A comparative analysis between money, currency, digital money, fiat money, electronic money and cryptocurrencies

The inspiration for its content came from studies that founded the book “CRYPTOCURRENCIES IN THE INTERNATIONAL SCENARIO: What is the position of Central Banks, Governments and authorities about cryptocurrencies ?" . This article was published originally in Portuguese in the Cryptocurrencies and Blockchain Portal “Criptomoedas Fácil”.

What’s money? What’s currency?

Money is, in its most basic form, any method to transfer some type of value from on person to the next. Food, salt, animal hides, gold, silver, each has already been serverd as money at one time or another.[1]

A currency is the actual execution of the theoretical concept of money.

Currencies under economic perspective

At first, it is important to notice that economists consider something as currency when it encompasses the following three features: medium of exchange, unit of account and stock of value.

Especially in countries where government credibility is in free decay, as it is the case of Venezuela, we can realize that more and more people are willing to keep Bitcoin to protect themselves from an economic crisis and the harming effects of inflation (stock of value.)[2]

Notwithstanding, although more and more retailers do accept crypto coins as a method of payment (medium of exchange), under economic perspective, Bitcoin can’t be considered a currency “yet,” once the high volatility has discouraged its use for pricing of products and services (unit of account.)

Here, it is essential to highlight the notes made by Monica de Bolle[3]regarding what a coin is.

Before paper money, before currency-liability which value depends on the confidence in the government that creates and destroys it, a coin was a good, an asset, like the gold coins that held value, not because they were golden and shiny, but because they were precious metals. And such currency-goods or asset-coins comply with the same functions of the paper money (they are used for quoting prices, they are used as a means of exchange, saved to stock value).

However, they do not depend on the solidity of any government, for they have intrinsic value, something that paper money does not have.

It is in this latter sense that the cryptocurrencies, attacked today by economists worldwide, not incidentally are called digital gold.[4]

Cryptocurrencies have intrinsic value.

Intrinsic value that is in the operational systems, in the Blockchain structures, without which these virtual assets would not exist.

Thus, while cryptocurrencies still do not satisfactorily comply with the functions of a currency as described above, it is a fact that cryptocurrencies are with us since the advent of Bitcoin, soon after the crisis of 2008. Almost ten years later not only the term “bitcoin” has become well known in general, but several other crypto coins came up from technological platforms more or less alike to those created by Satoshi Nakamoto.[5]

Currenciesfrom a legal perspective

Now, from a legal aspect, for crypto coins like Litecoin and TeslaColilCoin be coins, legal tender is required. Let us elaborate on it:

From a legal viewpoint, cryptocurrencies are “currency” if the law so defines.[6]

As an example, we can mention Germany that promoted Bitcoin to the category of legal tender and, therefore, equivalent to currency from the legal point of view, when used as a means of payment.[7]

Now, in countries whose law does not confer it such quality, like in Brazil, Bitcoin positions itself int the opposite direction of fiduciary currencies(those whose value comes from the trust that people have in those who issued them). In those countries, there are those who consider Bitcoin as a foreign currency.

That is what currencies are from the legal and economic point of view.

Cryptocurrencies vs. electronic money

Electronic Coins are resources stored in an electronic device or system that allows the end user to carry out a payment transaction in national currency.

Cryptocurrencies have their own form, that is, they are distinct units of account of currencies issued by sovereign governments, and there are no electronic device or system for storage in fiat money.

Cryptocurrencies are a kind of digital currency, not to be confused with electronic money.

Electronic money are issued by the state and made available in digital format.[8]

Cryptocurrencies vs. digital currencies

Digital money are money used on the internet.

Digital money existsonly in the digital form. It doesn’t have any physical equivalent in the real world. Nevertheless, it has all the characteristics of traditional money. Just as classic fiat money, you can obtain, transfer or exchange it for another currency. You can use it to pay for the goods and services, such as mobile and Internet communication, online stores and others. Digital currencies don’t have geographical or political borders; transactions might be sent from any place and received an any point in the world.”[9]

With less than ten years of existence, cryptocurrencies are such a new asset that conceptualizing them becomes a Herculean activity[10].

“The costly task of defining what cryptocurrencies are derives mainly from two factors:

1) The difficulty of qualifying its essence

2) the impossibility of tracking the size of the impact of something still under development.”

Though cryptocurrency is a type of digital currency, there are some fundamental differences.

Digital currencies are centralized; there is a group of people and computers that regulates the state of the transactions in the network. Cryptocurrencies are decentralized, and the regulations are made by the majority of the community. Digital currencies require user identification. You’ll need to upload a photo of yourself and some documents issued by the public authorities. Buying, investing and any other processes with cryptocurrencies do not need require any of that. Nevertheless, cryptocurrencies are not fully anonymous. Though the addresses don’t contain any confidential information such as name, residential address, etc., each transaction is registered, the senders and the receivers are publicly known. Thus, all the transactions are tracked[11].

