Digital currency

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Digital currency or digital money is an internet based medium of exchange (i.e., distinct from physical, such as banknotes and coins) that exhibits properties similar to physical currencies, however, allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies, but the converse is incorrect. 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 currencies such as bitcoin are known as "decentralized digital currencies," meaning that there is no central point of control over the money supply.

Definition[edit]

Digital currency can be defined as an internet based form of currency or medium of exchange (i.e., distinct from physical, such as banknotes and coins) that exhibits properties similar to physical currencies, however, allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies, but the converse is incorrect.[2]

History[edit]

Origins of digital currencies date back to the 1990's Dot-com bubble. One of the first was E-gold, founded in 1996 and backed by gold. Another known digital currency service was Liberty Reserve, founded in 2006; it let users convert dollars or euros to Liberty Reserve Dollars or Euros, and exchange them freely with one another at a 1% fee. Both services were centralized, reputed to be used for money laundering, and inevitably shut down by the US government.[3] Recent interest in cryptocurrencies, has prompted renewed interest in digital currencies, with Bitcoin, introduced in 2009, becoming the most widely used and accepted digital currency.

Comparisons[edit]

Digital versus virtual currency[edit]

"Virtual" can be defined as "not based in physical reality," and virtual currencies are those which are not intended for use in "real life," or for expenditures on real assets. Consequently, most virtual currencies can be found in online gaming and are subject to centralized authority, with the control of the money supply resting in the hands of the virtual world's developers. An example of a purely virtual currency is Amazon Coins.

In contrast, "Digital" currencies can be used to facilitate payment for physical goods and services in "real life," thus, inhabiting similar characteristics to traditional physical currencies in that respect. Furthermore, digital currencies can be used to facilitate payment in-person at physical business establishments.[4]

As such, bitcoin is often mistakenly classified as a virtual currency, in which it is actually a digital-cryptocurrency. This is exemplified by bitcoin's unique ability to provide effective utility as an effective currency in the "real-world" for physical-goods and services.

Digital versus traditional currency[edit]

Most of the traditional money supply is bank money held on computers. This is also considered digital currency. One could argue that our increasingly cashless society means that all currencies are becoming digital (sometimes referred to as “electronic money”), but they are not presented to us as such.[5]

Types of digital currencies[edit]

Virtual currency[edit]

Main article: Virtual currency

A virtual currency has been defined in 2012 by the European Central Bank as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community". The US Department of Treasury in 2013 defined it more tersely as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency". The key attribute a virtual currency does not have according to these definitions, is the status as legal tender.

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.[6][7][8][9] To view a list of cryptocurrencies click here

Bitcoin, an example of a decentralized, convertible digital currency[edit]

Main article: Bitcoin

Bitcoin is the first truly decentralized global currency system, and at the same time the largest digital currency as of 2014.[10] Trust in the currency is based on the "transaction ledger which is cryptographically verified, and jointly maintained by the currency’s users". The Bitcoin Foundation claims that Bitcoin was "designed to be fully decentralized with miners operating in all countries, and no individual having control over the network",[11] and that Bitcoin is "as virtual as the credit cards and online banking networks people use everyday".[12]

"Bitcoin mining has become increasingly centralized",[13] and cryptologic researchers have questioned, if Bitcoin is indeed a decentralized currency.[14] To improve Bitcoin's decentralization, they suggest to encourage fully decentralized mining pools, allow only 1 vote per Bitcoin client, and to increase transparency in decision making.[14]

Regulation[edit]

Virtual currencies pose challenges for central banks, financial regulators, departments or ministries of finance, as well as fiscal authorities and statistical authorities.

US Treasury guidance[edit]

On 20 March 2013, the Financial Crimes Enforcement Network issued a guidance to clarify how the US Bank Secrecy Act applied to persons creating, exchanging and transmitting virtual currencies.[15]

Securities and Exchange Commission guidance[edit]

In May 2014 the U.S. Securities and Exchange Commission (SEC) "warned about the hazards of Bitcoin and other virtual currencies".[16]

New York state regulation[edit]

In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date.[17] Unlike the US federal regulators it has gathered input from Bitcoin supporters and the financial industry through public hearings and a comment period until October 21, 2014 to customize the rules. The proposal would curb anonymity of the consumer,[not in citation given] yet per NY DFS press release “... sought to strike an appropriate balance that helps protect consumers and root out illegal activity".[18] It has been criticized by smaller companies to favor established institutions, and Chinese bitcoin exchanges have complained that the rules are "overly broad in its application outside the United States".[19]

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.[20]
  • There are concerns that cryptocurrencies are extremely risky due to their very high volatility[21][22] and potential for pump and dump schemes.[23]
  • Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.[24]
  • The non-cryptocurrencies are all centralized. As such, they may be shut down or seized by a government at any time.[25]
  • The more anonymous a currency is, the more attractive it is to criminals, regardless of the intentions of its creators.[25]
  • 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 has written that the value of bitcoin is largely derived from speculative trading.[26]

