Digital currency is a category of currency that exists electronically.
Added advantages that digital currency has over physical currency include, but not limited to:
- instantaneous transactions
- automatic update of accounting ledger
- cross-border transfer of ownership
Digital currencies are not new. The idea of virtual currencies started in the world of online games, known as gold-farming. Digital currencies exist upon any general-purpose 1 technology (GPT), including the internet or emerging new technology like digital ledger technology (DLT).
Characteristics of Digital Currencies
Digital currencies can be used to exchange for funds or other digital currencies. They are a digital representation of value that can be used for payment or investment purpose. Unlike digital assets, digital currencies are a more specific area of asset class that focuses on medium of exchange, a unit of account and store of value.
3 Types Of Digital Currencies
|Virtual currency||Digital form of currency in virtual ecosystem.
E.g. WOW gold, Second Life Linden Dollars,
|Digital presentation of value
Not legal tender
Accepted in virtual ecosystem
Not unnecessary pegged to fiat currency
|Digital form of currency built on DLT.
E.g. Bitcoin, Ripple, Tether
|Based on cryptographic algorithms
Not legal tender
Can be pegged to fiat currency as as a representative of legal tender
Governed with varying levels of centralization
Can be pegged to a basked of goods/services
Can be an independent invented currency
A private payment medium
|Digital form of fiat legal tender currency
issued by the central bank.
E.g. China's CBDC, Uruguay digital pesos
Issued by central bank
Established by government regulation of law
Part of nation's base money supply
Governed by a central authority: the central bank
- Castronova, E. (2001). Virtual worlds: A first-hand account of market and society on the cyberian frontier.