what is a Digital Currency

12 Aug 2021

Digital currency is any currency, money, or money-like asset that is primarily managed, stored, or exchanged on digital computer systems, especially over the internet. Types of digital currencies include cryptocurrency, virtual currency, and central bank digital currency.

 

Digital currencies exhibit properties similar to traditional currencies, but generally do not have a physical form, unlike currencies with printed banknotes or minted coins. This lack of physical form allows nearly instantaneous transactions over the internet and removes the cost associated with distributing notes and coins. Usually not issued by a governmental body, virtual currencies are not considered legal tender and they enable ownership transfer across governmental borders

 

These types of currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game.

 

Digital money can either be centralized, where there is a central point of control over the money supply (for instance, a bank), or decentralized, where the control over the money supply is predetermined or agreed upon democratically.

 

Sub-types of digital currency and comparisons

The digital currency as a specific type and as a meta-group name

 

Digital Currency is a term that refers to a specific type of electronic currency with specific properties. Digital Currency is also a term used to include the meta-group of sub-types of digital currency, the specific meaning can only be determined within the specific legal or contextual case. Legally and technically, there already are a myriad of legal definitions of digital currency and the many digital currency sub-types. Combining different possible properties, there exists an extensive number of implementations creating many and numerous sub-types of Digital Currency. Many governmental jurisdictions have implemented their own unique definition for digital currency, virtual currency, cryptocurrency, e-money, network money, e-cash, and other types of digital currency. Within any specific government jurisdiction, different agencies and regulators define different and often conflicting meanings for the different types of digital currency based on the specific properties of a specific currency type or sub-type.

 

Digital versus virtual currency

 

A virtual currency has been defined in 2012 by the European Central Bank as "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".[16] The US Department of Treasury in 2013 defined it more tersely as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency". The US Department of Treasury also stated that "Virtual currency does not have legal tender status in any jurisdiction.

 

According to the European Central Bank's 2015 "Virtual currency schemes – a further analysis" report, virtual currency is a digital representation of value, not issued by a central bank, credit institution, or e-money institution, which, in some circumstances, can be used as an alternative to money. In the previous report of October 2012, the virtual currency was defined as 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.

 

According to the Bank for International Settlements' November 2015 "Digital currencies" report, it is an asset represented in digital form and having some monetary characteristics.[19] Digital currency can be denominated to a sovereign currency and issued by the issuer responsible to redeem digital money for cash. In that case, digital currency represents electronic money (e-money). Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency. As such, bitcoin is a digital currency but also a type of virtual currency. Bitcoin and its alternatives are based on cryptographic algorithms, so these kinds of virtual currencies are also called cryptocurrencies.

 

Digital versus cryptocurrency

 

Cryptocurrency is a sub-type of digital currency and a digital asset that relies on cryptography to chain together digital signatures of asset transfers, peer-to-peer networking, and decentralization. In some cases, a proof-of-work or proof-of-stake scheme is used to create and manage the currency. Cryptocurrencies can allow electronic money systems to be decentralized. When implemented with a blockchain, the digital ledger system or record-keeping system uses cryptography to edit separate shards of database entries that are distributed across many separate servers. The first and most popular system is bitcoin, a peer-to-peer electronic monetary system based on cryptography.

 

Digital versus traditional currency

 

Most of the traditional money supply is bank money held on computers. They are considered digital currency in some cases. One could argue that our increasingly cashless society means that all currencies are becoming digital currencies, but they are not presented to us as such.