Digital Currency: Positive and Negative Features

Digital currency, Crypto currency, Bitcoin and Blockchain are certain  terms that have often been appearing in the front pages of newspapers across the world.  The recent ransomware attacks, WannaCry and Petya, have made these terms more familiar. 

What is a digital currency?

Digital currency can be described as a digital representation of value of an imaginary asset , issued by private developers and denominated in their own unit of account.  This currency can be obtained, stored, and transferred through electronic medium as long as both parties for a transaction agree to use the same. 

Digital currency, cryptocurrency and virtual currency are normally considered as different nomenclatures for a form digital asset.  However, there are arguments that cryptocurrency and virtual currency are subsets of larger universe of digital currency.  Digital currencies have been in existence for more than two decades now. It is estimated that more than 700 different forms of digital currency are in existence as of now. The total value of digital currencies estimated in 2015 by International Monitory Fund was to the tune of US $ 7 billion. The value of digital currency is miniscule even if we compare it to the US money supply of $12 trillion alone. But the fact is that it is growing as an alternate monitory medium at a much faster pace. 

What are the differences between digital currency and physical currency?

Physical currency is a medium of exchange, representing the monitory value mentioned therein which is guaranteed by the central bank or the currency issuing nation.  US dollar, Rupee, Pound and Euro are examples of physical currency. These are recognized medium of exchange within a country and also between nations.  Physical currencies are issued in a highly regulated manner. The value of physical currency remains the same though the relative value in comparison with the physical currency of another nation may vary depending on factors like inflation, growth rate, political stability etc. of related countries   It is a liability on the central government or the central bank of the country and is a legal tender. 

Digital currency is not a liability on anyone.  It is an unregulated, digital asset issued and controlled by the developers and accepted and transacted by agreeing parties. They derive their value based on demand-supply position. The value of a digital currency fluctuates based on the demand-supply mismatch. Digital currency is not accepted as a legal tender by any country as of now.  They have a decentralized payment system and have no central repository. 

It may , however, be clearly understood that the electronic money that we use in our everyday life over internet or net banking represent the underlying physical currency only and  is not  digital currency.  

What are the main features of Digital currency?

The main features of digital currencies are:
•    They are based on distributed ledger system
•    The value is determined supply-demand gap
•    They are  not a liability on an individual, institution, government or central bank
•    New unit of currency is issued based on computer protocol. There is no identifiable issuer or intermediary for carrying out transactions 
•    Each type of currency has its own predetermined rules and method of creation
•    Denomination of the currency is not related to any underlying commodity or asset
•    A person keeps the currency in a  digital wallet with specific computer programme keys to identify the owner. 
•    On initiation of transaction by him, the amount is transferred to the wallet of another person who is ready to transact in digital currency.  The transaction undergoes a validation process.
•    The owner remains anonymous. 
•    Transactions are faster and cost effective. 

What are the negative features of digital currencies?

•    There is no underlying asset and hence the vale is a matter of speculation.
•    Huge volatility may lead to huge losses
•    Storage in digital forms are prone to cyberattacks and hacking
•    The anonymous character of the owner encourages usage of digital currency in illegal and underworld transaction involving drug trafficking, terrorism financing, hijacking, smuggling and ransom payments. The settlement of ransomware attacks are often carried out in digital currency because of anonymous nature of the account holder. 

What is the legal status of digital currencies?

So far no country has officially permitted usage of digital currencies as they are  created in unregulated environment and are used for activities like terrorism financing and settling transactions of underworld dealings. Though it was rumored that US Securities Exchange Commission was in the process of approval of bitcoin based exchange traded funds,  the same was not materialized. Japan and China are coming in terms with the usage of bitcoins. 

What is cryptocurrency?

Cryptocurrency is the most well-known form of digital currency.  It is an encrypted digital currency and applies a system of cryptography for creation of coins. Bitcoin is the most famous cryptocurrency and was created in 2005 for the first time.  What is bitcoin? How much is the outstanding value?

 

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