In today’s era, which is completely altered by the digital revolution, the introduction of digital assets has become mandatory to boost the digital economy of a country. The term ‘virtual digital assets’ is especially used for tradable digital assets like NFTs, DeFi, etc. As the name suggests, virtual digital assets do not have any real or physical entity. Most importantly, digital gold or any digital currency issued by the central bank doesn’t count as a digital asset.
On the contrary, digital currency is a form of currency that is only available in electronic form, and it is issued by the central bank of the country. Unlike virtual digital assets, digital currencies are nothing but legal tender and should serve as a sovereign currency just like the traditional one. Moreover, if you want to exchange your digital currency for equivalent paper money, you can always do that, and the value will remain the same as well.
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Most newbie investors find it difficult to distinguish between virtual digital assets and digital currency as there is a very thin line between them. If you intend to invest or trade in a digital medium, having a clear idea about both the assets and currencies is extremely crucial. The aim of the article is to provide you with a detailed overview of virtual digital assets, digital currencies, and their differences.
Virtual Digital Assets: A Complete Overview
Any digital information, code, or token generated with the help of blockchain technology and having a digital presence is known as a virtual digital asset. The use of the assets is not only limited to investment schemes; they can also be used to trade, transfer, or store electronically. Non-fungible tokens (NFTs) or any other tokens with similar attributes are also considered virtual digital assets. Actually, the term is used as a generalized form that can also include assets that may be introduced in the near future.
Types of Virtual Digital Assets
Currently, two types of virtual digital assets are stored, transferred, or stored in the electronic platform. But, any new assets that may emerge in the near future can also be included under the virtual digital assets. Now let’s discuss the two main categories of digital assets currently available in the market.
- Tokens- Any DeFi tokens, altcoins, native tokens of a blockchain market come under this segment. Furthermore, any other form of tokens on which you spend money to trade is also considered virtual digital assets. Tokens can be used as a medium of commercial transactions as they are identical to each other.
- Non-fungible Tokens (NFTs)- NFTs are nothing but encrypted digital assets with unique identification codes that separate them from each other. Unlike digital currencies, they can be exchanged or traded at equivalency. In other words, NFTs cannot be replicated. That means you can use them to represent real-world items like real estate or artworks. The possibility of online fraud while buying, selling, or trading through NFTs is very less as every single NFT can be tokenized with unique information.
Digital Currency: A Complete Overview
Digital currency is a special form of legal tender that can be operated on an electronic medium only. Many countries, including India, have decided to introduce a digital currency to boost their digital economy. The main advantage of digital currencies over virtual digital assets is that you can exchange digital currency for real cash. In other words, it will serve as a sovereign currency. But, the only difference between the physical and digital currency will be the operational medium. You have to operate your digital currency electronically to store, transfer, or trade it.
Just like virtual digital assets, digital currency can also be classified into two main parts. They are-
- Virtual Currencies– These are unregulated forms of digital currencies controlled by the founding organization or developers. It can also be controlled algorithmically by a predefined network protocol if required. The controlling authority also sets the value of these types of currencies, and it may vary according to their policy. In-game purchasing is a common use of virtual currencies where the value of gaming network tokens is decided by the game developers.
- Central Bank Digital Currencies (CBDCs)- These are regulated forms of digital currencies issued by the central bank of a country. The best part of this type of currency is that it can be easily exchangeable for equivalent physical cash. The value of the currencies is also fixed, and they can be a replacement or supplement of the traditional form of currencies. But, the existence of CBDCs is completely digital, and one has to trade or transfer the currency electronically.
Advantages and Disadvantages of Digital Currencies
The introduction of digital currency comes with its own advantages and disadvantages. Now let’s quickly look into the main pros and cons of trading in digital currency.
- No Requirement Of Physical Manufacturing
Unlike the traditional fiat currency, the digital currency doesn’t require any physical manufacturing setup. Moreover, such currencies are also immune to any physical damage or soiling.
- Transaction And Transfer Times Are Faster
The time involved in digital transfer and transaction is extremely fast and instantaneous. Such currencies don’t require any intermediary to transact, and that is the reason it is way faster than all other forms of transactions. In addition to that, all the digital currencies exist within the same network. On the other hand, physical fiat money transactions involve banking systems or clearinghouses.
- Transaction Cost Is Cheaper Than The Traditional Method
In a digital payment environment, you can directly pay or receive payments from the opposite party without any intervention from intermediaries. As an obvious result, the cost of transaction becomes way cheaper than the physical format due to the absence of the middle man.
- Digital Currencies Can Be Highly Volatile In Value
Regulated or non-regulated, both types of currencies come under digital currency. While the government-issued CBDCs may involve less risk, the non-regulated currencies are highly volatile in nature. Their prices can fluctuate hugely within a very short timeframe.
- Digital Currencies Are Prone To Hacking
You need to store your currencies in a digital wallet in order to use them electronically. And hackers often tend to target those wallets to steal your currency or even change the protocol of the digital currency to substantially decrease the market value of the particular currency.
- You Need Online Wallets Or Storage To Store Digital Currencies
It is true that digital currencies do not require any physical establishments to store or transact them. But, they do have their own set of requirements. You need an electronic device like mobile phones, laptops, computers, etc., and an active internet connection to trade with digital currencies. Above all, you need to possess a virtual wallet to store your digital currencies.
Differentiating Factors between Virtual Digital Assets and Digital Currencies
The major difference between virtual digital assets and digital currencies is their issuing authority. According to the government of India, a currency will be considered a digital currency only when the central bank of the country issues it. On the other hand, any type of digital asset issued by either the government or any private authority can be classified as a virtual digital asset.
The main three differentiating factors of digital currencies and virtual digital assets are as follows:
- Issuing Authority-Virtual digital assets and digital currencies are mainly differentiated by their issuance authority. Any currency that is issued by the central bank of a country is recognized as a digital currency. But, virtual digital assets can be issued by either the government or any other private organization. Even the regulatory information or code can be managed by the issuing organization in the case of virtual digital assets.
- Usage Of The Assets And Currencies-The best part about digital currencies is that you can exchange them for equivalent physical cash. But, in the case of virtual digital assets, you cannot trade them in exchange for physical fiat money. Though, you can represent real-life assets like artwork or real estate through NFTs.
- Involvement of Fraudulent Risk- As both the assets and currencies are being operated on a digital medium, the risk associated with them while transacting is pretty high. Often hackers target the online wallet to steal the stored currencies or change the protocol of the currency to decrease its market value substantially. Different types of assets and currencies have different risk factors involved with them.
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While most countries are introducing digital assets and currencies to boost their digital economy, a safe infrastructure to transfer and transact them is yet to be built. But, there is denial in the fact that digital assets and currencies are going to be the future of trading, transferring, and transacting as the value and advantages of using them to boost the economy of a country are very high.