In the last few years, electronic currency has been a hot topic of discussion in the financial sector. It has the ability to change the way we conduct transactions, save money, and view money altogether. Everything from cryptocurrencies to CBDCs are pushing the digital currency frontier further and further out. In this article, we cover the what, the how, the various advantages, and disadvantages, and how it may look in the near future.
What Is Electronic Currency?
To put it simply, any form of currency that is stored online or exists virtually is referred to as electronic currency. In contrast to other forms of currency where one physically has cash or coins, this form of currency is non tactile, and can ONLY be used over the internet. This type can be kept, sent, or spent through electronic devices such as computers, smartphones, or even special wallets.
Currently, the market is dominated with two main types of electronic currency ‘Cryptocurrency’ and ‘Central Bank Digital Currency’ also known as the CBDC. These currencies are vastly differnt in their structure, purpose, and underlying technologies and yet the one thing they have in common is that they are purely in digital form.
Blockchain Technology: The Secure Future of Finance
Bitcoin, by far the most profitable and widely accepted form of digital currency, was built over a decade ago in the year 2009 by a group of anonymous individuals led by Satoshi Nakamoto. Similar to how Ethereum, Ripple, and Binance Coin emerged later on, most cryptocurrencies majorly stem from Bitcoin.
The world of cryptocurrencies is thriving, and one of its greatest advantages lies in the network of computers which function autonomously to operate transactions. Unlike traditional currencies backed by government banks and institutions, cryptographic currencies rely on independent systems known as nodes that confirm transactions without the need for a central entity.
Most cryptocurrencies are typically built on blockchain technology. A blockchain is an immutable and reputable virtual ledger that maintains transparency, while recording transactions across a network of computers. Once a transaction is recorded, it is impossible to erase or modify it. This approach greatly enhances security by diminishing chances of manipulation and fraud.
With all the good that cryptocurrencies provide, there are quite a few negatives to it. One such positive of cryptocurrencies is, how swifty the transactions are. Whether it is a cross border transaction or a local transfer, it usually is completed within a few minutes. And the fees charged per transaction are way lower compared to using a bank or a payment processer to do the transaction. This make it more appealing to people. Not to mention, it also helps people who do not have ready access to traditional banks. All in all, it promotes the idea of financial inclusion.
On the other hand, with every good, comes a bad with cryptocurrencies. One such enormous hurdle, is price volatility. Within a short period of time, the price of a currencies can fluctuate drastically, which can be a real concern for any investor. One of the most famous cryptocurrency, Bitcoin, witnessed an enormous spike in value after a few months of its inception. But it suffered drastically after and is the reason for concern for people looking for stability in their investments.
Another con to cryptocurrencies is how the world is grappling to find a central regulation. Quite a few countries have welcome cryptocurrencies, however, not all have. Some nations have minimized or placed a ban altogether on it. The concern governments, and rightly so, have is the use of crypto currencies for illegal activities such as tax evasion or money laundeting.
In contrast to CBDCs, Central Bank Digital Currencies (CBDCs) are government issued digital currencies that are similar to crypto currencies that are decentralized. Similarly, unlike crypto currencies, CBDCs have a central bank eradicating the common ethers of trust needed for crypto. These coins are designed to help back economy in replace of physical money.
Currently, Digital versions of United States Dollar and Euros are still being conceptualized by their respective countries, however China has already started deploying and testing it’s Digital Yuan in various cities.
Offering more stability than their crypto counterparts, CBDCs provide way less volatility. With being back by a central currency like the Euro or US Dollar, CBDCs offer a reliable alternative to exchange. Moreover adopting these coins could also avoid the bulk and lengthy paperwork that comes with international transactions.
The introduction of CBDCs comes with a promise of enhancing financial inclusion. The fact that governments control the issuance of CBDCs means that there is a guarantee for these currencies to be available to everyone, even those who are unbanked or underbanked. Using smartphones and digital wallets, remote populations could access this secure, government-backed money.
