It’s quite likely that you have heard or read the terms ‘Blockchain’ and ‘Cryptocurrency’ used together quite often, maybe it be in the headlining articles of news websites or blog posts from crypto-enthusiasts or YouTubers.
Perhaps it sparked your curiosity and you would like to learn what exactly these things are about. We admit, the world of cryptocurrency can be a little hard to understand sometimes, but surprisingly, understanding the difference cryptocurrency and blockchain isn’t really that hard.
Put simply, blockchain is the technology which makes the existence of cryptocurrencies possible. It’s essentially the medium through which cryptocurrency operates and is transacted between parties.
The Basics of Blockchain and Cryptocurrency
Let’s try to understand these terms with the help of an example:
Imagine you are going on a holiday to another country. To be able to make transactions in that country, you will require the local currency of that country. The currency notes or coins of your home country that you have with yourself are simply not valid here, so you exchange the currency of your home country with the one of the country that you are traveling to.
In this case, the money that you had with yourself initially (home country) is fiat money, and the money that you exchanged it for (host country) is cryptocurrency. The host country itself is the Blockchain that makes the transaction between cryptocurrencies possible.
Just like how your native currency (fiat money) is invalid in the host country (Blockchain), in the same manner, the currency of the host country (cryptocurrency) is invalid outside its premises.
Still not sure? Okay, let’s take another example.
Suppose you are at a casino. In order to gamble, you exchange your cash for chips. You can use these chips inside the casino to play and transact, but outside the casino, these chips are worthless.
In this case, the cash (fiat money) is being exchanged for chips (cryptocurrency) and those chips only operate under the boundaries of the casino building (blockchain).
Blockchain Technology vs. Traditional Banking
Perhaps the most valuable difference between Blockchain technology and traditional banking is that Blockchain is decentralised in nature, which means that it doesn’t have any central government body regulating the circulation of money in the system.
Essentially, blockchain technology brings the power back to the people because they can freely transact cryptocurrency among each other without having any intermediary in the middle.
Since there is no control of the middle party, the value of different cryptocurrencies is determined purely by the market forces of supply and demand.
However, in the case of fiat money, the value of the currency is determined not just by market forces, but also by the government’s regulatory practices. The value is also subject to change due to political and legal factors the country is affected by.
Not just that, blockchain technology also helps in transparency which means that all the transactions made via it are publically visible to virtually everyone at all times – making transactions easy to track.
But ironically enough, even though the transactions are easy to track, the actual user is not because unlike credit cards, transacting within the Blockchain doesn’t require you to show your face or sign your signature to validate your identity.
Blockchain technology goes beyond cryptocurrency
The common misconception when talking about this topic is that people think the terms ‘blockchain’ and ‘cryptocurrency’ are interchangeable. They’re not. Blockchain technology is not something that is limited to just cryptocurrency, albeit, it was indeed built for that purpose.
In reality, however, Blockchain technology goes way beyond cryptocurrency. Some of its potential applications can include the automotive industry, voting processes, and even healthcare.
Cryptocurrency is simply an applicable built on top of the Blockchain technology that records and links transactions – like a ledger. Confused? Don’t worry. These concepts are often not understood clearly at first glance. Let’s take a quick look at an example to understand things better.
First, let’s break down the term ‘blockchain’. Block-chain, as in “a chain of blocks.” A “block” in this case is simply a set of transactions bundled together that is added to the chain. It’s very similar to adding beads to a necklace. Think of the beads as blocks. Each bead has to follow the previous one to make the necklace.
As far as cryptocurrency is concerned, you can think of it as the paint or coating sprayed on top of the necklace. The coating encompasses the necklace, but the necklace is not built of the coating itself, so as to say that Blockchain can support cryptocurrency transactions, but the technology isn’t built of cryptocurrency itself.
Potential Risks, Money Laundering, and Defence Bodies
All this talk regarding how secure and transparent Blockchain technology is can make it sound like there is no way the system can ever be compromised. Well, that’s not true, because of the same reason we mentioned earlier: you don’t have to show your face to validate your identity.
The only thing that is transparent and trackable are the transactions themselves, but not the actual person sitting behind the screen since the transactions are made using public and private keys and not personal ID like traditional banking systems.
This can and has caused some serious cases of money laundering using the Blockchain technology via cryptocurrency. To avoid crimes like this is the reason why inter-governmental bodies like the FATF (The Financial Action Task Force) exist.
They act as an international watchdog that supervises countries and puts them in different categories such as Blacklists and Greylists. Via the FATF Grey Countries List (officially referred to as ‘Jurisdictions under Increased Monitoring’) they record the names of countries that are under a much higher risk of money laundering and terrorism financing.
The countries listed in the Greylist have agreed to work together with FATF to develop action plans to redeem their systemic deficiencies to lower these crimes in their countries. The countries that do not agree to work with FATF, are put in the Blacklist.
The reason why we’re informing you about these potential dangers and defence body is because in the world of cryptocurrencies, it’s always better to stay informed as much as you can to stay above the waters.
Thank you for reading this article. We hope you learned a fair bit of new information regarding what cryptocurrency is, how it’s different from blockchain, and how it’s taking the world in a newer direction.
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