Digital currency refers to any currency that exists online. Cryptocurrency, on the other hand, refers to currency held as a record on a blockchain database. This distinction is important because it can have significant tax implications. So, how is digital currency different from online banking?
How Is Digital Currency Different From Online Banking?
To get the answer to this, firstly you need to know what are digital currency and cryptocurrency and compare them.
What is Digital Currency?
1. Digital currency is any currency that is recorded and transferred on computers, for example, dollars in an online account. You can hold traditional currency in physical or digital form depending on how you store it. This is the standard definition or the functional definition .
2. Digital currency is a currency that is recorded and transferred only on computers. It has no physical counterpart, meaning that it has no printed or minted form in the real world. This refers to a pure digital currency and is generally not the preferred usag .
The difference is that under the more common definition, dollars, pound,s and euros can exist as digital currencies when they're held and moved online.
For example, say you open a bank account with $10,000 in it. You might find a bank that will literally keep a vault filled with cash on hand, with your $10,000 stored inside. In this case all of your money would be held in physical currency . But more likely you'll find a bank that holds your cash as an entry in their database. They record your $10,000 and hold it in digital currency. You can spend it as a digital currency (for example, if you use your debit card to pay for things) or you can spend it as physical currency (for example, if you make a withdrawal from the ATM).
Your money can move back and forth between physical and digital form depending on how you hold it.
What Is Cryptocurrency?
Cryptocurrency is a purely virtual currency, meaning that it has no official physical asset, that is recorded and stored on a blockchain database. This is the most common definition of cryptocurrency and the one generally used. It applies to assets like Bitcoin.
Cryptocurrency is a purely virtual currency, meaning that it has no official physical asset, that is secured by any means of cryptography. This is not a common usage of the term.
Under the second definition, you can use any kind of digital security to create a cryptocurrency. This generally isn't how people use the term for a number of reasons. Among others, according to this definition virtually, any currency can be a cryptocurrency. But while your bank can use cryptography to secure the dollars in your account, that doesn't make your dollars a cryptocurrency.
At the same time, cryptocurrencies in a blockchain are largely inseparable. At the time of writing all crypto projects used blockchain for their security and data storage.
When you own a cryptocurrency, you literally own an entry in a database. The ledger will record, for example, that Bitcoin ABC123 belongs to you. When you spend it, the ledger will update that entry to reflect the bitcoin's new owner. There is no other asset or physical entity that “is” a single bitcoin.
Consequently, cryptocurrency is a form of digital currency. But not all digital currencies are cryptocurrency.
I hope now you can get the answer to "how is digital currency different from online banking?"
