What’s the difference between cryptocurrency and paper currency? They definitely aren’t the same thing, but at the same time, the difference between them is less than what most people probably assume. In this blog post from the Noble Institution, we’ll look at what paper currency really is –and how cryptocurrency is both similar and different.
Early Paper Currency
Early paper currency took the form of banknotes. A banknote was simply a written promise from a bank to issue a certain quantity of gold on request. Banks issued so many banknotes that they would have collapsed if everyone had presented their banknotes at the same time –they didn’t have that much gold on hand!
Eventually, governments started to form their own banks and issue their own banknotes, a type of money known as “fiat currency” because it’s issued by government fiat. Once fiat currency existed, it was only a matter of time before private banks were forbidden from issuing their own banknotes. The government, just like the banks, did not really have enough gold to cover every banknote.
In 1971, U.S. President Nixon abolished the connection between U.S. Dollars and gold. Ever since then, paper currency in the U.S. has been purely symbolic. However, it’s still the case that banks do not hold on to enough cash to cover all the money held in their accounts. Instead, they use that money for investments and loans, meaning that if everybody took out their money at the same time, the bank would collapse. Paper currency, like its predecessor the banknote, is more theoretical than real.
Cryptocurrency simply takes this process one step further. Now that “paper currency” is mostly digital (existing only in the bank’s computer system!), it makes sense to create a truly digital form of currency. Cryptocurrency is purely digital, with no paper format all. However, it isn’t any less real than the money stored in your bank account.
The biggest difference between paper currency and cryptocurrency is that paper currency is issued by fiat from a government-controlled bank like the Federal Reserve. Cryptocurrency is decentralized, not issued by the government, and not stored in any bank. Instead, cryptocurrency is stored in the distributed blockchain ledger, which is protected from any unauthorized changes by advanced cryptography. In a way, cryptocurrency has brought back the old way of doing things, where currency was not issued or controlled by the government.
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