Digital currency is often used interchangeably with this century’s buzzword, cryptocurrency.
While cryptocurrency is indeed digital currency, it is only just one type. There are some other digital currency forms, and cryptocurrency itself has subgroups.
The simplest way to define digital currencies is that they are electronic money. They only exist on electronic devices on the internet, and they can be exchanged for goods and services. No other digital currency type exemplifies this definition better than cryptocurrency since its introduction in 2009 with Bitcoin as its flagship.
Cryptocurrencies use cryptography technology to verify transitions on the blockchain while
managing the creation of new currency units. They may or may not be regulated, with popular cryptos being the aforementioned Bitcoin and altcoins like Ethereum, Cardano, and Solana, to name a few. Cryptocurrencies are accepted in most parts of the world and can be exchanged for over-the-counter goods and services or fiat currencies.
Different cryptocurrencies fall under categories like meme coins, payment coins, and
stablecoins. Memes and satire jokes on the internet inspire meme coins. They do not have a particular use case or aim to solve any problem; their value is derived entirely from online sentiment. This doesn’t mean they are not good stores of value, with Elon Musk’s favourite Dogecoin being ever so popular on any of the most preferred platforms for buying and investing in meme coins.
Like in the name, stablecoins are less prone to price fluctuations than other types of
cryptocurrencies. They are usually pegged to fiat currencies, with examples like USDT and
USDC pegged to the US dollar. These can be pegged algorithmically or by keeping the same
volume of actual fiat currency.
Payment coins can be used to buy goods and services online or in walk-in stores. These are
becoming more widely accepted in places of business and have the same reputation as fiat
currencies. In many parts of the world, they are encouraged to trade facilitators because of the speed and ease with which they can be used to facilitate business. Common examples include but are not limited to Bitcoin, Bitcoin Cash, and Ethereum.
Virtual currencies are almost identical to cryptocurrency but differ in two key areas.
The first is that they are not generally accepted outside of their original use case. They are
usually privately developed and managed for use on a private network of users. An example would be in-game tokens created by game developers to be used for purchases on the gaming network. It is common for these to be traded for fiat currencies by players on the same network, but you cannot walk into stores with these currencies.
The second area where they diverge from cryptocurrencies is that they are largely unregulated, owing to the fact they are privately developed and managed. Finally we have CBDCs, which are currencies developed by a country’s central bank or apex financial institution to serve as a replica of their fiat currency but strictly for electronic use.
These are regulated by the apex financial institution of the country and serve as legal tender, just like fiat currency. Examples include the Digital Rupee launched by the Reserve Bank of India and the proposed Digital Euro.