Digital currency has made headlines over the past years - in an increasingly digitized world, it is key for modern business owners to understand what digital currency is and how it works.
Digital currency - explained
Digital currency describes electronic money - it only exists in digital form and can only be stored and exchanged using technology. If you are paying with eg Apple Pay, you are still using fiat currency - in electronic currency, there is no physical money involved at all.
Digital currency does not have to mean bitcoin. For example, the money held by central government deposits and financial institutions. The capital they hold does not exist in any physical form, but it is held digitally as a safety net for economic disaster. The public does not have access to these (central bank) digital currencies. This digital money can only be accessed by the government or the banks and only ever exists in electronic form. In recent years, the most discussed virtual currency is cryptocurrency.
Cryptocurrency - explained
Cryptocurrency describes a decentralized form of digital currency. Anyone can create a cryptocurrency and invest in it. This means that there are innumerable virtual currencies in the field of crypto. There is no central commodity determining the value of crypto. Where, with physical currency, governments and central banks regulate the supply and value, the value of cryptocurrencies is defined by their buying and trading.
There is no intermediary in transferring digital currency in the form of crypto. All transactions with eg Bitcoin are stored in what is called a blockchain – a digital public ledger. This data on transactions has no bank or organization controlling or holding it, it is distributed on hard drives and servers around the world. While this is accessible and extremely secure, regulations are necessary to protect investors and minimize risk.
Benefits of digital assets and currency
Due to the lack of an intermediary, these transactions tend to be less cost-intensive than other ways of trading currency. They allow their investors and users to make quick, cheap transactions. These transactions can be done internationally. Due to the cryptographic system, fraud is unlikely (compared to using fiat currencies).
Central Bank Digital Currency (CBDC)
CBDC describes digital currencies which are issued and regulated by the central bank of a country. This is a result of states responding to the rise in cryptocurrency. An increasing number of countries is exploring this option to provide the security that comes with digital currencies and working towards a society with no paper currency.
China, for example, has already introduced its digital currency and the USA is experimenting with the digital dollar.