It is sometimes difficult for newcomers to the industry to understand the difference between electronic money and cryptocurrencies. What are the main differences between these concepts and in what scenarios is it better to use these two types of payment instruments?
So far, cryptocurrencies remain a new and relatively little-studied technology that does not have an established terminology and systematization. New users of the industry and even the media sometimes confuse the terms “electronic money” and “cryptocurrency”, using them as synonyms.
How electronic money differs from cryptocurrencies, Oleg Kurchenko, founder and CEO of the digital asset exchange Binaryx, talks about the strengths and weaknesses and prospects of both assets.
Electronic money is digital fiat currencies that are controlled through a banking system or another intermediary – an electronic payment operator. The issuer of electronic money can be a government or a private organization. Almost all popular payment systems fall under the concept of electronic money – PayPal, Qiwi, WebMoney, YuMoney (Yandex.Money) and others.
Money in e-wallets is not subject to government insurance. Access to the electronic wallet is provided by login and password. Some payment systems additionally use private key files and two-factor authentication.
How cryptocurrency differs from electronic money
The dividing line between cryptoassets and electronic money runs along technical and partly economic characteristics:
Decentralization. Cryptocurrencies operate in a distributed network and do not have a single center for storing and processing information, such as WebMoney. Decentralization also provides for special methods of confirming the authenticity of transactions – PoW, PoS and other types of proof protocols.
Anonymity. When using cryptocurrencies, users are not required to verify their identity – there is no database with the personal information of the participants in the transaction, except for their IP and wallet address. While more and more cryptocurrency exchanges are obliging users to undergo KYC checks, crypto asset owners are finding ways to minimize the disclosure of personal information. In centralized payment systems, if it is possible to send or receive money to an unverified user, then only with a number of restrictions.
Transparency. In traditional EPS, only the central operator has data on the user’s account and is not disclosed to other participants in order to maintain bank secrecy. The blockchain is open to anyone, so everyone can see from which wallet the money was sent, the size of the transfer and the recipient’s address. However, there are confidential cryptocurrencies, for example, Zcash, whose developers use cryptographic mechanisms to hide information about the amount of a transaction, its recipient and sender.
Unregulated cost and emissions. The cost and procedure for issuing electronic money is set by their issuer (government, game developers, etc.). Cryptocurrency is issued according to predetermined rules, and its value in fiat depends on demand is determined by demand – the open market determines the fair value of an asset. An exception to this rule can be considered stablecoins – crypto assets, the value of which is pegged to fiat currency in a 1: 1 ratio. The issue of a stablecoin is determined by its issuer, which is ready to provide the crypto asset with real fiat reserves.
For quite a long time, a distinctive feature of cryptocurrencies was the lack of legislative regulation of turnover and official recognition as a means of payment. As of 2021, many countries have somehow introduced cryptocurrency into their legal systems, and in Japan and El Salvador it is even considered a means of payment.
Pros and cons of electronic money
Despite the fact that cryptocurrencies are becoming more and more popular as a progressive payment method, traditional electronic money also has strengths:
Liquidity. Electronic money can be used to pay for almost any product or service – its liquidity is provided by the state or the issuer.
Transfer speed. Centralized electronic payment systems process several thousand transactions per second. At the same time, the Bitcoin blockchain processes approximately 5-7 transactions per second, and Ethereum – 15-20 transactions.
Availability. It is easier for an ordinary user to create an electronic wallet than a cryptocurrency wallet. E-wallet is easy to replenish and you don’t need to think about storing private keys. The price of the currency in the e-wallet is equal to the value of the corresponding fiat currency.
However, electronic money has a number of disadvantages that have contributed to the emergence of new generation payment networks: Centralization. Electronic payment systems have one information processing and storage center that is relatively easy to attack. The central server becomes the so-called “point of failure”.
High cost. Commissions for traditional transfers are higher due to the need to maintain staff and equipment.
Dependence on the regulator. A single organizational center is also a “point of failure”. If the authorities decide that this payment system needs to be closed, its work will be stopped immediately, without asking the opinion of users.
Electronic money, with all its advantages and disadvantages, remains an important part of our life and is used everywhere – from shopping in stores to cross-border transfers between companies. This position of electronic money will continue until cryptocurrencies gain widespread acceptance and distribution.
Pros and cons of cryptocurrencies
Since cryptocurrencies emerged as a response to the weaknesses of traditional electronic payment systems, their main pros mirrored the cons of electronic money:
Resistance to breaking the system as a whole. To make changes to the blockchain, an attacker must hack more than one data center, but take control of more than 51% of the mining capacity or coins on the network. For large cryptocurrencies, this task is almost impossible. However, unpopular altcoins fall prey to such attacks from time to time.
Low cost of translations. Decentralization implies that there is no single center that pays for the work of employees and the maintenance of equipment. The operator of each node bears all the costs himself, which makes transactions cheaper compared to electronic payment systems. Although due to the growing popularity of cryptocurrencies in 2021, fees in the Bitcoin and Ethereum networks have grown many times and reached historical highs, developers are constantly working to reduce them through the development of updates.
Self-regulation. The work of Bitcoin or Ethereum cannot be stopped only at the request of the regulator. To do this, you will have to disconnect all nodes on the network.
Confidentiality. Blockchains do not store personal information about users, so no one can steal this data.
Cryptocurrencies also have serious drawbacks that do not yet allow them to gain mass distribution.
Volatility. The leaps in the rate do not allow fixing the value of the cryptocurrency, which makes it difficult to use it in everyday life. The exception is stablecoins, usually their price is pegged to the US dollar or euro.
Relatively low liquidity. No one is obliged to buy cryptocurrency from a user or exchange it for another asset. For how much the owner will sell the coins and whether they will sell them at all, only the market decides.
Scaling. The low bandwidth of early blockchains limits the number of users and increases transfer times, which is alienating to many people. However, progress does not stand still. For example, Ethereum developers are actively working on the launch of the second iteration of the network, which should significantly increase the bandwidth of the blockchain. Ethereum L2 solutions like Hermez can provide 100x the bandwidth. And some projects, such as Solana and Kadena, are capable of processing hundreds of thousands of transactions per second and can match the speed of Visa. However, high speed is usually achieved through partial centralization.
Irreversibility of transactions. If, when hacking an electronic payment system, the server can simply make a backup copy of all data or cancel the transfer of money sent to scammers, then cryptocurrencies do not provide such an opportunity. If the user’s private keys were stolen and the coins were transferred to another address, they cannot be returned.
Every year, developers solve these problems more and more effectively, so the ability to pay with cryptocurrencies for a purchase in a supermarket is only a matter of time. However, electronic money will also remain an important part of the financial system for a long time due to the smooth operation of such systems and their convenience.
