What is digital currency?
Digital money is a form of money available only in digital or electronic form and not in physical form. It is also called digital money, electronic money, electronic money or cyber money.
Key points to remember
- Digital currencies are currencies that can only be accessed with computers or mobile phones because they only exist in electronic form.
- Since digital currencies do not require an intermediary, they are often the cheapest method of exchanging currencies.
- All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
- Digital currencies are stable and are traded with the markets, while cryptocurrencies are traded via consumer sentiment and psychological triggers of price movement.
Understanding digital currency
Digital currencies are intangible and can only be held and processed using computers or electronic wallets connected to the Internet or to designated networks. On the other hand, physical currencies, such as banknotes and minted coins, are tangible and transactions are only possible by their holders who have their physical property.
Like any standard fiat currency, digital currencies can be used to purchase goods as well as to pay for services, although they may also find limited use in some online communities, such as gaming sites, game portals or social networks.
Digital currencies have all the intrinsic properties like physical currency, and they allow instant transactions that can be executed transparently to make payments across borders when connected to supported devices and networks.
For example, it is possible for an American to make payments in digital currency to a distant counterpart residing in Singapore, provided that they are both connected to the same network required to carry out transactions in digital currency.
Digital currencies offer many advantages. Since payments in digital currencies are made directly between the parties to the transaction without the need for intermediaries, transactions are generally instant and inexpensive. This is better than traditional payment methods that involve banks or clearing houses. Electronic transactions based on digital currency also provide the necessary record keeping and transparency in transactions.
Difference between digital, virtual and cryptographic currencies
Since they exist in many variations, digital currencies can be thought of as a superset of virtual currencies and cryptocurrencies.
If it is issued by a country’s central bank in a regulated form, it is called “central bank digital currency (CBDC)”. Although the CBDC only exists in conceptual form, England, Sweden and Uruguay are some of the countries that have considered launching a digital version of their native fiat currencies.
With the regulated CBDC, a digital currency can also exist in an unregulated form. In the latter case, it can be qualified as virtual currency and can be under the control of the currency developer (s), the founding organization or the defined network protocol, instead of being controlled by a centralized regulator. Examples of such virtual currencies include cryptocurrencies and monetary systems linked to coupons or rewards.
Since cryptocurrencies are not regulated, they are also considered virtual currencies.
Cryptocurrency is another form of digital currency that uses cryptography to secure and verify transactions and to manage and control the creation of new monetary units. Bitcoin and ethereum are the most popular cryptocurrencies.
Essentially, virtual currencies and cryptocurrencies are considered forms of digital currencies.