January 01, 2022
In 2009, Bitcoin was created as the first digital currency. Despite facing operational inefficiencies and security concerns, digital currencies have gained widespread popularity as a payment method on a global scale. Over time, the adoption and investment in digital currencies have witnessed substantial growth, prompting governments and central banks to explore the possibility of integrating digital currencies alongside traditional fiat currencies.
What is digital currency?
Digital currency refers to currency that exists solely in electronic form, without any physical counterpart like coins or banknotes. There are various types of digital currencies, including Virtual Currency and Central Bank Digital Currency (CBDC). Unlike traditional currencies, digital currency is purely digital and operates within computer networks, facilitating exchanges through digital means.
The existence of digital currency is supported by highly efficient databases and digital storage devices, overseen either by centralized or decentralized entities. Its functionality mirrors that of traditional currencies, such as banknotes and coins. While some central banks are exploring the concept of creating their own CBDC, certain communities and nations remain skeptical and prohibit their use. Additionally, digital currencies can vary in terms of control: some are governed by centralized bodies like a central bank, while others operate in a completely decentralized manner, with no single entity responsible for its distribution and regulation.
Virtual currency is a form of digital currency that operates without regulation from a central bank. It is not issued or controlled by any centralized authority. On the other hand, cryptocurrency, a specific type of virtual currency, relies on cryptographic techniques to secure digital asset transfers, utilizing peer-to-peer networks and decentralized systems. The transactions in cryptocurrencies are managed and recorded through blockchain, a decentralized technology spread across multiple computers.
In contrast, Central Bank Digital Currency (CBDC) represents a nation's official currency in digital form. Unlike decentralized cryptocurrencies, CBDCs are centralized and subject to regulation by the country's monetary authority.
Advantages of using digital currency
- Minimal transaction fees
- Rapid funds transfer
- Ease in international trading
- Access to funds at anytime
Downsides of using digital currency
- Limited acceptance of digital currency
- Volatility leads to apprehension of using it as a source of funds for businesses
- Developing a regulated form of Digital currency is difficult, time consuming, hypothetical
- Difficult to grasp the concept of how to use digital currency
How do international bodies see digital currency?
International bodies have diverse perspectives on digital currency, with governments around the world responding in various ways to the use of cryptocurrencies. For instance, countries like Singapore and Switzerland have emerged as active cryptocurrency hubs, fostering the growth and development of cryptocurrency industries within their borders. On the other hand, certain nations like India, China, and South Korea have chosen to impose bans on cryptocurrencies or specific cryptocurrency-related activities. In contrast, several European countries and the United States are adopting a more nuanced approach, aiming to strike a balance between encouraging financial innovation and managing potential risks through the regulation of cryptocurrencies.
According to the Bank of International Settlements, Digital Currency refers to an asset represented in digital form, possessing certain monetary characteristics. This means it can be converted into a sovereign currency and is issued by an entity responsible for redeeming digital money for cash.
As per the European Central Bank, Digital Currency is a type of unregulated, digital money typically issued and controlled by its developers. It is utilized and accepted within a specific virtual community.
The US Department of Treasury defines Virtual currency as a medium of exchange that lacks legal-tender status in any jurisdiction. While it operates similarly to a currency in some countries, it does not possess all the attributes of a real currency.
Final Take: At least 80% of central banks are currently researching this technology.
Users of cryptocurrencies state that digital currency will be the future of money. While digital currencies have become popular over the years, there are still some issues with cryptocurrencies being used as money, as mentioned above. Recently, a few countries such as China have also banned the use of cryptocurrency, leading to huge volatility in their prices. China has also started testing its state-regulated digital currency (CBDCs) and the national banks of several countries are looking at integrating blockchain technology into their financial systems – and it’s possibly going to change the way people view digital currency in the future.