It is a form of currency or medium of exchange that is electronically created and stored (i.e., distinct from physical, such as banknotes and coins). Some digital currencies, such as ‘Bitcoins’ are crypto-currencies. Like traditional money these currencies may be used to buy physical goods and services but could also be restricted to certain communities such as for use inside and online game or social network.
Bitcoin is the most widely used digital currency invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led US Treasury to categorize it as a decentralized virtual currency.
It is a type of unregulated, digital money, which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. It is a medium of exchange that operates like a currency in certain countries, but does not have all the attributes of real currency. The key attribute a virtual currency does not have, according to these definitions, is the status as legal tender.
Advantages of Digital Currency:
The adoption of e-money may also grow rapidly elsewhere for one or several of at least six reasons:
• Convenience: E-money is better integrated into our digital lives relative to central bank money. It is typically issued by companies that fundamentally understand user-centered design and integration with social media.
• Ubiquity: Cross-border transfers of e-money would be faster and cheaper than of cash and bank depos- its. However, various other hurdles might emerge, such as requiring that market makers in foreign countries be ready to provide redemption in local currency. To limit the scope of this paper, we do not explore further the rich and important topic of cross-border payments using digital currencies.
• Complementarity: If assets like stocks and bonds were moved to blockchains, blockchain-based forms of e-money would allow seamless payment of automated transactions (so-called delivery versus payment, assuming blockchains were designed
to be interoperable), thereby potentially realizing substantial efficiency gains from avoiding manual back-office tasks. More generally, e-money function- ality more naturally lends itself to being extended by an active developer community, which may draw on open source codes as opposed to proprietary tech- nologies underpinning b-money. Developers could for instance allow users to determine the goods that e-money could purchase—a useful feature for remit- tances or philanthropic donations.
• Transaction costs: Transfers in e-money are nearly costless and immediate, and thus are often more attractive than card payments or bank-to-bank transfers especially across borders. As a result, people might even agree to sell their car for an e-money payment as the funds would immediately show up in their account, without any settlement lag and corresponding risks.
• Trust: In some countries where e-money is taking off, users trust telecommunications and social media companies more than banks.12
• Network effects: If merchants and peers also use e-money, its value to prospective users is all the greater. And as new users join, the value to all participants—existing and prospective—grows.
Challenges of Digital Currency
- Many of these currencies have not evidenced widespread usage and may not be easily used or exchanges. Banks generally do not accept or offer services for them
- There are concerns that crypto-currencies are extremely risky due to their very high volatility and potential for pump and dump schemes.
- Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.
- The non-cryptocurrencies are all centralized. As such, they may be shutdown or seized by a government at any time.
- The more anonymous a currency is, the more attractive it is to criminals, regardless of the intentions of its creators.
- Anyone with the right skills can issue digital currency. It can be compared to issuing bonds with zero interest rate, no real security behind them is involved and thus a no real obligation for the issuer to pay back the amount. This means that the issuer who succeeds in selling his currency to other users, can earn a great deal of actual money at the expense of his users.
Central bank digital currency
(CBDC, also called digital fiat currency or digital base money) is the digital form of fiat money (a currency established as money by government regulation, monetary authority or law).
Central bank digital currency is different from virtual currency and cryptocurrency, which are not issued by the state and lack the legal tender status declared by the government. As such, public digital currencies could compete with commercial bank deposits and challenge the status quo of the current fractional reserve banking system.