Differences between tokens, coins and virtual currencies


There is a difference, and it’s significant. However, not everyone understands and accepts it, even at the level of the creators and developers themselves. So JPMorgan Chase called their JPM “digital coin”, and Libra from Facebook was positioned by the creators as a cryptocurrency. However, many experts did not agree with such formulations.

Moreover - at a basic level. After all, since JPM and Libra are issued by specific corporations, then the main characteristic of the definition of cryptocurrency - “the need for decentralization” - does not apply to them. They can rather be called “digital” or “virtual” money, and there is some difference between these terms, but we'll turn to it later.

The main definition that most experts are inclined to say is: “Cryptocurrency is a digital or virtual currency created on the basis of cryptographic principles, which makes it safe, unique and unchanged. The vast majority of them work on blockchain technology, which operates through a decentralized computer network. ”However, they can exist without a blockchain, like Digicash, for example, formally corresponding to the definition, but released in the early ‘90s.

What are the coins?

Bitcoin (BTC), Monero (XMR) and Ether (ETH) are classic examples of cryptocurrency coins. They are united by the fact that they all exist within their own independent networks. Bitcoin, Monero and Ethereum respectively.

Coins correspond to the same features as regular money - they are interchangeable, divisible, portable and limited on offer. And they are used to pay for the purchase of things and services, like physical cash. However, the same ETH serves not only as a means of payment but also as a tool to facilitate transactions on its network. However, these are not required properties to define a “coin.”

The term "altcoin" describes any alternative to Bitcoin. These include branches of the original protocol, such as Litecoin (LTC) and Dogecoin (DOGE), as well as completely independent projects. So basically all coins except Bitcoin are altcoins.

What are tokens?

In short, these are assets that can be used within the ecosystem of a single project. For their work, some external blockchain is required. Most often - Ethereum. But there are other options, such as NEO or Waves.

Some tokens can be used as an external means of payment - then they are called “currency”.

“Service” tokens are those that are used to create decentralized applications and are used to indicate the right to use some of the special functions of the project. An excellent example is the Basic Attention Token (BAT), created on the basis of Ethereum, which is a tool for the distribution of digital advertising.

“Security tokens” are, in essence, ordinary investments in the development of a project. They are needed for launch, but unlike stocks or securities, they do not give the owner the actual ownership and the ability to influence project management. That is how, according to the initial idea, the Initial Coin Offer - ICO worked. However, abuses soon began and state regulatory authorities became interested in these cases.

The difference between virtual and digital currencies

“Digital currency” is a collective term for all electronic money that does not have a material form. It was first used in the research work of David Chaum from 1983, on the basis of which the digital currency Digicash was soon developed.

As already stated, they do not have a material embodiment, so all operations can be done using online wallets connected to the network. Transactions are almost instantaneous, there is practically no commission. An important point - there is no difference between the digital “currency” and the “money”.

Virtual currencies are one of the digital options, but can be used, as defined by the European Central Bank, only in an “unregulated environment for paying for transactions within a specific virtual community”. In addition, their release, cost and other features are fully controlled by the developers of the “virtual environment”. They are not cryptographic but are used quite actively. For example - in-game World of Warcraft tokens or points from games of the FIFA series. Yes, they can be purchased for both real and digital money, but the opposite is not always possible.

Virtual currencies are very prone to volatility, since their methods of extraction and cost are regulated exclusively by developers. Therefore, cryptocurrencies are by no means "virtual", but they themselves fall under the definition of "digital".

Are these definitions universal and complete?

No, they are not, because the market has been seriously developing for less than 10 years, and it has huge problems with regulation. Cryptocurrencies alone have at least 5 official definitions, depending on which regulatory body issues them. The US Internal Revenue Service considers them simply property, SEC - securities, Financial Crimes Enforcement Network - ordinary money. And in Japan, regulatory frameworks generally define cryptocurrencies as the "value of the properties." Well, there is also the term "currency surrogate", repeatedly used by the Russian Central Bank.

It is possible that in the future new definitions will appear, but for now - you can use the ones described above. They mostly describe the difference between different categories of digital currencies.