths and weaknesses of these two groups of digital money

What are digital currencies or CBDC?

CBDC (Central Bank Digital Currency) is the digital currency issued and backed by the central bank of each country. It is a resource that is the opposite of physical bills and coins, but with the same functionality because it is a means of payment that has a store of value. The purpose of its use is to contribute to virtual innovation and streamline composting methods.

How are digital currencies different from cryptocurrencies?

A digital currency issued by a central bank fulfills all the traditional functions of money. That is, it can be used to pay debts and pay taxes. On the other hand, although they can be used to carry out transactions on the main e-commerce platforms, cryptocurrencies do not have the official support of an entity and they are highly volatile. Both have the advantage of not obeying “a geographical barrier and can be sent or received from anywhere in the world,” says the specialist.

The blockchain technology that characterizes cryptocurrencies allows “access control and user confidentiality,” says Jairo Acha. On the other hand, a digital currency has a side that exposes those who use it, Mauricio Tovar, director of Fundación Blockchain Colombia, explained it well in an interview for a Colombian media: “One of the biggest risks is related to privacy, well yes these payments are tied to identity, they are not private and the bank will know who makes them ”.

“A user does not know if their own data is being stored by third parties,” adds Acha regarding the digital currency and highlights that, on the other hand, it has a legal aspect that allows all companies in the financial system to accept this currency. The same does not happen with cryptocurrencies that, as they are not regulated, do not have the backing of the larger entity such as the BCRP. Therefore, they are not accepted by banks or savings banks.

“The difference is in the structure. The digital currency has a single issuer which is the BCR. Cryptocurrencies are decentralized and there is no regulation beyond that established by the community that this cryptocurrency affects ”, concludes the trader.

In which countries have digital currencies already been issued?

Although Venezuela launched its own currency called Petro, it was not a currency that had the support of the central bank. For this reason, the first official electronic currency is that of the Bahamas.

Bahamas

In October 2020, this country launched its own digital currency, the sand dollar, and made it available to the approximately 393,000 residents of the archipelago. It was a pilot program in which 48,000 sand dollars were used on the Exuma and Abaco Islands. Each of them was pegged to the Bahamian dollar, which in turn was pegged to the US. Its value is US $ 3,695 and it is already an accepted currency in Nassau, the capital.

China

In April this year, the People’s Bank of China issued the CyberYuang. So far, this coin circulates in closed environments and not in the main system. In a first stage, the entity plans to offer the digital money to commercial banks and other operators, and then to the public so that they can deposit it in their electronic wallets. Its value is US $ 0.15 (equal to one yuan).

Antigua and Barbuda, Saint Lucia, Saint Kitts and Nevis, and Grenada

In all these countries, the circulation of a single digital currency has favored exchange. It is called DCash and it is issued by the Central Bank of the Eastern Caribbean and its configuration is based on blockchain technology, the one used in cryptocurrencies.

The Caribbean Issuer informed the media that the project intends to put this currency into circulation in other islands of the region such as Anguilla, Dominica, Montserrat and Saint Vincent and the Grenadines by 2025, year in which a reduction of 50% is also predicted. of physical money.

Which countries are discussing the possibility of creating digital currencies?

There are 46 nations that are debating the possibility of setting up their own digital currency. In this framework, the European Central Bank, headed by Christine Lagarde, announced that it is working on a project for the creation of the digital euro, planned for approximately 2026. For this same year, the Swedish economy plans to complete the study of a pilot project that has the e-krona as the protagonist.

But this participation is not massive, since there are countries that have refused to be part of that measure. One of them is Germany, whose arguments point to the collapse of the banking system and the difficulty in providing guarantees on users’ personal financial information.

In Latin America, Jamaica stands out for its progress in the context of this strategy. In May of this year it launched the eCurrency, a pilot project scheduled until December 2021. The central bank hopes to implement the currency at the national level during the first quarter of 2022. And Brazil is not far behind: the guideline for the use of the digital real It was published in May, after seven months of work by a team that studied cryptocurrencies.