There are even companies that perform this tracking, and help prevent, detect and investigate cryptocurrencies money laundering, fraud and compliance violations like Chainalysis[12]and Elliptic[13].

“Digital currencies are not transparent. You cannot choose the address of the wallet and see all the money transfers. This information is confidential. Cryptocurrencies are transparent. Everyone can see any transactions of any user, since all the revenue streams are placed in a public chain.

Digital currencies have a central authority that deals with issues. It can cancel or freeze transactions upon the request of the participant or authorities or on suspicion of fraud or money-laundering. Cryptocurrencies are regulated by the community. It’s very unlikely that the userswill approve the changes in the Blockchain, although there were some precedents such as the hack of The DAO.”[14][15]

What are cryptocurrencies?

Hence,from what has been said above, it is possible to conclude that:

They are not issue by any government. The fluctuation of its price is only linked to demand and supply.

Cryptocurrencies, which has a private nature, are issued and guaranteed by cryptographics algorithms(by mathematics and encryption). Cryptocurrencies are decentralized and they are executed via Blockchain[16](Revoredo, 2018).

Thus, cryptocurrencies are a new asset (digital and with global range) that has enabled the development of a new Economy: The Crypto Economy.[17]

[1]Hosp, Dr. Julian. In: Cryptocurrencies: Bitcoin, Ethereum, Blockchain, ICO’s & Co. simply Explained, 2017.

[2]Revoredo, Tatiana. In: Criptomoedas: cenário global e tendências, Jota, on October 27, 2017

[3]Economist and researcher at the Peterson Institute for International Economics and Professor at Sais/Johns Hopkins University

[4]Bölle, M. d., In: O que é moeda? O Estado de São Paulo, on February 7, 2018

[5]Idem Reference 8

[6]Revoredo, T. In: Criptomoedas: analise comparativa com moeda eletrônica e moeda estrangeira, Criptomoedas Fácil, on August 27, 2018

[7]Bundesministerium der Finanzen. In: Umsatzsteuerliche behandlung von bitcoin und anderen sog virtuellen waehrungen, on February 27, 2018.

[8]Revoredo, T. In Blockchain we trust: conheça o novo guardião da confiança.Criptomoedas Fácil, July 26, 2018

[9]Tar, Andrew. In: Digital Currencies vs. Cryptocurrencies, Explained. Cointelegraph. December 13, 2017.

[10]Idem Reference 11

[11]Tar, Andrew. In: Digital Money vs. Cryptocurrencies, Explained. Cointelegraph, on December 13, 2017.

[12]Chainalysis is a compliance and research software for the world’s top institutions. Its Blockchain Intelligence Platform is able to cryptocurrency transaction monitoring in real-time with raises real-time alerts on incoming and outgoing transactions for links to potentially suspicious activity. Its compliance analysts get dynamically updated customer risk profiles with the most up to date information from the blockchain for periodic reviews. Also, Chainalysis uses pattern recognition, machine learning and millions of open source references to identify and categorize 1,000’s of cryptocurrency services.

[13]Elliptic identify illicit activity in cryptocurrencies, providing actionable intelligence to cryptocurrency companies, financial institutions and government agencies.

[14]Tar, Andrew. In: Digital Money vs. Cryptocurrencies, Explained. Cointelegraph, on December 13, 2017.

[15]The DAO was a digital decentralized autonomous organization, and a form of investor-directed venture capital fund. The DAO had an objective to provide a new decentralized business model for organizing both commercial and non-profit enterprises. It was instantiated on the Ethereum blockchain, and had no conventional management structure or board of directors.The code of the DAO is open-source. The DAO was stateless and not tied to any particular nation state. As a result, many questions of how government regulators would deal with a stateless fund were yet to be dealt with. The DAO was crowdfunded via a token sale in May 2016. It set the record for the largest crowdfunding campaign in history.

In June 2016, users exploited a vulnerability in the DAO code to enable them to siphon off one third of The DAO’s funds to a subsidiary account. On 20 July 2016 01:20:40 PM +UTC at Block 1920000, the Ethereum community decided to hard-fork the Ethereum blockchain to restore virtually all funds to the original contract. This was controversial, and led to a fork in Ethereum, where the original unforked blockchain was maintained as Ethereum Classic, thus breaking Ethereum into two separate active blockchains, each with its own cryptocurrency. Wikipedia, In: The DAO (organization).

[16]To learn more about what Blockchain is, it is advisable to read: 1) “Blockchain and its potential to impact society and create unimaginable business models”, 2) “DLT vs. Blockchain: brief comparative analysis of its underlying resources”, both articles published on Global Blockchain Strategy.

[17]Idem Reference 11

Oxford Blockchain Foundation founding member| Expert in Blockchain from University of Oxford and MIT | Liaison at European Law Observatory on New Techs