Digital currency – definition and examples
Digital currency is a type of money that is only available electronically. Unlike banknotes and coins, digital currency is not available in physical form. We can transfer digital currency between users or entities using technology like smartphones, tablets, computers, or the Internet.
As with traditional money, we can use digital currencies to purchase goods and services.
Sometimes, however, you can only use a digital currency for specific purposes, such as a social network or online game.
We also call it digital money, virtual money, virtual currency, or cybercash. However, their meanings may vary slightly, depending on who is writing or speaking.
Cryptocurrency and central bank issued ‘digital base money,’ for example, are types of digital currency.
Physical vs. digital currency
Digital currencies are similar to traditional money. However, they differ in two main ways:
– First, digital currencies have no physical properties. You cannot hold them in your hand like you can a $10 bill, nor can you put them in a physical piggy-bank. In other words, they are intangible.
You can, however, hold digital currencies in a virtual wallet.
– Second, they allow for borderless transfer-of-ownership and instantaneous transactions.
Techopedia says the following regarding digital currencies:
“A payment method which exists only in electronic form and is not tangible.”
“Digital currency can be transferred between entities or users with the help of technology like computers, smartphones, and the internet.
Traditional vs. virtual vs. digital currency
We see many terms for traditional currency and currency in electronic form. People often use some of them interchangeably, both correctly and incorrectly.
However, when experts cannot agree on what virtual currencies and digital currencies mean, it is difficult to know who is right.
Digital or virtual currency?
A 2015 ECB (European Central Bank) report says that virtual currencies are a digital representation of value. No central bank, e-money institution, or credit institution has issued them.
In some cases, people use virtual currencies as alternatives to money.
An ECB article titled ‘Virtual Currency Schemes‘ defines virtual currency as a type of unregulated digital money.
The authors say that the currency’s developers issue and control it. Only members of a specific virtual community accept it, they add.
The Bank for International Settlements (BIS), on the other hand, defines digital currencies as assets represented in digital form. The BIS also said that digital currencies have some monetary characteristics.
Digital currencies may be traditional currencies
Sometimes, digital currencies represent sovereign (traditional) currencies which people can redeem for cash, just like digital money. In such cases, digital currency represents e-money, i.e., electronic money.
Wikipedia writes:
“Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency.”
Therefore, the cryptocurrency Bitcoin is a digital currency. However, it is also a kind of virtual currency.
Bitcoin, Ethereum, Litecoin, and Ripple base themselves on cryptographic algorithms. Therefore, these types of virtual currencies are also cryptocurrencies.
Cryptocurrencies
Cryptocurrencies are a type of digital currency. Their creators designed them to be ultra-secure, and in the majority of cases anonymous. In other words, people can perform transactions without revealing their identities.
Cryptocurrencies are secure thanks to cryptography. Cryptography is the art of creating and deciphering code.
Cryptocurrency creators use encryption techniques to regulate currency generation and also to verify the transfer of funds.
Unlike traditional currencies, cryptocurrencies do not have a central regulator, i.e., there is no central bank.
The first cryptocurrency was Bitcoin. Bitcoin, which is the most common cryptocurrency in circulation today, appeared n 2009. Ethereum (Ether) is the second most common.
Video – Bill Gates on digital currency
In this Bloomberg video, Bill Gates, the principal founder of Microsoft Corporation, talks about digital currencies. In the 1990s, Gates predicted that one day digital currencies would emerge.
Many people believe that digital currencies, specifically cryptocurrencies, are the next step in the evolution of money. Others, however, say that cryptocurrencies are a fad that will soon die away.