But CBDCs raises worrying issues regarding privacy and control. The most prominent one is if the government or central bank control specific entities, every transaction could be scrutinized, and there emerges the fear of surveillance. Moreover, there are differences regarding how CBDCs would affect existing economic structures, and they all stem from the question: How would traditional banks adjust themselves in this new system?
Now, Let’s look at the fun facts of digital currency
Just like any new currency, digital currencies pose challenges that if addressed make this option worthwhile for individuals and businesses as well as taxpayer supported entities. Some of the key advantages include:
Speed: Digital currencies, particularly cryptocurrencies, enable fast transactions. Cross-border payments that take days to settle are now a thing of the past when it only takes a matter of minutes to complete them with digital currency.
Lower Transaction Costs: Compared to traditional banking systems, digital currencies allow for more advantageous transactions due to lower fees. This is beneficial not only for consumers but also for businesses.
Following the global spread of COVID-19, virtual currencies emerged and sparked a heated debate among economists. The idea behind these currencies was mainly to allow cashless transactions at a faster rate. Virtual currencies differ from traditional ones as they are not backed by tangible assets, unlike the dollar that is pegged to gold. These currencies’s value fluctuate based on market demand. For instance, one Bitcoin was worth 60,000 US dollars in 2021 while in 2022 it was worth 16,000 dollars. Their introduction raised numerous questions regarding their usefulness, advantages, and disadvantages. If you are wondering why do people even bother investing in Bitcoin, Ethereum, and other altcoins, here are the main advantages of virtual currencies:
Inception of Virtual currencies: A new era in financial investment goes beyond just digital currencies enabling investors of today with diverse options such as NFTs, and other altcoins. Imagine fostering a two dimensional world where interactions take place in a virtual like environment, where online users can create and trade unique assets, all animated and graced with new technology like AI.
Advancements in technology, constant changes to the Web environment, and new challenges in globalization enabled the growth of virtual currencies. The incorporation of revolutionary innovations gave rise to opportunities for their applications, investment assets, and accelerated the decentralization of the internet.
These digital currencies were developed as a response to the lack of customer comfort with traditional investments. There is a limitless nature to how they can be operated or converted into assets: gaming, entertainment, or even valuable commodities.
Everything About Digital Currencies Moving Forward
The introduction of digital currency has contributed to the evolution of the global economy, and has a lot of potential for further development in the foreseeable future. Considering the future of digital currency, further adoption of cryptocurrency and CBDC into the financial system is inevitable. National governments will continually try to figure out how these new forms of money will fit into their economies, as well as how to manage them, while cryptocurrencies might remain as non-restricted models of currency.
Moving forward, it is apparent that cryptocurrencies will have a more prominent utilization which will have implementation in shapping the economy at a global level. Whether it is seeking a more secure and effective financial system or non-restricted trading models, one common aspect everyone will seek is the positive impact of the cryptocurrency and other digital currencies.
Conclusion
Digital currency is here to stay, the future of finance will not be the same. With cryptocurrencies, the people have a means to trade that is outside of a centralized control and for maximum security and efficiency there are Central Bank Digital Currencies. All of these developments give us limitless options of how to shape money. Innovations such as speedier transactions, lower costs, and greater financial inclusiveness do raise certain issues such as volatility, regulatory ambiguities, and concerns around privacy.
It will be essential to find these middle grounds for the innovative currency to be successful enabling costs to be efficient but also being able to tackle key issues. This will only be possible when businesses, governments and financial institutions work in tandem. Properly executed, the problems cited can be mitigated and the standardized benefits can be gained, making it possible for digital currencies to foster more democratic access to economic systems.
Without question, digital currency ushers us to a more advanced and interconnected economy. While we are still trying to catch up with these changes, one truth remains, be it in efficiency, inclusivity, or simplicity, th money of the future will be entirely ‘digital’. What that money will be and how it will impact the society is something we have yet to shape.
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