See also[edit]

References[edit]

  1. ^ "What is bitcoin?". CoinDesk. Retrieved 24 January 2014. 
  2. ^ "Digital vs. Virtual Currencies". Andrew Wagner. Retrieved 1 December 2014. 
  3. ^ Jack Cloherty (May 28, 2013). "'Black Market Bank' Accused of Laundering $6B in Criminal Proceeds". ABC News. Retrieved May 28, 2013. 
  4. ^ "Digital vs. Virtual Currencies". Andrew Wagner. Retrieved 30 November 2014. 
  5. ^ European Central Bank (October 2012). "1". Virtual Currency Schemes (PDF). Frankfurt am Main: European Central Bank. p. 5. ISBN 978-92-899-0862-7. Archived from the original on 2012-11-06. 
  6. ^ Wary of Bitcoin? A guide to some other cryptocurrencies, ars technica, 26-05-2013
  7. ^ What does Cryptocurrency mean?, technopedia, 01-07-2013
  8. ^ From your wallet to Google Wallet: your digital payment options, The Conversation, 26-05-2013
  9. ^ Liu, Alec. "Beyond Bitcoin: A Guide to the Most Promising Cryptocurrencies". Vice Motherboard. Retrieved 2014-01-07. 
  10. ^ Decker, C.; Wattenhofer, R. (11 September 2013). "Information propagation in the Bitcoin network" (PDF). IEEE Thirteenth International Conference on Peer-to-Peer Computing (P2P). Archived from the original on 2014-03-24. 
  11. ^ "What is Bitcoin mining?". FAQ. Bitcoin Foundation. Archived from the original on 2014-03-15. 
  12. ^ "Is Bitcoin fully virtual and immaterial?". FAQ. Bitcoin Foundation. Archived from the original on 2014-03-15. 
  13. ^ Lee, Timothy (4 July 2013). "Four Reasons Bitcoin Is Worth Studying". Forbes. Retrieved 6 October 2014. 
  14. ^ a b Gervais, A; Karame, G; Capkun, S; Capkun, V (2013). "Is Bitcoin a Decentralized Currency?". 829/2013. International Association for Cryptologic Research. Archived from the original on 2014-01-31. 
  15. ^ "FIN-2013-G001: Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies". Financial Crimes Enforcement Network. 18 March 2013. p. 6. Archived from the original on 2013-03-19. 
  16. ^ Bobelian, Michael (9 May 2014). "SEC Warns Investors To Beware Of Bitcoin". Forbes. Retrieved 2 October 2014. 
  17. ^ Bobelian, Michael (25 July 2014). "New York's Financial Regulator, Benjamin Lawsky, Maintains Lead On Bitcoin Regulation". Forbes. Retrieved 3 October 2014. 
  18. ^ "NY DFS RELEASES PROPOSED BITLICENSE REGULATORY FRAMEWORK FOR VIRTUAL CURRENCY FIRMS". New York State Department of Financial Services. 17 July 2014. Retrieved 8 October 2014. 
  19. ^ SydneyEmber (21 August 2014). "More Comments Invited for Proposed Bitcoin Rule". DealBook (NY Times). Retrieved 3 October 2014. 
  20. ^ Banks Mostly Avoid Providing Bitcoin Services. Lenders Don't Share Investors' Enthusiasm for the Virtual-Currency Craze
  21. ^ moneyweek.com/bitcoin-and-cryptocurrencies-the-new-dotcom-stocks/
  22. ^ Tucker, Toph. "Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last". Bloomberg BusinessWeek. Bloomberg. Retrieved 6 April 2014. 
  23. ^ O'Grady, Jason D. "A crypto-currency primer: Bitcoin vs. Litecoin". ZDNet. Retrieved 6 April 2014. 
  24. ^ Frances Schwartzkopff; Peter Levring (Dec 18, 2013). Bitcoins Spark Regulatory Crackdown as Denmark Drafts Rules. Bloomberg. Retrieved 6 April 2014. 
  25. ^ a b Zetter, Kim (9 June 2009). "Bullion and Bandits: The Improbable Rise and Fall of E-Gold". Wired. Retrieved 6 April 2014. 
  26. ^ Worstall, Tim. "Bitcoin Is More Like A Speculative Investment Than A Currency". Forbes. Retrieved 24 January 2014. 


External links[edit]

  • List of digital currencies Non-exhaustive list of some digital currencies.
  • What is Bitcoin? by CoinDesk A generalized introduction and Q&A regarding the most widely used digital currency: bitcoin.
  • UK Digital Currency Association Non-profit organisation to inform public debate and promote growth-friendly policy and regulation for digital currencies in the United Kingdom
  • Chamber of Digital Commerce The Digital Chamber is an authoritative representative for the digital commerce industry in Washington, promoting the acceptance and use of digital assets.
  • Digital Currency Council Training, certification & support for lawyers, accountants, and financial professionals in the digital currency economy.