Digital currency : Types Characteristics free PDF

Digital currency

Digital currency can be either centralized, where there is a central point of control over the money supply (for example – a bank) or decentralized. Where the control over the money supply is predetermined.

Digital currency
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What is Digital Currency

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency or cybercash.

A digital currency is a medium of exchange that is generated, stored and transferred electronically. Digital currencies are not usually associated with the government of any country or appear in physical forms such as coins and notes of traditional currencies.

The most common category of digital currency, is what comes to most people’s mind when they hear the word. Cryptocurrencies rely on encryption to secure the processes involved in creating units and making transactions. They are used for online and in-person purchases in a similar way to traditional money and are accepted by an increasing number of vendors.

How does work Digital Currency

Digital rupee will actually be a currency based on other technology including blockchain. There are two types of digital currency – retail and wholesale. Where wholesale currency is used by financial institutions and retail digital currency is used by common people and companies.

Actually blockchain technology is decentralized. Meaning all types of information are on all the computers of a network. However, the digital rupee will be different from this. The reason for this is that it will be regulated by RBI. It will not be really decentralised. You will easily be able to send it to each other from mobile and you will be able to buy all kinds of goods and use the services.

Cryptocurrency transactions take place through electronic messages that are sent across the network with instructions about the transaction. Instructions include information such as the electronic addresses of the parties involved, the amount of currency to be traded, and a time stamp.

This type of currency can be used to buy physical goods and services. But it may be limited to certain communities, such as for use within online games.

Types of Digital Currency

1. Virtual currency

Virtual currency, or virtual money, is a digital currency that is largely unregulated and issued. This currency is controlled by its developers and used and accepted electronically among members of a specific virtual community.

In 2014, the European Banking Authority defined virtual currency as “a digital representation of value”. which is neither issued by a central bank or a public authority nor necessarily linked to fiat currency, but accepted by natural or legal persons. It is a means of payment and can be transferred, stored or traded electronically.” A digital currency is issued by a central bank is known as a central bank digital currency. For example- virtual currency, is a token which is defined and controlled by the semantics developers.

2. Crypto currency

Crypto is a digital currency designed to serve as a medium of exchange through a computer network. Which is not dependent on any central authority, such as government or bank, to maintain or maintain it.

Cryptocurrency does not exist in physical form (like paper money) and is not usually issued by a central authority. Cryptocurrencies typically use decentralized control, as opposed to Central Bank Digital Currencies (CBDCs). When a cryptocurrency is mined or created by a single issuer prior to issuance, it is generally considered centralized.

3. Central Bank Digital Currency (CBDC)

Central bank digital currencies are digital tokens similar to cryptocurrency issued by a central bank. They are measured against the value of the fiat currency of that country.

Many countries are developing CBDCs and some have even implemented them. Because so many countries are researching ways to transition to digital currencies. It is important to understand what they are and what they mean for society.

Characteristics of Digital Currency

1. Cheap International Transfers

International currency transactions are very expensive and people are charged high fees for transferring money from one country to another. Especially when it involves currency conversion. Digital assets can disrupt this process by making it faster and less expensive. Digital currency can also be exchanged from mobile sitting at home, which makes it very accessible.

2. 24 hours service

With digital currency, transactions work at the same speed 24 hours a day, seven days a week.
Digital currency can be easily exchanged at any time. Money transfers take longer because the bank takes longer. Digital payments come in handy during weekends when banks are closed and cannot do transactions.

3. Transparency and efficiency will increase

Experts say that digital rupee will increase transparency and efficiency. It will be based on blockchain technology, allowing real-time tracking and ledger maintenance. It is also hoped that a digital rupee will promote financial inclusion and effective fiscal and monetary policy implementation in a country as large as India.

4. lowers transaction costs

The digital rupee will significantly reduce transaction costs and speed up account settlement as transactions can be recorded in the ledger in real time. Currently banks update the ledger at the end of the day, which means there is a lag.

5. No Physical damage

No physical damage. Unlike currency notes, there is no risk of damage to the digital rupee by way of damaging or losing it.

6. peer-to-peer transactions

Digital currencies are decentralized, which means you don’t need any third-party resources like a bank or credit company to manage them, but it also means that your transactions are directly peer-to-peer. Hence there is no need for a third party to guarantee the transaction.

7. Safe for merchants

Digital currency transactions are validated in seconds. For merchants, this means less risk of check bounce or chargeback attempts. Once a transaction is written into the blockchain, it cannot be reversed, offering increased security for businesses. An increasing number of merchants see digital currency as the future and are working with it to conduct more of their business.

8. Discrete and Confidential

With fiat currency, most of your financial history is documented and controlled by third parties such as credit reporting agencies, banks, collectors and marketers. This does not happen with digital currencies.

Disadvantages of Digital Currency

1. Possibility of hacking

The digital origin makes digital currencies very susceptible to hacking. Hackers can steal digital currency from online wallets or change the protocol for digital currency. Thereby rendering them unusable, as proven by the many cases of cryptocurrency hacks. Securing digital systems and currencies is a work-in-progress.

2. Unstable value

Digital currencies used for business may have wildly value changes. For example, the decentralized nature of cryptocurrency resulted in abundance of low -capital digital currencies. Whose prices are in danger of sudden change in prices based on the craze of the investor. Other digital currencies have followed the same price trajectory in their early days.

3. Storage and infrastructure issues

Digital currency does not require a physical wallet as it has its own set of requirements for storage and processing. For example, an Internet connection is required, like smartphones and services related to their provision. Online wallets with strong security are also necessary to store digital currencies.

