Digital Currency: What is It and how does it work?

Digital currency, otherwise known as digital money, is any form of payment in electronic format. It is not physically represented like gold or coins but transacted over the internet. A famous example of digital money is cryptocurrency assets like Bitcoin.

Streamlining the existing financial infrastructure and leveraging distributed ledger technology, digital money offers faster, seamless, cheaper, and more secure transactions, eliminating third parties. This way, it helps facilitate cross-border transactions and improves a country’s monetary policy.

In this article, we will briefly talk about the types, as well as the advantages and disadvantages of digital currency. Without further ado, let us explore.

Types of Digital Currency

Due to the versatility of digital currency innovation, it can be modified for specific functions in different forms. Generally, there are three types of digital currency.

Central Bank Digital Currency (CBDC)

The central bank digital currency is a form of digital money issued by a country’s central bank. They are digital versions of a country’s fiat currency, fully monitored by the government. CBDCs facilitate monetary policy enforcement by eradicating intermediaries and establishing a direct link between customers and the government. CBDCs are of two types: Retail CBDCs issued for businesses and individuals. Wholesale CBDC is issued for transactions between banks and financial institutions.

Cryptocurrencies

Cryptocurrency is a form of digital currency built on cryptography technology, making it more secure and tamper-resistant than other forms of currency. The primary crypto asset, Bitcoin, came to popularity in 2017, currently, there thousands of crypto assets in existence with a joint market cap of about $2 trillion dollars. Crypto assets are purely decentralized, unlike CBDCs, offering faster and cost-effective transactions. However, the crypto market is highly volatile and risky than other forms of digital money.

Stablecoins

Stablecoin is a more private cryptocurrency whose value is pegged to a fiat currency in order to control price volatility that plagues typical cryptocurrency.m, making it more stable. They are similar to traditional currency, but they are not backed by the government. Currently, there are more than 200 stablecoins in the crypto market, with the commonest ones including USDC, USDT, and BUSD.

Advantages of Digital Currency

The invention of digital money has brought a lasting solution to the common issues plaguing traditional currency system such as the ones listed below.

• First and foremost, digital currency speeds up the rate of transaction complements, offering a low cost of transaction. It also facilitates the cross-border remittance system as it makes international transactions cheaper, faster, and more secure.

• It offers substantial security to your funds without needing a physical edifice, which is often needed in a cash-intensive system. With the aid of a digital wallet, you can personally manage and control your investment.

• Leveraging the blockchain ledger, digital currency makes it easier to record transactions digitally and instantly, making it open to the public but remaining resistant to record tampering.

• Digital currencies like cryptocurrency and stablecoins are censorship-resistant, making them impossible to track by the government. However, CBDCs, on the other hand, can be tracked by the authority.

Disadvantages of Digital Money

The disadvantages of digital money are as follows:

• With the high level of security that digital currency offers the finance sector, it is, however, often plagued with hackers and back actors whose primary goal is to steal funds and crypto assets. Millions of dollars have been lost to cryptocurrency scams in the past.

• Digital money can compromise customers’ privacy as digital money can be traced. In addition, CBDCs, which are centralized and regulated by the government, give liberty to the authorities to intrude on individual transaction details and records, thereby breaching privacy rights.

Conclusion

the ability to provide solutions to the issues that plague the traditional financial system puts digital money on the pedestal of a unique innovation, providing cheaper, faster, and more secure transactions. However, it exposes users to price volatility risk, privacy violation, and hacker activities, making it a risky investment. Nonetheless, with a good regulatory framework and a robust security system, digital money would soon revolutionize the global economy.