Digital currency is a form of currency or medium of exchange that is electronically created and stored (i.e., distinct from physical, such as banknotes and coins). 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.
Digital versus traditional 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.
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.
Bitcoin is the most widely used and well known cryptocurrency. Many of the current cryptocurrencies are based on Bitcoin.
- 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.
- There are concerns that cryptocurrencies are extremely risky due to their very high volatility and potential for pump and dump schemes.
- Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.
- The non-cryptocurrencies are all centralized. As such, they may be shut down or seized by a government at any time.
- The more anonymous a currency is, the more attractive it is to criminals, regardless of the intentions of its creators.
- 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.
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- European Central Bank (October 2012). "1" (PDF). Virtual Currency Schemes. Frankfurt am Main: European Central Bank. p. 5. ISBN 978-92-899-0862-7. Archived from the original on 2012-11-06.
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- Banks Mostly Avoid Providing Bitcoin Services. Lenders Don't Share Investors' Enthusiasm for the Virtual-Currency Craze
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- Worstall, Tim. "Bitcoin Is More Like A Speculative Investment Than A Currency". Forbes. Retrieved 24 January 2014.