4. Uncertainty for the future:

Digital currency is still new and in the early stages of development. Because of this, the outlook is uncertain, and there is no guarantee that funds you hold digitally will remain useful or retain value.

5. More accessible to criminals:

While there are advantages to digital currencies being more accessible, there are also disadvantages. Digital currency can open avenues for criminal elements who want to exploit it for their own needs. Authorities are most concerned about money laundering or digital currencies being used to fund illegal activities.

Digital currency challenges and future

Digital currency, often referred to as cryptocurrency, has gained significant attention and popularity in recent years. However, it also faces several challenges and holds various potential futures. Let’s delve into the details:

Digital currency Challenges:

  1. Regulation and Legal Frameworks: Digital currencies challenge traditional regulatory frameworks, raising questions about how to classify, tax, and regulate them. Governments are grappling with how to strike a balance between innovation and consumer protection.
  2. Volatility: Many cryptocurrencies are known for their extreme price volatility. This hinders their adoption as stable means of payment or stores of value, as people might be wary of using or holding assets that could drastically lose value.
  3. Scalability: Some digital currencies, like Bitcoin, face scalability issues. As more transactions occur, network congestion can lead to slower transaction times and higher fees.
  4. Security Concerns: Cybersecurity risks such as hacks, scams, and wallet vulnerabilities are prevalent in the digital currency space. The loss of private keys can lead to irreversible loss of funds.
  5. Lack of Consumer Awareness: Despite the growing popularity, many people still don’t fully understand how digital currencies work, which can hinder their mainstream adoption.
  6. Energy Consumption: Proof-of-Work (PoW) based cryptocurrencies, like Bitcoin, require substantial energy consumption for mining activities, leading to concerns about their environmental impact.
  7. Interoperability: The lack of standardized protocols and interoperability between different blockchain networks can hinder the seamless transfer of assets and data across platforms, slowing down the adoption of digital currencies.
  8. User Experience: User interfaces and interactions with digital wallets and platforms need to improve to make using cryptocurrencies more user-friendly. Complex addresses, security procedures, and transaction confirmation times can be off-putting for newcomers.
  9. Adoption Barriers: Limited merchant acceptance and the absence of a widespread infrastructure for spending cryptocurrencies can deter their adoption for everyday transactions.
  10. Governance and Consensus: Decentralized systems often struggle with decision-making processes and consensus mechanisms, leading to debates and forks within communities, which can impact user confidence.

Future Possibilities for digital currency:

  1. Mainstream Adoption: If challenges like regulation and volatility are addressed, digital currencies could become widely accepted for daily transactions, similar to traditional fiat currencies.
  2. Financial Inclusion: Digital currencies could provide access to financial services for the unbanked and underbanked populations, especially in regions with limited banking infrastructure.
  3. Smart Contracts and Decentralized Finance (DeFi): Blockchain-based platforms allow for the creation of smart contracts, enabling automated, trustless agreements. DeFi applications could reshape traditional financial systems.
  4. Central Bank Digital Currencies (CBDCs): Many central banks are exploring the idea of issuing their own digital currencies. CBDCs could provide enhanced efficiency in payment systems and monetary policy transmission.
  5. Tokenization of Assets: Real-world assets, like real estate and art, could be tokenized and traded on blockchain platforms, increasing liquidity and accessibility.
  6. Interoperability: Projects are working on improving the interoperability between different blockchains, allowing for seamless exchange of assets and data across networks.
  7. Privacy and Security Enhancements: Future digital currencies might focus on improving user privacy without compromising security, through techniques like zero-knowledge proofs.
  8. Reduced Environmental Impact: Some newer consensus mechanisms, like Proof-of-Stake (PoS), are more energy-efficient than PoW, potentially addressing concerns about environmental impact.
  9. Global Remittances and Cross-Border Transactions: Digital currencies can significantly reduce the time and cost associated with cross-border payments, benefiting both individuals and businesses by enabling faster and cheaper international transactions.
  10. Tokenization of Intellectual Property: Digital currencies could enable creators to tokenize and monetize their intellectual property directly, leading to new models for content creation, distribution, and ownership.
  11. Decentralized Identity: Digital currencies could be linked to decentralized identity systems, allowing individuals to have better control over their personal data and enhancing privacy.
  12. Machine-to-Machine Transactions (IoT): The rise of the Internet of Things (IoT) could be facilitated by digital currencies, allowing devices to transact autonomously with each other, creating new possibilities for efficiency and automation.
  13. Micropayments and Content Monetization: Digital currencies can enable frictionless micropayments, revolutionizing how content creators monetize their work, from articles and videos to music and art.
  14. Charitable and Humanitarian Efforts: Cryptocurrencies have already shown their potential in providing quick and transparent aid during humanitarian crises, allowing funds to reach those in need more directly.
  15. Predictive Economics and Data Insights: Blockchain’s transparent and tamper-proof nature could revolutionize data collection and analysis, providing more accurate insights into economic trends and behaviors.
  16. Artificial Intelligence and Digital Currencies: The integration of AI and blockchain could lead to more sophisticated trading algorithms, fraud detection systems and personalized financial services.
  17. Collaborative Business Models: Digital currencies can enable decentralized organizations and collaborative ownership models, where stakeholders actively participate in decision-making and share in the success of the organization.
  18. It’s important to note that the trajectory of digital currencies will depend on technological advancements, regulatory developments and how effectively the challenges are addressed. As these currencies continue to evolve, their impact on various sectors of the economy and society as a whole will become clearer.

In conclusion, the future of digital currency is promising, with the potential to revolutionize finance, increase access to services and transform various industries. However, challenges remain and their resolution will significantly influence how digital currencies evolve and are integrated into global economies.

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