Digital currencies are intangible and can only be owned and transacted in by using computers or electronic wallets connected to the Internet or the designated networks. In contrast, physical currencies, like banknotes and minted coins, are tangible and transactions are possible only by their holders who have their physical ownership. Digital currencies include virtual money and cryptocurrency. This digital money may be used as traditional money to buy and sell goods, but with the allowance of instant transactions and borderless transfer-of-ownership. Digital money can be restricted to a certain community or be fully free for anyone to use. Digital money can also be decentralized or have a central authority over an emission process, can be backed by other currency or liquid asset, or work without any backing. Investing in digital currency has become very popular after the explosion of cryptocurrencies due to their volatility, which makes them a great speculation tool. Although digital currencies are useful and progressive, they are not yet widespread and most banks do not accept them.
Different ways Digital Currencies will change the world:
When we look at digital money, we see a revolutionary technology that allows people or institutions to transfer funds instantly, securely and without a middleman. Digital money can potentially expand international commerce, support financial inclusion, and transform how we shop, save and do business in ways we probably cannot even yet fully understand. From programmable money to new forms of e-commerce, here are five ways the new technology will change the world:
Faster, cheaper bank transfers:
The way banks move money today is outdated. International bank transfers can take up to a week, with correspondent banks and country-specific clearing houses involved at both ends. Even the cross-border sharing of payment data faces challenges and frictions. By using a digital currency such as bitcoin, bank transfers could be made instantly, cheaply and safely. In fact, such transfers could even happen without using new currencies.
A boost to global remittances
Every year, migrants from developing countries send home more than $500 billion in remittances, a sum that exceeds foreign direct investment. Technology has the potential to help these transfers become fast and cheap. Using virtual currency, private users could even send money directly to their families via mobile phone, with the only remaining fees being those charged by the currency exchanges. While traditional money transfer companies have to carry capital to compensate for delays in international money movement, capital requirements are much lower for firms using digital currencies. Of course, capital carrying costs and the cost of money movement comprise only part of the cost for remittance businesses. Nonetheless, reducing these costs might make it easier for smaller players to enter and establish new remittance corridors or for existing players to serve smaller towns or new countries.
Safe money for the poor:
Anyone with a mobile phone can store money there, and send credits to another user. The problem is that the fees are large: cashing out has historically cost as much as 20%, although the widespread acceptance of the credits means that many consumers are able to spend the credits directly without incurring large fees. Digital currencies could become another convenient and safe form of payment in countries where most citizens don’t have bank accounts. While using bitcoin as a second currency in a country would expose citizens there to a certain amount of currency risk, it might be better than the existing options, particularly in high-inflation countries. For example, it would be physically safer than storing cash at home or buying gold jewelry. In addition, someone holding bitcoin could exchange it for a more stable currency on one of the global bitcoin exchanges. In this way, it could expand access to international financial markets, allowing even the unbanked a way to save and protect against inflation. One implication may be that capital controls become harder to enforce.
Ideal Properties of Digital currencies:
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As the Internet has become an integral part of our lives, the ecommerce revolution has transformed the way in which we interact and transact online. With it came a growing interest in electronic payments and digital money. The concept of digital cash, however, has been around since the 1980s and has since accumulated a rich history. In our examination of electronic currencies, we first outline the ideal properties of digital cash:
Secure: Digital payments systems should use high-quality encryption techniques to ensure a high-level of security, such that transactions cannot be forged or altered.
Anonymous: Transactions should be private and accessible only to the parties involved. The complexity of transactions is an optional but desired property.
Portable: Digital cash should be independent of any physical location, and easily transferrable through the network.
Two-way: Digital payments should be peer-to-peer and occur between users (rather than a registered entity, such as a credit card company).
Offline Capable: Payments should be processed offline without requiring 3rd party authentication. Users should be able to spend and receive money anytime.
Divisible: Digital money should be convertible and divisible into smaller units of cash.
Additionally, it would be highly desirable for digital cash to be widely accepted and to exist in a user-friendly form. Most importantly, the digital transaction space is particularly vulnerable to the “double spending” problem. Because electronic files can easily be replicated, a digital coin can instantaneously be spent and retained in one’s computer files, allowing that coin to be effectively spent twice. Up until now, electronic payments have required a trusted 3rd party midway such as PayPal or Visa to verify the intent and authenticity of transactions. Bitcoin is “revolutionary because for the first time the double spending problem can be solved without the need for a third party”. To understand how Bitcoin accomplishes this, we must first understand aspects of public key cryptography, digital signatures, and hash functions.
