Digital currencies are available in electronic or digital form only (do not have a physical form like a note or coin). We can store, manage or exchange digital currencies through computer systems over the internet.
In 1983, David Chaum, an American computer scientist, introduced the idea of digital cash in his research paper. In 1989, he founded an electronic cash company named Digicash in Amsterdam. But, in 1998, the company filed for bankruptcy. Later, e-gold became the first widely used internet money introduced in 1996 and shut down by the US government in 2008. That is how the idea of digit money got originated and spread. Now we have hundreds of digital currencies available for us.
Broadly we can categorise digital currencies into three types:
Cryptocurrencies: Exists only in digital form; cryptocurrencies are now prevalent and are used to secure and verify any transaction in a network. Bitcoin, Ethereum, Litecoin, Ripple etc., are examples of cryptocurrencies. These currencies may or may not be regulated. Some countries, including China, Indonesia, Egypt, Turkey etc., have banned cryptocurrencies.
Central Bank Digital Currencies (CBDCs): These are regulated digital currencies issued by the country's central bank. CBDCs exists purely in digital form, unlike fiat currency (currencies that have both physical and digital formats). Countries like England, Sweden, and Uruguay are considering launching a digital version of their fiat currencies.
Virtual currencies: Virtual currencies are unregulated digital currencies controlled by developers or founding organizations. Also, virtual currencies can be controlled by algorithms by some defined network protocols. For example, a gaming network token is owned and managed by its developers.
After understanding the types of digital currencies now let us see the advantages of using this technology:
Faster transaction and transfer: Digital currencies generally exist within the same network and do not require transfers intermediaries. Hence, more secured transactions take place.
Cheaper transaction: Digital currencies enable direct interactions within a network; hence the burden of paying for the middlemen gets eliminated. Thus, the overall transaction cost gets reduced.
Does not require physical manufacturing: Absent of physical form of digital currencies give immune to material defects or soiling.
Ease in implementing fiscal policies: CBDCs can help banks and other financial institutes to disburse payments directly to citizens. Also, the production and distribution methods get simplified as the burden of physically manufacturing and distributing gets obviated.
Although using digital currencies have many advantages over traditional currencies, it also has some disadvantages, which includes:
Internet connection is necessary.
Do not require physical wallets but have storage and processing problems.
Digital currencies are susceptible to hacking.
It can be volatile in value, especially in the case of cryptocurrencies.
Digital money has been criticized and is generally not acceptable by banks for offering services. Cryptocurrencies are also considered highly risky and unregulated. But several counties have adopted digital currencies. Digital currencies have growth potential, and we may see the widespread usage of digital currencies around the world soon with the emerging technological advancements.