The topic of this article is What is Digital Currency? We will give you information about this subject.
Digital currency (or digital money) refers to any payment tool that exists completely electronically. Digital currency is not physically concrete, such as five pounds of banknote or coin. It is accountable and transferred by using online systems.
Digital currency, dollar or euro can also represent nominal currencies. It is replaced using technologies such as digital currency, smartphones, credit cards and online crypto currency exchanges. In some cases, it can be converted to physical money by using an ATM.
- Digital currency is completely digital currency. It is not a physical material asset, such as cash or other commodities such as gold or oil.
- Digital currency can make the execution of monetary transactions cheaper and faster by regulating the existing financial infrastructure. It can also facilitate the monetary policy implementation of central banks.
- Examples of digital currency types are crypto currencies, the Central Bank digital currencies and fixed currencies.
- Digital currency is open to attacks and can endanger the user privacy.
What is Digital currency?
Today, there is already a type of cash -shaped digital currency in the society in the society. This cash can be sent to others or taken from them. It can also be used for online transactions.
Digital currency is similar to a cash equivalent in terms of concept and use in terms of being a tool for an account unit and a tool for daily transactions. But not cash. For example, the dollar in your online bank account is not digital currency, because when you withdraw them from the ATM, they take a physical form.
Digital money is different from cash because it improves the monetary transactions process. For example, technological rails of digital currency can make money transfers easier and faster than standard money. This form of money also regulates the monetary policy implementation process for central banks. The use of cryptography in some forms of money makes the processes containing them resistant to tampering and censorship, ie they cannot be controlled by governments or private institutions.
Given these advantages, digital currency has become a priority for many governments in the world. The Central Bank of Sweden, a country that is on its way to becoming a cash -free society, has published several research reports that investigate the benefits and disadvantages of putting digital money into its economy since 2017. Meanwhile, China has performed pilot tests containing the digital equivalent of the national currency, DC/EP and plans to launch soon. The dollar of the Bahamas is a digital repeating of the country’s national currency. It was released in October 2020.
According to the February 2021 survey conducted by the International Monetary Fund (IMF), approximately 111 countries from 159 member states are planning to introduce digital currency in the near future.
What problems does digital currency solve?
A few systems are already trading with digital versions of money. For example, credit card systems allow users to purchase credit goods and services. Bank transfer systems provide a cross -border movement of cash.
Such operations are expensive and time consuming because they include the use of different processing systems. The SWIFT system, which is a payment systems network of various banks and financial institutions around the world, is an example of such equipment. The fee is charged for each transfer made through the SWIFT network. SWIFT’s member institutions also function in a regulation specific to a different financial jurisdiction. In addition, these systems are based on the promise of future payments, providing a delay time for each transaction. For example, the agreement of credit cards takes place on a later date and users can submit an opposite for transactions.
One of the objectives of digital currency is to eliminate time delay and operating costs for such transactions using distributed notebook technology (DLT). In a DLT system, nodes or shared books are connected to form a common network to process operations. This network can also spread to other authority areas and minimize the processing time for transactions. Provides transparency to the authorities and stakeholders, increases the flexibility of a financial network by eliminating the need for a central registration database.
Digital currency also solves the double expenditure problem using an algorithmic consensus system. The problem, which is quite simple, is about ensuring that a “note ın of digital money is not spent twice by the same person.
The production and distribution of a centralized currency, such as the current banks, uses a serial number system to ensure that each banknote is unique. Some forms of digital currency such as digital currencies (CBDCs) of the Central Bank (CBDCs) or digital currency issued by special parties repeat the role of a central authority in ensuring the payment power and integrity of transactions, even in a digital context.
Other types of digital currency are not central. They eliminate the function of central authorities to control the production and intermediaries required to distribute the currency. Cryptography is used. Blind signatures, hides the identity of the transaction parties, and zero information evidence encrypts the process details. Examples of such digital money can be given crypto currencies such as Bitcoin and Ethereum.
Digital Currency Types
Thanks to its technological infrastructure, digital currency can be made suitable for many purposes and can take various forms. The three recent adaptations of digital currency are as follows:
Central Bank Digital Currencies (CBDCs)
The Central Bank Digital Currencies (CBDCs) are the currencies given by the central bank of a country. It is also separate from the nominal currencies supported by the authority and loan of a central bank and is another obligation of the institution. CBDCs make a direct connection between the government and the average citizen to remove intermediaries from politics and facilitate the implementation of monetary policy. Banks and financial institutions responsible for distributing the national currency are no longer necessary in the process.
