All to know about digital currency

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Back to today article which is on digital Currency, after reading answer this question.

What did you like most about digital Currency?

Do you think it will be okay for country to use as a substitute for there Currency?

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What Is Digital Currency?

Digital Currency are any means of payment that exists in a purely electronic form. They are not physically tangible like a coin or dollar also they are being transferred through online systems. One known example of digital money is the cryptocurrency Bitcoin.

Digital money is exchanged using technologies such as smartphones,online cryptocurrency exchanges and credit cards.Digital money can be represent such as dollars or euros so it can be converted into physical cash through the use of an ATM.

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Note:

Digital currency can ease monetary policy implementation by central banks in the sense that it cheaper and faster to conduct monetary transactions.

Examples of types of digital money are cryptocurrencies, central bank digital currencies, and stablecoins.

  • Digital money is susceptible to hacks and can compromise user privacy.

What to know about Digital Currency

A lot of digital money is already present in our society today in the form of cash held in online bank accounts.

It can also be used for online transactions,sent to others and are also sent back to us.

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Digital money is similar to other cash counterpart and can be a unit of account and a medium for daily transactions. But note they are not cash.

For example: dollars in your online bank account are not digital money because they take on a physical form when you withdraw them from an ATM.

Given these advantages, digital money has become a priority for several governments around the world. The central bank of Sweden, a country that is on its way to becoming a cashless society, and has released some exploration about using digital currency,Meanwhile, China has already conduct test involving the digital equivalent of its national currency, and is planning to release it soon.

According to survey conducted in February this years by the (IMF-International Monetary Fund), that around 111 countries from its 159 member countries are planning and researching about how to introduce digital money in the near future.

Aim of Digital Currency 

Aims of digital money

  • To do away with the time lag and operating costs of transactions.

  • To provides transparency to authorities and stakeholders, improving the resiliency of a financial network by eliminating the need for a centralized database of records.

  • To eliminate the function of central authorities to oversee production and intermediaries needed to distribute the currency. Cryptography is used. Blind signatures hide the identity of transacting parties, and encrypt transaction details. Examples of this type of digital money are cryptocurrencies like Bitcoin and Ethereum.

Types of Digital Money

Presently there are three types of digital Currency and they are:

Central Bank Digital Currencies (CBDCs)

They are currencies issued by the central bank of a country. They are separate from fiat currencies, which are also backed by the authority and credit of a central bank, and are another obligation of the institution. CBDCs ease monetary policy implementation by removing intermediaries from the policy by establishing a direct connection between the government and the average citizen. Banks and financial institutions responsible for distributing national currency are no longer required in the process.

Depending on their use and type of implementation in the economy, there can be two types of CBDCs. Retail CBDCs are designed to be used for daily transactions, much like fiat currencies. In a more limited implementation of the concept, Wholesale CBDCs are used for transactions conducted between banks and financial institutions.

Cryptocurrencies

They are digital currencies designed using cryptography. The crypto wrapper around a digital currency provides enhanced security and makes transactions tamper-resistant. The most popular cryptocurrencies are Bitcoin and Ethereum. Since 2017, the popularity of cryptocurrencies as an investment class has skyrocketed their value and the overall crypto markets. By July 2021, the market cap of cryptocurrencies had surpassed $2 trillion.

Stablecoins

They are a variation of cryptocurrencies and were developed to counter the price volatility of regular cryptocurrencies. Stablecoins can be likened to a form of private money whose price is tied to that of a fiat currency or a basket of goods to ensure that they remain stable. They can be a proxy for fiat currencies, except they are not backed by governmental authority. The market for stablecoins has exploded in recent times. As of February 2021, 200 stablecoins had been released or were in development.

Advantages of Digital Money 

Below are the advantage of digital money

  • Digital money removes 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 are unbanked can still participate in an economy by using digital money present in their online wallet or mobile.

  • Digitalmoneyeliminates the need for physical storage and safekeeping that is a characteristic of cash intensive systems. You do not need to invest in a wallet or bank vaults to ensure that your money is not stolen.

  • While it has already shortened the amount of time and the cost required to transfer money across borders, digital money has the potential to further revolutionize the remittance industry by eliminating intermediaries and further reducing the costs associated with cross-border transfers.

  • Digital money simplifies accounting and record-keeping for transactions through technology. Therefore, manual accounting and separate entity-specific ledgers are not necessary to maintain records of transactions.

  • In the case of cryptocurrencies, digital money transactions can become censorship-resistant, meaning they can be impervious to tracking by government or other authorities.

  • Disadvantagesof Digital Money 

The disadvantages of digital money are as follows: 

  • Digital money use can compromise user privacy. Cash is anonymous, and it is nearly impossible to track and trace its users. On the other hand, digital money can be traced. While the use of internet cookies enables targeted advertising, the implications for digital money tracking are more far-reaching. For example, organizations or governments could blacklist or freeze accounts without the permission of users. They could also instigate double-accounting in bank accounts, inflating expenses and reducing the overall total.

  • Digital money is susceptible to hacking. Even as it removes the need for physical safekeeping, digital money's origins in technology ensure that this form of money becomes a target for hackers, who can steal from digital wallets. A seamless financial infrastructure consisting of digitally connected entities can be brought down by hackers.

  • Digital money has its own set of costs. For example, digital Currency required to store digital money. Cryptocurrencies also require custody solutions that act as a failsafe against hackers. Systems that use blockchain also have to pay transaction fees, or the costs associated with processing the transaction, to miners.

Question of the day

Do you think Digital Currency can solve monetary problem?

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