What Is Digital Money And How Does It Work?

bitcoin cryptocurrency Digital currency and digital money are one and the same thing – it is any means of payment that is managed, stored or exchanged on digital systems. It covers all forms of money that you cannot touch, although you could argue that physical coupons can technically be called tangible ‘digital money’. The types of digital currencies include but are not limited to cryptocurrency like Bitcoin and central bank digital currency.

Digital money has a long history dating back to the Internet’s inception. In the beginning, it was difficult to persuade the public to start using digital money. But as they started getting more familiar with the technology, and began feeling assured about its safety and security, it gained popularity and encouraged globalization of economies at an even faster pace.

The digital money concept has been applied in very diverse settings, ranging from newer avatars such as Bitcoin and Ethereum to credit cards to purely digital forms of existing payments systems like PayPal, Apple Pay or Android Pay.

Digital money can transition to non-digital form via existing physical sovereign currencies. For example, the government-approved legal tender that exists in your bank account as a mere figure is made non-digital when your withdraw it as cash through an ATM.

Today, it is impractical to talk about digital money and not touch on cryptocurrency like Bitcoin or Ethereum. This is a sort of digital money that is protected by encryption, making counterfeiting and double-spending nearly impossible.

El Salvador has declared Bitcoin legal tender. Some countries are considering the idea of issuing a government-backed cryptocurrency. But the main draw of cryptocurrencies has always been that they differ from traditional fiat currencies. They are not issued by the central banks or government authorities, making them practically immune to government interference.

Examples Of Digital Currencies

ethereum The money held by banks and central authorities is the most well-known kind of digital currency. These funds are not kept as cash in a physical place. Instead, they are stored electronically as numbers. Banks and central authorities conduct transactions involving billions of dollars, but no real currency is used.

Cryptocurrency is the trendiest digital currency at present. It is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in an encrypted database using strong cryptography and controlled by no single entity. Each transaction between parties must be verified with cryptographic proofs to assert that the sender has control over what they say belongs to them, and also that it belongs exclusively to one party at any given time.

It is made possible due to blockchain. The latter is essentially a digital ledger of transactions that records everything in an encrypted form with high levels of security. The decentralized network makes it difficult to manipulate the information on the blockchain, which allows for unfettered transparency and accountability through its distributed architecture. Bitcoin, Ethereum, Dogecoin and Litecoin are some popular cryptocurrencies.

The Usage Of Digital Currencies

A lot more people have moved on to digital currencies due to how secure it is to store, transfer and exchange them. Banks are already storing money ‘digitally’ and allowing safe, digital transfers via Internet banking, debit cards and so on.

Individuals also have the option of holding their money in e-wallets such as Apple Pay or PayPal. There are different types of electronic wallets too, such as those owned by brokerage companies, for example. However, the services that these companies might offer those who have to store digital currencies such as USD and virtual currency like Bitcoin are different. For example, a review of HotForex broker shows that the company can provide its clients with proper services when it comes to trading with digital money such as USD or many others, while they do not allow the storage of cryptocurrencies.

It is important to analyze the pros and cons before signing up for an e-wallet or similar digital vault. Choose one that meets your requirements the most in terms of benefits and services.

Financial Services And Virtual Currencies

The main advantage of a transaction using digital money is that it eliminates the need for physical transfers and makes banking considerably easier by allowing consumers to conduct personal banking without having to go to a physical location or carry cash in their pockets.

A lot of banks are lowering their retail personnel workforce in order to keep up with the influence of digital money. Many branches are shutting down as individuals in developed and developing nations increasingly bank with digital money.

There is a fear that e-wallet services as well as decentralized, virtual currencies like Bitcoin will make retail banking and the related financial services as we know it redundant in the near future. After all, crypto was invented as a means to make transactions untraceable by banks, governments, or any third party.

But cryptocurrency has been in and out of popularity since the advent of the Internet. The current rage surrounding it might peter out at any given time. And e-wallets need the support of financial institutions to function.

Digital Money Related Risks

Payment frauds that are difficult to trace are a big concern associated with the increased usage of digital money. Payment fraud may take many different forms. In general, it refers to illegal or unlawful transactions.

For example, a cybercriminal might hack into a victim’s e-wallet or bank account and use the latter’s credentials to purchase goods or services. Someone buying an item deemed illegal in their state is also considered to have made an unlawful transaction. But such transactions that happen behind a screen are not easy to keep an eye on.

Even cryptocurrency is not completely safe from frauds since the private encryption key of the owner can be stolen. Unless a huge amount is involved, as in the recent case of the Colonial Pipeline ransomware attack, it’s not easy to summon the resources to put right a digital payment fraud involving crypto assets.

But digital money has brought in so many positive socio-economic changes that its benefits cannot be said to outweigh its risks.