Depending on the use of the economy and the types of application, two types of CBDC can be. Retail CBDCs are designed for daily transactions such as Fiat currencies. In a more limited application of the concept, wholesale CBDCs are used for transactions between banks and financial institutions.
Crypto currencies are digital currencies designed using cryptography. Crypto surrounding around a digital currency provides advanced security and makes operations resistant to tampering. The most popular crypto currencies are Bitcoin and Ethereum. Since 2017, as an investment class of crypto currencies, popularity has rapidly increased its values and the overall market value of crypto markets. Until July 2021, the market value of crypto currencies exceeded $ 2 trillion.
Stablecoins are a kind of crypto currencies and have been developed to resist the price volatility of normal crypto currencies. Stabil coins can be likened to a special money form that depends on the price of the Fiat currency or a basket of goods to ensure that they remain fixed. Unless they are supported by the state authority, they can be a proxy for Fiat currencies. The stabilcoin market has recently exploded. As of February 2021, 200 stablecoin was released or developed.
Advantages of Digital Currency
The current financial infrastructure is a complex system of many assets. Processing between financial institutions requires time and money because they work in different technological systems and regulatory regimes. The main advantage of digital currency is that it accelerates the transaction speed and reduces costs.
Other advantages of digital currency are:
- Digital currency eliminates the need for physical storage and storage, which is a feature of cash intensive systems. You don’t have to invest in a wallet or bank safe to ensure that your money is not stolen.
- Digital currency simplifies accounting and registration for transactions through technology. Therefore, manual accounting and separate books specific to the institution are not required to keep the records of the transactions.
- Although digital currency has already shortened the time and cost required for transferting money transfer, it has the potential to create more revolution in the transfer industry by eliminating intermediaries and reducing costs related to cross -border transfers.
- Digital currency eliminates intermediaries in the implementation of monetary policy and makes it possible to include groups of people who were previously excluded from the economy. For example, those who do not have a bank account can participate in the economy using the digital currency found in their online wallets or mobile phones.
- In the case of crypto currencies, digital currency transactions may become censored, ie the government or other authorities may be resistant to monitoring.
Disadvantages of Digital Currency
The disadvantages of digital currency are as follows:
- Digital currency is sensitive to hacked. Even if it eliminates the need for physical protection, the origins of digital currency in technology make it a target for computer pirates that can play from digital wallets. A perfect financial infrastructure of digitally interconnected beings can be collapsed by computer pirates. 2018 SWIFT attacks affecting multiple countries are an example. A large scale digital currency hackers have the potential to bring the financial infrastructure of a country to the knees and create a national security threat.
- The use of digital currency can endanger user privacy. Cash is anonymous and is almost impossible to follow and monitor users. On the other hand, digital currency can be monitored. While the use of internet cookies is possible, the impact on digital money monitoring is more comprehensive. For example, organizations or governments may take or freeze accounts without users’ permission. They can also start double accounting in bank accounts, inflate expenses and reduce the total total.
- Digital currency has its own costs. For example, digital wallets are required to store digital money. Crypto currencies also require storage solutions that move safely against computer pirates. Systems using block chains are also obliged to pay the transaction fees or costs related to the processing of the transaction to the miners.
- Digital currency, governance and policy framework offers various difficulties on the front. This form of money is an undiscovered field for policy makers, and problems have already begun to emerge in the ecosystem.
In short, what is digital currency?
Digital currency (or digital currency) refers to any payment tool that exists completely electronically. Digital currency has no physical and concrete form such as banknotes or coins and is accountable and transferred using online systems.
What are different types of digital currency?
Technological foundations mean that digital money can be adapted to various purposes. In addition to being a digital representation of the Fiat currency, digital currency has three other forms: crypto currencies, Central Bank digital currencies and fixed currencies.
What are some advantages of digital currency?
It facilitates and accelerates digital money, money transfer and transfer systems. In addition, it simplifies the implementation of the monetary policy of the central banks by removing intermediaries such as banks from the process. Crypto currencies are also resistant to censorship, ie digital money flow and use in block chains cannot be traced.
What are the disadvantages of digital currency?
Digital monetary systems are sensitive to attacks. Through the skillful targeting of such systems, computer pirates can collapse important financial infrastructure and crippled the economic foundations of a country. Central digital currency systems, such as those for CBDCs, can enable user information to monitor and monitor and endanger their privacy.
Digital currency is an important innovation in financial technology. It overcomes cash problems and makes payment systems faster and cheaper. However, as digital currency can be hacked and error, there are also problems that technology brings with it. Although it is early for digital currency, it will play an important role in the future of finance.
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