Definition

Digital currency

What is digital currency?

Digital currency is a form of money that is available only electronically or digitally. Digital currency is stored on digital databases or electronic systems, thus, making it accessible only with mobile phones (or smartphones) and computers.

In addition, digital currencies are intangible and can be owned and transacted only electronically. The value of a digital currency is upheld by fiat money.

Digital currency is transferred via electronic codes and has become progressively prominent as payments have become more digital and has reduced paper money or tangible currency usage.

A growing number of financial service companies and banks have now facilitated a seamless and more secure transfer of digital currencies. Digital currency can be transferred and exchanged using technologies like credit cards, debit cards, smartphones, online cryptocurrency exchanges, etc.

Digital currency was invented post the invention of the internet. Initially, the population faced difficulty in adopting the concept and technology. But later, people became confident and comfortable with the technology, and the technology also became more secure and safe. As a result, people are willing to use digital currencies. 

Currencies held by governments and banks are the most common example of digital currency. Digital currency can also be termed as cybercash, electronic money, e-money, and digital money.

Digital currency has the following four features:

  • Store of value: It stores its value electronically until it is withdrawn.
  • Medium of exchange: It is a medium of exchange. It is used electronically to pay for goods and services acquired.
  • Unit of account: It provides a measure of the services and goods acquired.
  • Standard of deferred payment: It can also be used to provide a loan or credit.

Frequently Asked Questions (FAQs)

  1. What are the advantages and disadvantages of using digital currency?

Some of the advantages and disadvantages of using digital currency are mentioned below:

Advantages

  • Increased flexibility and convenience: The use of digital currency has increased convenience and flexibility while transacting. It has removed the tediousness and hassle involved with payments using fiat money. Transactions are completed from anywhere in the world, using just a click of a button.
  • Historical record: The use of digital currency has become increasingly popular as it maintains the record of every transaction. With simple tracing of all transactions possible, it has made the process of budgeting, preparing detailed expenditure reports, etc., quick.
  • Prevents fraudulent activities: The introduction of digital currency has made available the entire history of transactions and has made it easy to trace them back. It helps prevent malpractices and fraudulent activities.
  • Increased security: Digital currency brings a sense of security as it verifies the transaction's authenticity using verification measures. While transacting online, it implements advanced security measures protecting personal information.
  • Speedy transactions: Using digital currencies, transactions are completed in just a few seconds by clicking on a button from anywhere in the world. It has eliminated long queues, delayed payments, etc.

Disadvantages

  • The necessity of infrastructure: To use digital currency, specific infrastructure is necessary, like computers, smartphones, and a stable internet connection.
  • Possible security hacks/breaches: The internet is subjected to hacks leading to loss of personal information, money laundering, and fraud.
  • Online frauds: Digital currency deploys authentication measures and a highly secure network; still the online fraud is possible. For instance, a person can fake his identity and can get access to online stored funds.
  1. How is digital currency classified?

Digital currency is broadly classified into two categories:

  • Hard digital currency: Hard digital currency is when the money is used for highly secured transactions (or irreversible transactions).
  • Soft digital currency: Soft digital currency offers high flexibility and allows the users to make changes in the given period, even after the transaction is completed.
  1. What is an online payment system, and what are the different electronic payment methods?

An online payment system is a method of paying for goods and services acquired electronically. It does not involve cash and bank cheques. The electronic payment methods can be broadly divided into:

  • Cash payment system
  • Direct Debit: An account holder authorizes their bank to deduct a certain amount directly from their bank account for goods and services purchased.
  • E-cheque: It is the digital transfer of the amount without using a hard copy of the cheque.
  • Stored prepaid card: A card (like gift cards) stores a certain value that can be reimbursed in the issuing shop.
  • Loan payment system
  • Credit card: An electronic payment mode, where the cardholder utilizes a plastic card issued by a financial institution to make payments.
  • Electronic Wallet: It is a prepaid account that stores all the user's financial information (like debit card and credit card information) to make payments. Paytm and PayPal are examples of electronic wallets.
  1. How is cryptocurrency different from digital currency?

The differences between cryptocurrency and digital currency are discussed below:

  • Encryption: Encryption is the primary difference between a digital currency and a cryptocurrency. The digital currency is not encrypted, and the cryptocurrency is extremely encrypted. The digital currency holder has to open a bank account, and the cryptocurrency holders need to open an account in the forum where the cryptocurrencies are traded.
  • Current Rate: The cryptocurrency market is highly volatile and requires extensive research before making any transaction. On the contrary, the global currency market is relatively stable and does not require much research before dealing with any type of transaction.
  • Transparency: Cryptocurrency operates on a blockchain network, which provides the highest transparency level. It records the entire history of the conversations between the parties and is confidential. While transacting using digital currency, the parties involved (sender and receiver) will only have access to the transaction-related info like the time, date, amount, and bank details.
  • Authority: The digital currency is a centralized system; the authorized banks regulate the entire banking system across boundaries. Cryptocurrency is a decentralized system. As of now, no authorized entity manages its transactions.