Digital currency, also known as digital money, electronic money, electronic currency, or cyber-cash, is a type of currency that only exists in digital or electronic form. It can be accessed and used through computers or mobile phones connected to the internet or designated networks. In contrast, physical currencies like banknotes and coins have tangible attributes and can only be transacted when their holders have physical possession of them. This article is focused on understanding digital currency pros & cons.
Unlike physical currencies, digital currencies can be seamlessly transferred and used for transactions across borders without requiring intermediaries, which often make them a cheaper option. May I remind you that all Cryptocurrencies are digital currencies, but not all digital currencies are Cryptocurrencies.
Understanding Digital Currency
Digital currency refers to currency that exists only in electronic form and does not have physical attributes like banknotes or coins. Transactions involving digital currencies are conducted using electronic wallets or computers connected to the internet or designated networks, unlike physical currencies that require physical possession. Similar to physical currencies, digital currencies can be used to purchase goods and services, and they also have restricted use in certain online communities like gaming sites, gambling portals, or social networks.
Digital currencies provide the benefit of instant transactions that can be easily executed across borders. For example, a person in the United States can make payments in digital currency to counter-party in Singapore if they are both connected to the same network. Read also read 3 best finance and crypto ad network in 2023.
3 Major Types of Digital Currencies
Digital currency is an umbrella term used to describe different types of currencies that exist in the electronic realm. Currently, there are 3 major types of digital currencies and they are as follows:
These are digital currencies that use cryptography to secure and verify transactions on a network. Examples include Bitcoin and Ethereum. Because they are unregulated and exist only in digital form, Cryptocurrencies are considered virtual currencies. Depending on the jurisdiction, they may or may not be subject to regulation.
2. Virtual Currencies
These are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders. They may also be algorithmically controlled by a defined network protocol. An example of a virtual currency is a gaming network token with economics defined and controlled by developers.
3. Central Bank Digital Currencies (CBDCs)
These are regulated digital currencies issued by a country’s central bank. A CBDC can either supplement or replace traditional fiat currency. Unlike fiat currency, which exists in both physical and digital form, a CBDC exists purely in digital form. Countries like Sweden, England and Uruguay, are considering launching a digital version of their fiat currencies.
How Digital Currencies Have Worked Around the World
The concept of a US Central Bank Digital Currency (CBDC) has been proposed, but it has not yet been fully developed. In contrast, other countries around the world have made significant progress in creating digital currencies. According to the Atlantic Council’s Geo-economics Center’s CBDC Tracker, 10 countries have already launched their own digital currencies. China, which has one of the largest CBDC programs, has been conducting a pilot project since 2014.
In China, the digital Yuan is being tested in five cities through lotteries, where winners receive free CBDC that they can spend at local shops that accept it. Once China’s platform is ready, it is expected to expand through banks and mobile providers such as Alipay. Moreover, the central banks of China and the United Arab Emirates are collaborating on a project that will use blockchain and CBDC for regional payments between nations. If successful, these projects could inspire other nations to develop their own CBDC.
Lilya Tessler, who is the current head of Sidley’s Blockchain and FinTech group, is optimistic about the future use of digital currencies. She believes that digital currencies will be adopted on a large scale, but it is difficult to predict how they will be used. It is becoming clearer now that the paper versions of the US dollar may be replaced by CBDC, or society may focus on mainstream adoption of decentralized Cryptocurrencies.
How Would Digital Currency Affect You?
The adoption of a digital currency in the US would provide an electronic alternative to cash and have the added benefit of quick money transfer. Cunha suggests that the CBDC should be free or nearly free, like cash, to ensure accessibility for all. He also proposes alternative ways to access the CBDC, such as chip-based cards, point-of-sale systems, and web accounts, to make it accessible to everyone regardless of their technological capabilities. Additionally, offline transaction capabilities must be developed to enable two people to exchange CBDC even without an internet connection.
Although there is a lot of work to be done and industry input required, the potential benefits make it worth the investment. Cunha believes that CBDC should be fully investigated since it holds great potential, similar to the early days of the internet. With CBDC, the possibilities are endless.
Advantages of Digital Currency:
1. Faster Payments
Digital currency allows for quick payments compared to traditional methods like ACH or wire transfers, which can take several days for financial institutions to confirm a transaction.
2. Cheaper International Transfers
International currency transactions are expensive due to high fees charged by financial institutions, especially for currency conversions. Digital currency has the potential to reduce these costs significantly, making it faster and more affordable.
3. Readily Accessible
Existing money transfers can take longer on weekends and outside normal business hours because banks are closed and cannot confirm transactions. Digital currency allows for transactions to occur at any time, 24 hours a day, and seven days a week.
4. Support for the Unbanked and Under-banked
A significant number of American households do not have a bank account, and they end up paying costly fees to cash their paychecks and send payments through money orders or remittances. A CBDC could provide unbanked individuals access to their money and pay their bills without extra charges.
5. More Efficient Government Payments
A CBDC could enable the government to send payments like tax refunds, child benefits, and food stamps to people instantly, rather than mailing them a check or figuring out prepaid debit cards.
Disadvantages of Digital Currency:
1. Too Many Options
The current popularity of cryptocurrency has resulted in several digital currencies being created across different blockchains, each with its limitations. It will take time to determine which digital currencies are suitable for specific use cases, including whether some are designed to scale for mass adoption.
2. Steep Learning Curve
Digital currencies require users to learn how to perform fundamental tasks, such as opening a digital wallet and storing digital assets securely. The system needs to be simplified for digital currencies to be widely adopted.
3. Expensive Transactions
Cryptocurrencies use blockchain, which requires computers to solve complex equations to verify and record transactions. This process takes considerable electricity and becomes more expensive with more transactions. However, this would likely not be an issue for CBDC, as the central bank would probably control it, and complex consensus processes are not required.
4. Price Volatility
Cryptocurrency values and prices can change suddenly, thereby making business owners reluctant to accept them as a medium of exchange. CBDC value is much stable, like paper currency, and cannot fluctuate as much.
5. Slow Progress
Presently, a U.S. CBDC is still hypothetical, and if the government takes decision to creating one, then, there will be costs associated with its development.