Difference between Federal Currency and Cryptocurrency

The evolution of money from the barter system, Bretton wood system to fiat money has been a great journey. From ancient times in India, precious metals were used as currency. As the technology evolved, the system changed, regulations came in and money was made stronger.

The world is moving towards WEB 3.0, technical advancements, and blockchain technology. It made a few sections of society realize that there is no need for a centralized system that manages everything, as they discriminate against some of the other points. This ideology gave birth to a new ecosystem called a decentralized financial system which runs entirely on code and computers. Cryptocurrency is a part of this system.

Understanding federal currency and cryptocurrency

Cryptocurrency is a digital currency that acts as a medium of exchange. It does not require any middleman such as a bank or a payment processor and it operates on a binary data system. Thousands of various cryptocurrencies are in circulation across the globe and it is now a big instrument for investment. It uses complex code or protocol based on mathematics for protection.

Federal currency is mostly physical currency, but it can be digital too. It requires a bank as an intermediary. The presence of intermediaries and other factors make federal currencies safer. It is produced and monitored by central authorities. This form of currency is more usable for transaction and exchange purposes compared to cryptocurrency.

Difference between Federal Currency and Cryptocurrency

1. Meaning

   A federal currency is a physical currency issued by a central authority. It is generally backed by the governments of respective countries.

   Cryptocurrency is a digital currency operated by a decentralized private system. It is secured by cryptography to prevent duplicate transactions. Cryptocurrencies are not issued, they are mined digitally.

2. Issuing medium

   Federal currency is issued and operated by the Central bank or any authorized entity of the origin country. Cryptocurrency is not issued by the government or any regulatory authority. It is operated by a private system independently.

3. Intermediaries

   For the exchange and transfer of federal currency, intermediaries such as banks are required. Even for digital transactions, payment processors and banks are an intermediary. Cryptocurrencies do not require any intermediary for the transfer or validation.

4. Medium of Exchange

   The medium of exchange for federal currency can be physical or digital whereas, for cryptocurrency, the medium of exchange is digital-only.

5. Supply

   Federal currency is unlimited in supply. The reason is that the government does not have any restricted extent to which it can produce money. It prints money based on the requirements and prevailing conditions. No one can exactly tell how much money is in circulation.

   The supply of cryptocurrency is limited to an extent. For instance, Bitcoin, the world's largest cryptocurrency, is limited to 21 million.

6. Legality

   All the countries across the globe have their federal currency. These currencies are operated by a central authority and backed necessarily by the government. Therefore, federal currencies are a legal medium for exchange and transaction.

   On the other hand, trading and exchange of cryptocurrencies are banned in some countries. The reason being it can be used to support illegal activities such as terrorism.

7. Tangibility

   Federal currencies are physically exchanged using coins or notes. In contrast, cryptocurrencies do not have any physical form. It is a digital medium of exchange with encrypted codes. It is intangible.

8. Storage

   Federal currencies can be stored in bank accounts. Digital federal currencies can be stored in digital form on payment platforms. Those who have the currency are the owners.

   Cryptocurrencies are stored in cryptocurrency wallets that are made up of unique information. This wallet validates the users as owners.

9. Safety

   Transacting in federal currency is safer. The reason is simple, it is backed by a central authority. Comparatively, any fraud can be detected and resolved easily.

   Transacting in cryptocurrency is risky. The possibility of anonymous transactions makes it unsafe. Additionally, it is not operated or backed by the government or any such central authority. The problem of data hacking and fraud can occur in crypto transactions. Tracking and catching the fraud is more challenging.

10. Representation

    Federal currencies are represented by coins and notes. Cryptocurrencies are represented by a computer code that can be public or private. These codes are unique as well as complex and prepared based on mathematics and engineering principles.

11. Volatility

    Federal currencies are less volatile as there is a central system controlling the flow of currency in the market. The speculation involved in cryptocurrency makes the currency more volatile as there are no intermediaries or regulatory bodies involved who act as a watchdog on its movement.

12. Transaction Cost

    Transaction cost is higher in the case of federal currency because of the presence of intermediaries. The absence of intermediaries in cryptocurrency reduces the transaction cost significantly.

In short, both federal currencies and cryptocurrencies have some similarities and some differences. While both are used for transaction purposes, they can be divided into smaller units. The major differences between both include issuance, storage, tangibility, and intermediaries.