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What is the future and Impact of Digital Currencies?
Digital currencies are still a force in the global economy, and they hold the potential to deliver significant long-term impact. According to Coin Market Cap, digital currencies have a market cap of about $130 billion, and Bitcoin is in the lead with a market cap of roughly $70 billion as of this month. A survey by the World Economic Forum estimates that 10% of global GDP may be stored in a block chain by 2027.
The benefits of digital currencies have repeatedly been adorned: decentralized financial trust, border-less transactions, and convenient settlement. Yet these currencies have three critical shortcomings:
- Scalability. Digital currency platforms process transactions more slowly than existing systems and use more electricity two obstacles to scaling them up.
- Anonymity. Digital currency platforms can be used to launder money and fund illegal activity because they mask users’ identities.
- Volatility. The valuation of digital currencies fluctuates dramatically and their liquidity is low, transferring them to a speculative investment rather than a de facto currency.
Will COVID-19 speed the transition to digital currency?
COVID-19 has highlighted a distinct disadvantage of physical cash, which may speed the transition to digital currency. Banknotes, whether made of paper, polymer, or cotton and linen as is the case with U.S. dollar, can carry viruses. This was confirmed by the World Health Organization (WHO) in recent comments to The Telegraph, and in a study from Germany which found coronavirus can survive on notes, coins, and the plastic exteriors of ATMs for several days. Yang Dong, Director of Blockchain Research at China’s Renmin University, says this means it is time to roll out the digital yuan.
“Institutions and individuals will be more inclined to use non-direct contact transaction media including digital currencies in a short period of time, and this tendency will quickly form a user stickiness. Digital currencies will use this as an opportunity to accelerate Its distribution and application,” said Dong in an interview with local newspaper China Daily.
An inflection point for virtual currency:
Most transactions in China are already conducted digitally using WeChat Pay or AliPay. But as China-based blockchain consultant Robert Van Aert told Brave New Coin, the “social governance” aspects of a government virtual currency which might feed into a social credit system could prove helpful for keeping tabs on quarantined citizens. In the rest of the world, the focus on improving personal hygiene makes virtual cash an attractive proposition. As the virus has spread and citizens have been placed under lockdown, paper notes have followed. Banknotes have been disinfected with ultraviolet light and high-temperature ovens in China, and placed in a 14 day quarantine period in places as far afield as Hungary and the U.S. If the trend continues and prompts widespread distaste for physical cash, the credit card industry is likely to benefit, along with payment firms like PayPal, and card-issuing banks.
On the other hand, if authorities recognize the opportunity to seize tighter control over the economy, governments could be stimulated into releasing their own central bank digital currencies. This would enable a new era of economic experimentation as governments tighten the reins around currency more than ever before to drive through unpopular economic measures like quantitative easing and negative interest rates.
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Technological innovations have opened the door to the development of cash-like instruments that permit electronic transactions, much like deposits but without the involvement of financial intermediaries to settle the transaction, similar to cash. Both digital currencies’ status as money and the distributed ledger technology used by them have potential to develop over time. Most digital currencies, at present, deploy fixed eventual money supplies, although this is not strictly an essential feature. Usage of digital currencies is presently very low and, as currently designed, there are a variety of incentive problems that are likely to prevent their widespread adoption in the long run. Digital currencies do not, at present, play a substantial role as money in society. But they may have the potential to come to exhibit at least some of the functions of money over time. There is little incentive for the pricing of goods and services to change from traditional currencies, however, unless these currencies were to suffer from a wholesale collapse in confidence. Digital currencies and distributed ledgers are an innovation that could have a range of impacts on many areas, especially on payment systems and services. These impacts could include the disruption of existing business models and systems, as well as the emergence of new financial, economic and social interactions and linkages. Even if the current digital currency schemes do not persist, it is likely that other schemes based on the same underlying procedures and distributed ledger technology will continue to emerge and develop. A variety of potential risks to financial stability could emerge if a digital currency attained systemic status as a payment system, most of which could be addressed through regulatory supervision of relevant parties.