Economics

What Is A Digital Currency?

Virtual currencies and cryptocurrencies are examples of digital currency.

Digital currency is also known as electronic money or digital money and differs from the physical currency that is banknotes and coins. The idea of digital currency is relatively new as it was proposed in 1983. Digital currencies possess attributes like those of physical currencies, but they enable real-time transactions as well as borderless transfer-of-ownership. Digital currencies can enable users to purchase products although others are only used in specific communities. Examples of digital currencies are cryptocurrencies. Digital currencies can be centralized where the money supply is controlled by one point of control or decentralized where several sources can supply the money.

Development Of Digital Currencies

The concept of digital cash was first proposed by David Chaum in a research paper drafted in 1983. He subsequently established DigiCash in 1990 in Amsterdam which was an electronic cash firm intended on commercializing his concept. By 1998, the company had filed for bankruptcy and Chaum left it in 1999. Coca-Cola proposed buying from vending machines via mobile payments in 1997 and Paypal began operating in 1998. Another system called e-gold faced legal issues since it was used by criminals prompting the US Feds to raid it in 2005. The origins of digital currencies can be traced back to the dot-com boom of the 1990s. E-gold is recognized as one of the first as it began operating in 1996 and it was backed by gold. Another one was Liberty Reserve where users could exchange euros for dollars to Liberty Reserve Dollars or even Euros. The two services however gained a reputation of aiding money laundering and their operations were halted by the US. Q coins emerged in 2005 on the messaging platform Tencent QQ and became popular in China. Bitcoin, introduced in 2009, is extensively used and accepted and it is regarded as the first decentralized digital money.

Differences With Virtual And Traditional Currencies

The terms virtual and digital are mistakenly used interchangeably. Virtual currencies are a kind of digital currency, but the vice versa is incorrect. Virtual currencies are not used in the real world, but rather they are used on virtual platforms such as games. Most of the virtual currencies are centralized where the developers of the virtual world supply the currencies. Digital currencies, on the other hand, can be traded in exchange for physical products. Bitcoins and other cryptocurrencies are a kind of virtual currencies as they can replace cash. The bulk of the traditional money supply is held in banks on computer systems, and this is also regarded as digital currency. Although arguments may be raised that all currencies are becoming digital in the context of an increasingly cashless society, they are not declared to the public as such.

Types Of Digital Currencies

Digital currencies have varying levels of popularity. Bitcoin is perhaps the most notable of these currencies. The system is the brainchild of the elusive Satoshi Nakamoto launched in 2009. The supply of Bitcoin is decentralized with a peer to peer system devoid of an intermediary. The transactions are certified by network nodes after which they are recorded in a blockchain. Bitcoins can be traded in place of services, currencies, and goods, in either the black or legal markets. A bitcoin user is required to install a Bitcoin wallet on a computer or mobile phone, and it will generate the initial Bitcoin address. The user can create others as the need arises and use the bitcoins in real time transactions. Another similar digital currency is Litecoin which is a cryptocurrency based on a peer to peer system. The third-biggest cryptocurrency on market capitalization is Ripple unveiled in 2012. The system provides low-cost, real-time, and certain global payments and it is built on the native currency called ripples (XRP) and consensus ledger in addition to an open source internet protocol. Another digital currency platform is Etherum which provides the Etherum Virtual Machine. The machine is decentralized, and it enables peer to peer contracts via a cryptocurrency called Ether. The M-Pesa system, used in countries such as Tanzania, Kenya, Afghanistan, and India, enables users to deposit, send money, and withdraw and even pay for products via their mobile phones. Users redeem their deposits for money from the many agents scattered around their respective countries.

Adoption By Governments

More than 24 nations had invested in distributed ledger technologies by 2016. Hong Kong introduced the Octopus card system in 1997 which allows public transport users to use a contactless smart card. The system enjoyed rapid popularity and is now widely used to pay for public transport in Hong Kong. Some merchants also accept the Octopus Card. The success of the Octopus Card facilitated the development of the Oyster Card in London. Residents of London use the card to access transportation in the tube, buses, trams, London Overground and most of the City's National Rail Service. Zug in Switzerland has made strides towards adopting digital currencies. The municipality included bitcoins as a method of paying little amounts to a maximum of 200 SFr. Zug promptly converts the bitcoins accepted into the country's currency. Other countries have either proposed or are working on introducing digital currencies. The Bank of Canada, for example, has assembled partners and experts in trying to create its currency's version on the blockchain. Netherlands' central bank has been doing trial runs for a virtual currency based on Bitcoin referred to as "DNBCoin."

Criticism

The existing digital currencies are yet to register widespread use, and it can be difficult to trade with them. Banks largely do not take the currencies and do not provide services for them. Issues have been raised over the high volatility of cryptocurrencies and their potential use for pump and dump schemes which make them very risky. Regulators in some nations have issued warnings concerning digital currency transactions in an attempt to dissuade potential users. The non-cryptocurrencies are centralized, and they can be pulled down by a government without warning. The systems which enable digital currency transactions can be hacked such as the Mt. Gox exchange of bitcoins of 2014 which saw the system lose half-a-billion dollars in bitcoin and users had nearly all of their earnings disappear. Digital currencies have also come under fire for aiding criminal activities due to the perceived anonymity of the systems.

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