Digital currency

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Digital currency is a form of virtual currency or medium of exchange that is electronically created and stored. Some digital currencies, such as Bitcoin, are cryptocurrencies. Like traditional money these currencies may be used to buy physical goods and services but could also be restricted to certain communities such as for example for use inside an on-line game or social network.[1]

Digital versus traditional currency[edit]

Most of the traditional money supply is bank money held on computers. Therefore, even this could be considered 'digital' currency. However, this isn't the common usage of the term.

Limits on being currency[edit]

The IRS decided in March 2014, that Bitcoin and other virtual currencies are treated as property for IRS purposes, not currency.[2][3]

FinCen guidance[edit]

On 20 March 2013, the Financial Crimes Enforcement Network (FinCen), a bureau of the United States Department of the Treasury, issued a document providing interpretive guidance to clarify the applicability of the Bank Secrecy Act (BSA) to persons creating, exchanging and transmitting digital or "virtual currencies".[4]

Cryptocurrency[edit]

Main article: Cryptocurrency

A cryptocurrency is a type of digital token that relies on cryptography for chaining together digital signatures of token transfers, peer-to-peer networking and decentralization. In some cases a proof-of-work scheme is used to create and manage the currency.[5][6][7][8]

Bitcoin[edit]

Main article: Bitcoin

Bitcoin is the most widely used and well known cryptocurrency. Many of the current cryptocurrencies are based on Bitcoin.

Criticism[edit]

  • Many of these currencies have not yet seen widespread usage, and may not be easily used or exchanged. Banks generally do not accept or offer services for them.[9]
  • There are concerns that cryptocurrencies are extremely risky due to their very high volatility[10][11] and potential for pump and dump schemes.[12]
  • Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.[13]
  • The non-cryptocurrencies are all centralized. As such, they may be shut down or seized by a government at any time.[14]
  • The more anonymous a currency is, the more attractive it is to criminals, regardless of the intentions of its creators.[14]
  • Anyone with the right skills can issue Digital Currency. It can be compared to issuing bonds with zero interest rate, no real security behind them and thus no real obligation for the issuer to pay back the amount. This means that the issuer who succeeds in selling his currency to other users, can earn a great deal of actual money at the expense of his users.
  • Forbes writer Tim Worstall was written that the value of bitcoin is largely derived from speculative trading.[15]

See also[edit]

References[edit]

  1. ^ "What is bitcoin?". CoinDesk. Retrieved 24 January 2014. 
  2. ^ "Notice 2014-21". Fact sheet. IRS. March 2014. Retrieved 25 April 2014. 
  3. ^ Levitin, Adam (March 26, 2014). "Bitcoin Tax Ruling". Blog. Retrieved 25 April 2014. 
  4. ^ "FIN-2013-G001 : Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies". Financial Crimes Enforcement Network. 18 March 2013. 
  5. ^ Wary of Bitcoin? A guide to some other cryptocurrencies, ars technica, 26-05-2013
  6. ^ What does Cryptocurrency mean?, technopedia, 01-07-2013
  7. ^ From your wallet to Google Wallet: your digital payment options, The Conversation, 26-05-2013
  8. ^ Liu, Alec. "Beyond Bitcoin: A Guide to the Most Promising Cryptocurrencies". Vice Motherboard. Retrieved 2014-01-07. 
  9. ^ Banks Mostly Avoid Providing Bitcoin Services. Lenders Don't Share Investors' Enthusiasm for the Virtual-Currency Craze
  10. ^ moneyweek.com/bitcoin-and-cryptocurrencies-the-new-dotcom-stocks/
  11. ^ Tucker, Toph. "Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last". Bloomberg BusinessWeek. Bloomberg. Retrieved 6 April 2014. 
  12. ^ O'Grady, Jason D. "A crypto-currency primer: Bitcoin vs. Litecoin". ZDNet. Retrieved 6 April 2014. 
  13. ^ Frances Schwartzkopff; Peter Levring (Dec 18, 2013). Bitcoins Spark Regulatory Crackdown as Denmark Drafts Rules. Bloomberg. Retrieved 6 April 2014. 
  14. ^ a b Zetter, Kim (9 June 2009). "Bullion and Bandits: The Improbable Rise and Fall of E-Gold". Wired. Retrieved 6 April 2014. 
  15. ^ Worstall, Tim. "Bitcoin Is More Like A Speculative Investment Than A Currency". Forbes. Retrieved 24 January 2014.