In the wake of the FTX implosion, everyone is talking about the pros and cons of cryptocurrency. This week, for clickbait reasons, it’s mostly the cons. Before you offer an opinion about cryptocurrency to your friends or consider formulating a cryptocurrency policy for yourself or your business, you should take a moment to understand that cryptocurrency “crypto” is a catchall phrase, and a lazy one at that.

This is hard to understand in the context of the word “currency,” which most of us have grown up to think of as dollars or euros or other stores of value, methods of exchange (or payment), and units of account that governments issue by fiat (aka fiat currencies).

While there are some cryptocurrencies that mimic the behaviors of fiat currencies, there are many different types of digital assets generally lumped under the “crypto” moniker, and they all serve different purposes.

It is important to differentiate between the utility value each type of cryptocurrency provides, what new behaviors they might empower, and what new business models might evolve around them and to be able to think through what could go right and, of course, what could go wrong. When talking about digital assets and cryptocurrencies, it is also important to clearly define the type of crypto you are referring to.

Defining Money

Wikipedia’s definition of money begins, “Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.” But the rest of the wiki is less agreed upon. If you are curious, there’s a nice essay about what money is on positivemoney.org.

For our comparison of various cryptocurrencies, we will concentrate on the three agreed-upon attributes of money: “a medium of exchange,” “a unit of account,” and “a store of value.”

Bitcoin and Store of Value Coins

Bitcoin (BTC) is the grandparent of all modern cryptocurrencies and the biggest by market cap. So it’s no wonder that many people use the word “bitcoin” to represent all cryptocurrencies. It is wrong to do so. Bitcoins are bitcoins; all other cryptocurrencies are generally referred to as “altcoins” because the foundational principles and utility value of most coins and tokens are unlike those of bitcoin in nontrivial ways.

Some experts call BTC a “store of value” coin. It has also been called “digital gold.” Whether or not any cryptocurrency is a true store of value is a hotly debated topic. Some contend that, unlike gold or other generally accepted stores of value, any digital asset has (in theory) an unlimited supply. People who make this argument do not understand (or care about) the programmatically limited number of bitcoins that can ever be mined (19,202,943.75 BTC) or the deflationary automation that Bitcoin, Ethereum, and others have programmed into their respective networks.

In the end, the value of BTC is worth what people are willing to pay for it. The better question is, what are people willing to purchase with it? Although the technology is constantly evolving, at present it is very difficult to use BTC to purchase goods and services. So, for today, the “store of value” label makes sense. When bitcoin’s Lightning Network becomes more popular, bitcoin will have a scalable, virtually instantaneous transactional network (making it more like “money” as we generally understand it).

I’m not looking to change minds here. Just understand that BTC is called a commodity by the SEC, is erroneously synonymous with all cryptocurrencies, and is invested in as if it were a security. Confused? We’re just getting started.

All bitcoins (and other store of value coins) are generally considered to be cryptocurrencies, but as you will soon see, all cryptocurrencies are clearly not bitcoins, although they may be store of value coins.

Central Bank Digital Currencies (CBDCs)

The Federal Reserve defines central bank digital currencies (CBDCs) as “a digital form of central bank money that is widely available to the general public. ‘Central bank money’ refers to money that is a liability of the central bank. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.”

Said differently, CBDCs are what we think of as “money.” You could call them “digital dollars” and be 100 percent correct. Of course, you already use digital dollars that are not CBDCs every time you bank online. How are they different from each other?

The Fed says, “While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.”

While all CBDCs are generally considered to be cryptocurrencies, all cryptocurrencies are clearly not CBDCs.

Stablecoins

Cryptocurrencies pegged to fiat currencies (government-backed money) are called stablecoins. The upside of a stablecoin is reduced volatility, earned interest, and inexpensive swaps and transfers. The downside is that because stablecoins are pegged to a fiat currency, they require a trusted third party, are subject to audits, offer lower ROI (return on investment), and are soon to be highly regulated. Examples of stablecoins are Tether (USDT), Circle (USDC), Gemini Dollar (GUSD), Paxos (USDP), TrueUSD (TUSD), and Binance (BUSD). Remember: while a U.S. dollar stablecoin is usually worth about a dollar, U.S. dollar stablecoins are not backed or issued by the U.S. government.

Are CBDCs and stablecoins the same? No. One is issued by a government; the other is issued by anyone who wants to issue one and is pegged to a fiat currency or some other “stable” asset.

While all stablecoins are generally considered to be cryptocurrencies, all cryptocurrencies are clearly not stablecoins.

Utility Tokens

A utility token serves some purpose within a specific ecosystem. For example, ether (ETH) is the utility token of Ethereum. All transactions on the network are settled with ETH, and when validators successfully verify a new block of Ethereum transactBions, they are paid with ETH. Other examples include Basic Attention Token (BAT), the utility token for the Brave Browser; Chainlink (LINK), the utility token for users of Chainlink’s oracle; and Binance Coin (BNB), the utility token of the Binance Crypto Exchange.

Utility tokens represent work performed. Value is created by, for example, using resources to validate a block. The value of the block validation is stored in the token along with whatever else it may represent.

While all utility tokens are generally considered to be cryptocurrencies, all cryptocurrencies are clearly not utility tokens.

Privacy Coins

Also known as anonymity-enhanced cryptocurrencies (AECs), privacy coins such as Monero (XMR) and ZCash (ZEC) are designed to be as private as possible. The myth that crypto transactions are untraceable starts here. Why is crypto privacy a myth? While it’s true that a wallet can be anonymous, most crypto transactions are viewable by anyone on a public blockchain. There are several companies that specialize in identifying the owners of crypto wallets.

Ironically, compared with cash transactions, crypto transactions are literally an open book. However, unlike most cryptocurrencies, privacy coins are specifically designed to hide their users. Privacy coins and tokens represent work performed. As with utility tokens, value is created by block validation, but also by the relentless pursuit of privacy.

While all privacy coins are generally considered to be cryptocurrencies, all cryptocurrencies are clearly not privacy coins.

This Is New

Confusing cryptocurrencies with money is easy to do. Confusing one type of cryptocurrency with another is extremely easy to do. When the FTX dust settles, strong cryptocurrencies with true utility value will thrive. I’m going to assume that government regulators are going to make their presence felt in the very near future and that the decentralized finance industry will mature over time (as all industries tend to do).

To help us quickly get past the “insanity stage” of this evolution, spend a few minutes learning about the potential ways each of these types of cryptocurrencies and digital assets are empowering the democratization of finance. Then you’ll be better positioned to formulate a cryptocurrency policy for yourself or your business.

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