Digital currencies can fundamentally alter how society views money. The growth of Bitcoin (BTC), Ethereum (ETH), and dozens of other cryptocurrencies that only exist in electronic form has prompted global central banks to investigate how national Digital currencies may function.
What is meant by Digital currencies?
Digital currencies are a form of money created, stored, and transferred digitally. They are not formally affiliated with any country’s government or represented in physical forms like traditional coins and notes. The Reserve Bank of India (RBI) is preparing to launch a pilot project for its Central Bank Digital Currency (CBDC), which it describes as digital legal money.
How can one profit from Digital currencies?
Mining is the most popular technique to profit from cryptocurrencies. Mining is validating Blockchain transactions and adding new data blocks to the chain. Miners are compensated with Bitcoin for their labor. Mining may be done with specific gear or using cloud mining services.
The digital rupee would be exchangeable at par with existing Digital currencies
It is accepted for payments and is a safe store of value. It’s sometimes referred to as digital fiat currency or digital base money. As with real banknotes and coins, it is a central bank’s liability and is a sum of money in the national currency.
Meaning of Central Bank Digital Currencies (CBDCs)
Central Bank Digital Currencies (CBDCs) are the digital equivalents of government-issued currencies. They are unrelated to a real commodity issued by Central banks. They are responsible for providing financial services to a country’s government and commercial banking system, setting monetary policy, and issuing currency. A CBDC, like other forms of money, would allow the general public to make digital payments.
However, as a Federal Reserve obligation, the Central Bank Digital currencies are the safest digital asset available to the general public, with no related credit or liquidity risk.
Are Central Bank Digital Currencies necessary?
The Central Bank Digital currencies do not have a general case since each economy is unique. A CBDC may be essential to financial inclusion in some circumstances, such as where geography prevents physical banking. In other cases, a CBDC might serve as a vital backup if other payment instruments fail.
Types of Digital Currencies
When broadly classified, there are 3 types of Digital currencies – Cryptocurrencies, Virtual Currencies and Central Bank Digital.
- Cryptocurrencies
Cryptocurrencies, sometimes known as crypto-currency or crypto, are Digital currencies (or virtual) that employ encryption to safeguard transactions.
- Virtual Currencies
A virtual currency specializes in a community, such as a gaming community. These often have no monetary value and may only be utilized inside the community. Any digital or virtual money employs cryptography to safeguard transactions.
- Central Bank Digital
Central Bank Digital currencies (CBDCs) are the digital equivalents of government-issued currencies unrelated to a real commodity. Central banks issue them, responsible for providing financial services to a country’s government and commercial banking system, setting monetary policy, and issuing currency.
An Overview of Digital Currencies
A. The Taxonomy
Virtual money is a type of digital asset that does not have legal tender status. It is a label to identify and categories digital assets so users can navigate them. The label’s category might be physical, referring to how the item is kept, or virtual, referring to how the object is perceived/navigated. They are an excellent resource for comprehending nomenclature and visualizing how new terminology fits a specific environment.
B. Maturity and Approach by Country
This drastic shift will benefit emerging economies and low-income countries the most. Digital money can also be issued by the private sector. These are sometimes called e-money since highly safe and liquid assets entirely back them. Stable coins are e-money but can exist in different forms with more variable values. Crypto assets, such as Bitcoin, are issued in their currencies and are highly volatile—far too volatile to be considered a form of digital money.
C. Use Cases and Market Sizing
Payments may be completed faster with digital currency than traditional methods such as electronic fund transfers or wire transfers, which can take days for banking institutions to authenticate a transaction. Several prominent cryptocurrencies are on the market, but market capitalization is the easiest method to determine a cryptocurrency’s popularity. One can calculate the entire worth of the crypto currency using the current price and the total number of outstanding coins in circulation.
Several prominent cryptocurrencies are on the market, but market capitalization is the easiest method to determine a cryptocurrency’s popularity. One calculates the entire crypto currency worth using the current price and the total number of outstanding coins in circulation.
D. Impact Scenario (opportunities vs. Risks)
Opportunities: Introducing the digital rupee is a significant step forward in India’s digital transformation. It will be a fantastic opportunity for India since it can raise the convenience of conducting business while improving the resilience and security of the whole payments infrastructure.
Risks: Payment fraud is one big problem related to the rising usage of digital money. Payment fraud may take many different forms. However, it often refers to fraudulent or unauthorized transactions by a cybercriminal.
Advantages of Digital Currencies
The following are the benefits of Digital currencies:
- Security
Once authorized, the digital currency transaction is final. This finalization provides superior fraud protection compared to fiat currencies, which are less secure owing to the personal information necessary to complete transactions and the possibility of chargebacks. Blockchain technology empowers Digital currencies, making them nearly hard to counterfeit or copy.
- Reduced transaction fees
Credit card fees can be exorbitant, especially when used abroad. They can range from 2% to 5% or more on transactions. You pay a substantially smaller charge, often none, when you use Digital currencies.
- Transactions that are completed more quickly
A transaction using Digital currencies is substantially faster than those involving traditional banking institutions. Moving funds worldwide, for example, through a traditional bank might take days for the money to be deposited into the receiver’s account.
- 24-hour availability
Since banks are closed and cannot confirm transactions, existing money transfers sometimes take longer on weekends and beyond regular work hours. Transactions involving digital money occur at the same rate every 24 hours, seven days a week.
- Decentralized and self-governing
Digital currencies, unlike actual cash currencies, are decentralized, which means a single governing authority does not govern them. Because governments and banks are not involved in your transactions, you have more control over managing your money. Your digital currency wallet functions similarly to the one in your pocket; you have direct and quick access to its contents. The difference is clear when compared to the hurdles you must jump through to transfer your fiat currency from one bank to another.
