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What is a digital currency?

Most of us when we hear digital currencies and cryptocurrencies could imagine just one definition and also several people might use them equivalently. In spite of common vision, they have many differences.

What is a digital currency?

Digital currency could be explained as a form of currency that is available only in digital or electronic form which is also called variously like digital money, electronic money, electronic currency, or cybercash.

They are currencies that would only be reachable with laptops or mobile phones as they are reachable in electronic form. Typical digital currencies do not need agents and are usually the economic method for trading currencies.

Substantially, Digital currencies don’t have physical attributes and are available only in digital form. Transactions involving digital currencies are made using laptops or electronic wallets connected to the internet or designated networks. Despite this, physical currencies, such as banknotes and minted coins, are tangible which means they have definite physical attributes and characteristics. Transactions including such currencies are made possible only when their holders have physical possession of these currencies.

On the other hand, Digital currencies have utility equal to that of physical currencies. They might be used for purchasing things and paying for services. They can also find restricted use between certain online communities, such as gaming sites, gambling portals, or social networks.

Furthermore, digital currencies also enable instant transactions that can be seamlessly executed across borders. To give an example, it is possible for a person located in the United Kingdom to make payments in digital currency to a counterparty residing in Italy, if only they are both connected to the same network

Types of Digital Currencies

Digital currency is an overarching term that could be used to explain different types of currencies that exist in the electronic realm. Broadly, there are three different types of currencies:

Cryptocurrencies

Cryptocurrencies are digital currencies that are using cryptography to secure and verify transactions in a network. It also might be used to control the creation of such currencies. Bitcoin and Ethereum are two famous examples of cryptocurrencies. Depending on the jurisdiction, cryptocurrencies may or may not be regulated.

Cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form.

Virtual Currencies

Virtual currencies are unregulated digital currencies managed by developers or a founding organization consisting of many stakeholders involved in the process. Basically Virtual currencies would also be algorithmically controlled by a defined network protocol. For instance, a virtual currency is a gaming network token whose economics is defined and managed by developers.

Central Bank Digital Currencies

Central bank digital currencies, short form as (CBDCs) , are regulated digital currencies issued by the central bank of any country. A CBDC could be a supplement or a replacement to traditional fiat currency. Despite fiat currency, which exists in both physical and digital form, a CBDC exists only in digital form. England, Sweden, and Uruguay are a few of the nations that are making plans to launch a digital version of their native fiat currencies.

The pros of digital currency

High Security:

Digital currency transactions are irreversible once authorized. This offers exceptional protection against fraud compared to fiat currencies, which are less secure due to the personal information required to make transactions and the potential for chargebacks.

Decentralized & Autonomous:

In Spite of hard cash currencies, digital currencies are decentralized which means they are not managed by a central governing body. The absence of governments and banks in your transactions gives you more control over how your money is managed.

Discrete & Confidential:

With fiat currency, much of your financial history is documented and handled by third parties, such as credit reporting agencies, banks, collectors, and marketers. With digital currencies, that’s not the case. The transaction history of the coin is what is recorded and stored, not the spender.

The cons of digital currency

Infrastructure problems:

While they do not require physical wallets, digital currencies have their own set of requirements for storage and processing. For example, an Internet connection is necessary as are smartphones and services related to their provisioning. Online wallets with robust security are also necessary to store digital currencies.

Hacking:

Their digital provenance makes digital currencies susceptible to hacking. Hackers can steal digital currencies from online wallets or change the protocol for digital currencies, making them unusable.

Digital currency vs cryptocurrency

The main difference that we could mention is Digital currency refers to the electronic form of fiat money issued by governments, whereas cryptocurrency is a store of value secured by encryption

  1. Regulatory Authority: As digital currency is the electronic form of fiat mone, it is always backed by a centralized authority. In India, the Reserve Bank regulates the rupee and all digital currency transactions are monitored by authorities. The cryptocurrency is based on a decentralized system and independent of any centralized regulation. But all transactions are recorded in a decentralized ledger that is available to everyone to see.
  2. Stability: Digital currency is usually stable and it is relatively easy to manage its transactions because of wider acceptance in the global market. Cryptocurrency is highly volatile and just gaining traction. Not many companies have started accepting payments with cryptocurrencies.
  3. Transparency: Details of digital currency transactions are only available to the sender, receiver and banking authorities. All cryptocurrency transaction details are in the public domain by virtue of a decentralized ledger.
  4. Transaction fee: There is a transaction fee with digital currency every time there is payment through the digital wallet. But there is no system of transaction fee in dealing with cryptocurrencies. Blockchain technology helps to reduce the expense as well as no extra commission for the third party agents.

“Transfers via cryptocurrency are more viable when doing inter country remittances. Crypto can also be used to do large payments, which is usually limited while using digital currencies,” said Patel.

Conclusion

Cryptocurrencies are subsets of digital currencies; Consequently, we find them using the terms interchangeably. although, there are some differences between them.

Digital Currencies

Regulated or unregulated currency that is available only in digital or electronic form.

Virtual Currencies

An unregulated digital currency that is controlled by its developer(s), its founding organization, or its defined network protocol.

Cryptocurrencies

A virtual currency that uses cryptography to secure and verify transactions as well as to manage and control the creation of new currency units.

Frequently Asked Questions

Why do we need digital currencies?

It can make the financial system safer and much faster.

Is bitcoin one of the digital currencies?

Not exactly, bitcoin is a cryptocurrency which is a variant of digital currencies.

Are digital currencies the same as cryptocurrencies?

All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.

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