The topic is confusing even to those who work in the industry but allow me the opportunity to simplify and define two issues that are regularly confused as being the same by separating blockchain technology from cryptocurrencies. We won’t deep dive into either as there are plenty of materials out there for that already. Our goal is to give you an easy-to-understand cheat sheet on these two topics that appear to gain steam daily to be normalized within our industry.
Let’s start with blockchain
As bankers, imagine an impenetrable vault filled with transparent safe deposit boxes in your bank. Each bank gets to determine the rules and extent of transparency for customers to meet their customers’ needs. Customers must also be given a key issued by the bank in order to access whatever assets are in any particular box. That is blockchain in a nutshell.
Businesses are increasingly adopting the tech because it provides immediate, shared and transparent information stored on an immutable ledger that can only be accessed by permissioned network members.
The best way to fully grasp it is to first forget there is any connection between blockchain and cryptocurrency for just a moment. At its core, blockchain is a public ledger. Anyone operating within that ledger can review, consider and validate anything that gets noted. It can be changed, but nothing can be erased. Because of that transparency, blockchain has gained popularity as a technology that is very secure, trustworthy and more efficient than anything else used to track assets.
These blockchain vaults can house any number of data sets, such as digital ballots for voting, patient information with networked healthcare providers, details for shared ownership of physical assets such as automobiles, houses or boats. Blockchain can even be used in banking. Imagine lenders using blockchain to execute loans through smart contracts built to allow certain events to automatically trigger, like title insurance review, service payments, full repayment of a loan, or the release of collateral. This would result in faster and more efficient loan processing, potentially allowing these lenders to offer better rates.
That brings us to digital currencies and cryptocurrencies, which are not the same.
Digital currencies vs. cryptocurrencies
Digital currency is any currency held in digital form, while cryptocurrency refers to digital currencies built on the blockchain platform. All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
We most often hear about cryptocurrencies like Bitcoin or Ethereum because they have built themselves to be more transparent to investors and potentially more valuable by fixing the amount of coins available. Whereas digital currencies are typically tied to a fiat currency. Regulators in the U.S. are currently reviewing the path toward a Central Bank Digital Currency (CBDC) but have been very wary.
We hope this cyber breakdown is helpful as your institution moves closer to taking a position on the digital currency landscape and blockchain platform.
| DIGITAL CURRENCY VS. CRYPTOCURRENCY |
| DIGITAL |
CRYPTO |
| Regulated by Central Authority |
Decentralized and Unregulated |
| Transactions are only known to sender, receiver and bank |
Transactions are publicly available on a decentralized ledger |
| Essentially e-cash and vulnerable |
Stored on blockchain encryption |