Digital currency or digital money is an Internet-based medium of exchange distinct from physical (such as banknotes and coins) that exhibits properties similar to physical currencies, but 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 Definition
- 2 History
- 3 Comparisons
- 4 Types of digital currencies
- 5 Regulation
- 6 Criticism
- 7 See also
- 8 References
- 9 External links
Digital currency can be defined as an Internet-based form of currency or medium of exchange distinct from physical (such as banknotes and coins) that exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies.
Origins of digital currencies date back to the 1990s 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. Q coins or QQ coins, were used as a type of commodity-based digital currency on Tencent QQ's messaging platform and emerged in early 2005. Q coins were so effective in China that they were said to have had a destabilizing effect on the Chinese Yuan or RMB currency due to speculation. 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.
In 2016, a city government first accepted digital currency in payment of city fees. Zug, Switzerland added bitcoin as a means of paying small amounts, up to SFr 200, in a test and an attempt to advance Zug as a region that is advancing future technologies. In order to reduce risk, Zug immediately converts any bitcoin received into the Swiss currency.
Digital versus virtual currency
According to the European Central Bank's "Virtual currency schemes – a further analysis" report of February 2015, virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money. In the previous report of October 2012, the virtual currency was defined 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.
According to the Bank For International Settlements' "Digital currencies" report of November 2015, digital currency is an asset represented in digital form and having some monetary characteristics. Digital currency can be denominated to a sovereign currency and issued by the issuer responsible to redeem digital money for cash. In that case, digital currency represents electronic money (e-money). Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency.
As such, bitcoin is a digital currency but also a type of virtual currency. Bitcoin and its alternatives are based on cryptographic algorithms, so these kinds of virtual currencies are also called cryptocurrencies.
Digital versus traditional currency
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.
Types of digital currencies
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. See also list of cryptocurrencies.
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
Securities and Exchange Commission guidance
New York state regulation
In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date, commonly called BitLicense. Unlike the US federal regulators it has gathered input from bitcoin supporters and the financial industry through public hearings and a comment period until 21 October 2014 to customize the rules. The proposal per NY DFS press release “... sought to strike an appropriate balance that helps protect consumers and root out illegal activity". 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".
- 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.
- There may be significant legal issues around security interests in bitcoin under the Uniform Commercial Code.[vague]
- 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 a 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.
|Wikimedia Commons has media related to digitalcurrency.|
- "What is bitcoin?". CoinDesk. Retrieved 24 January 2014.
- "Digital vs. Virtual Currencies". Andrew Wagner. Retrieved 1 December 2014.
- Jack Cloherty (28 May 2013). "'Black Market Bank' Accused of Laundering $6B in Criminal Proceeds". ABC News. Retrieved 28 May 2013.
- "'China's virtual currency threatens the Yuan'". Asia Times Online. 5 December 2006. Retrieved 14 May 2016.
- Uhlig/jse, Christian (1 July 2016). "Alpine 'Crypto Valley' pays with Bitcoins". DW Finance. Archived from the original on 20 September 2016. Retrieved 20 September 2016.
- 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 (PDF) from the original on 6 November 2012.
- Wary of Bitcoin? A guide to some other cryptocurrencies, ars technica, 26-05-2013
- What does Cryptocurrency mean?, technopedia, 01-07-2013
- From your wallet to Google Wallet: your digital payment options, The Conversation, 26-05-2013
- Liu, Alec. "Beyond Bitcoin: A Guide to the Most Promising Cryptocurrencies". Vice Motherboard. Retrieved 7 January 2014.
- "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.
- Bobelian, Michael (9 May 2014). "SEC Warns Investors To Beware Of Bitcoin". Forbes. Retrieved 2 October 2014.
- Bobelian, Michael (25 July 2014). "New York's Financial Regulator, Benjamin Lawsky, Maintains Lead On Bitcoin Regulation". Forbes. Retrieved 3 October 2014.
- "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.
- SydneyEmber (21 August 2014). "More Comments Invited for Proposed Bitcoin Rule". DealBook. NY Times. Retrieved 3 October 2014.
- Banks Mostly Avoid Providing Bitcoin Services. Lenders Don't Share Investors' Enthusiasm for the Virtual-Currency Craze
- Tucker, Toph. "Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last". Bloomberg BusinessWeek. Bloomberg. Retrieved 6 April 2014.
- O'Grady, Jason D. "A crypto-currency primer: Bitcoin vs. Litecoin". ZDNet. Retrieved 6 April 2014.
- Frances Schwartzkopff; Peter Levring (18 December 2013). Bitcoins Spark Regulatory Crackdown as Denmark Drafts Rules. Bloomberg. Retrieved 6 April 2014.
- Cowan, Miles. "Uniform Commercial Code and Bitcoin". We Use Coins. Retrieved 27 November 2014.
- Zetter, Kim (9 June 2009). "Bullion and Bandits: The Improbable Rise and Fall of E-Gold". Wired. Retrieved 6 April 2014.
- Worstall, Tim. "Bitcoin Is More Like A Speculative Investment Than A Currency". Forbes. Retrieved 24 January 2014.
- 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.