Thanks to the technological boom and financial innovations, the world has graduated from paper currency to paperless currency. More specifically, it is the digital currency, which is gaining momentum in an exponential pace.
What Is Digital Currency?
As its name suggests, digital currency is that king of currency exists only in digital or electronic form. It has a sharp contrast with the conventional or paper currency. Digital money, electronic money, electronic currency or cyber currency are all different terms used to describe digital currency.
Digital currency has revolutionized the way society thinks about money. The phenomenal growth of digital and cryptocurrency that are available only in electronic form has forced the central bankers to gauge the ways as how national digital currencies might work.
Also read: The Rise And Rise Of Digital Economy
Since these are available in intangible electronic form, it can be used with internet-enabled computers or mobile phones. Another characteristic of digital currency is that it does not require any intermediary, so they are considered as the cheapest mode to trade currencies. It is worth a mention that all cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Difference among Digital, Virtual and Crypto Currencies
Before proceeding on digital currencies, it makes sense to look into the differences among Digital, Virtual and Crypto Currencies. It is a common and easy mistake to consider all as the same, although, they are not.
Digital Currencies: It may be regulated or unregulated. If regulated by the central bank of a country, it is called “Central Bank Digital Currency (CBDC)”. CBDC exists only in conceptual form. Although, England, Sweden and Uruguay are researching to launch digital forms of their existing fiat currencies. No national central bank has so far launched their own digital currencies, it is estimated that at least 80% of central banks around the globe are researching and toiling for this transformation.
Virtual Currencies: If the digital currency is unregulated, it falls under the category of virtual currency and may be under the influence of currency developer(s), the founding entity instead of being monitored by a centralized regulator.
Crypto Currencies: A cryptocurrency is a king of unregulated digital currency i.e. virtual currency which employs cryptography to secure and prove transactions and to manage and control the creations of new currency units. Some of the popular cryptocurrencies are Bitcoin and Ethereum. Cryptocurrency has gained much momentum in this year’s Davos conference, arranged by World Economic Forum (WEF). Leaders from Blockchain Industry Group (BIG) gathered virtually to share ideas regarding regulations and its factors necessary for its growth.
Tesla has recently announced that it has plans to accept Bitcoins as a mode of payments for its cars and that it was buying $1.5 Billion Bitcoins. These development has brought Bitcoins to the limelight like never before. The recent outbreak of COVID-19 pandemic has also proved a blessing in disguise for digital currency industry. The governments, all over the world, are forced to practice the social distancing measures and close down inter-nation, inter-state and inter-city borders to curb this menace. The WHO has already cautioned that cash and credit/debit cards can be a potential source of transmission of the virus. Therefore, the use of digital or online currency appeared to be the safest option for conducting transactions. The significant infrastructure of the US financial market for e-money supplemented through Visa and MasterCard, and China’s fresh engagement with electronic Renminbi (e-RMB) are some of the best examples of the directions digital money is heading towards. Some of the characteristics of digital currency are that their conversion and value are same as that of physical money. They are available and accepted for all kind of e-transactions. They incur zero cost in creation and distribution of money.
However, the digital currencies are not without their far share of pros and cons in USA.
Pros of Digital Currency: Some of its pros or advantages are as follows.
- Swift payments: Digital currency usually takes only a minuscule of time the ACH or wire transfer takes, which can take a couple of day for financial institutions to confirm transaction.
- Inexpensive international transfers: International transfers of money involve exorbitant fees and levies. Digital currency, however, has disrupted this segment as they offer inexpensive and fast international transfers.
- 24/7 access: Conventional money transfer modes involve considerable time, if used outside their business hours and on holidays. With digital currency, no such thing becomes a hurdle. Transactions or transfers work consistently and uniformly 24 hours a day and 7 days a week.
- Banking for the unbanked: According to the Federal Deposit Insurance Corporation (FDIC), an estimated 7.1 Million US households do not have any bank account. The use of digital currency does not require an individual to have a bank account. Anyone with an internet-enabled computer and smart phone can use the digital currency.
- Efficient Government Payment System: If US government makes CBDC fully operational, it will enable it to reduce public expenditure. It can transmit tax refunds and social benefits like child benefits and food stamps to people swiftly, rather than sending them checks.
Cons of Digital Currency: Some of its cons or disadvantages are as follows.
- Taking time to learn digital currency: It is a relatively new phenomenon. On the part of the user, it will take great amount of time and efforts to learn the art of using digital currency. It is primarily the responsibility of the regulatory authorities to make it simple and user friendly.
- Too many cryptocurrencies at a time: At present, cryptocurrency industry is facing a downhill. There are at least 10 cryptocurrencies, which have their own limitations. Needless to mention, it creates confusion among different users. It will take time to determine which cryptocurrency may be useful in certain situations.
- Expensive Blockchain transactions: Cryptocurrencies use blockchains, which involve the computers for solving of complex equations to verify and record transactions. It incurs heavy power cost in case of multiple transactions. The same issue is less likely to be with CBDC if controlled by a central regulator.
- Fluctuations in the digital currency prices: Sudden and considerable variation in its prices make it less attractive for the businesses to use it as a medium of exchange. With CBDC, this issue is not material as regulated CBDCs have stable values.
- Developing of CBDC in view of time and cost: A U.S. based CBDC is still imaginary. Transition from this imagination to reality will incur exorbitant costs associated with its development.
If U.S. approves digital currency, it would play an alternative role to cash but would also have most of the inherent advantages of quick money transfer since it is electronic. Even then, it needs to be accessible as cash. Not all can afford a latest smart phone. But all should be able to afford the use of digital currency. There is a lot to be done and a lot of investments to be incurred. And these investments are undoubtedly worth it. With CBDC, the possibilities are endless.
