What Is a Digital Coin?
The rapid rise of cryptocurrencies and the emerging DeFi sector have made digital coins the focus of attention by central banks and regulators worldwide. Yet the lack of clear rules for this emerging space raises concerns about fraud, security, speculative investment, privacy and financial stability.
Digital Coin is any currency, money-like asset, or token that’s primarily managed, stored or exchanged on digital computer systems—especially over the internet. It’s an essential component of a larger economic system called Financial Technology (FinTech).
Cryptocurrency is the most well-known and widely traded form of digital coins, but there are many other options as well. Some, like Bitcoin, are “tokens” that represent ownership of the blockchain, while others (called altcoins) offer a more traditional value proposition. In general, a cryptocurrency’s value is determined by the market—which means that its price can fluctuate dramatically.
In the past decade, digital currencies have exploded in popularity around the world. Unlike cash, which is physical, a digital currency can be instantly and globally transferred to anyone with an internet connection. People are also using digital payments more than ever before, with most transactions occurring online rather than in a bank branch. Globally, we’re now transacting more than $2 trillion every day online—with that number expected to grow significantly over the next few years.
As the COVID-19 pandemic drove people to abandon cash in favor of electronic transfers, a growing number of people have been looking for alternative ways to conduct their financial transactions. This led to the introduction of cryptocurrencies, such as Bitcoin, which uses blockchain technology to allow for secure and transparent transactions. Cryptocurrencies have a number of advantages over traditional payment methods, including the ability to conduct transactions without any government interference, and their global reach allows for easier cross-border payments. However, the high volatility of many cryptocurrencies makes them less than ideal as a store of value.
One potential solution is to introduce a stablecoin—an official, government-backed crypto that’s designed to hold its value over time. Stablecoins could be a useful way to bridge the gap between fiat currencies and cryptocurrencies, as they’d provide the safety of fiat currency with the benefits of digital innovation. The RBA has begun experimenting with a prototype stablecoin and hopes to continue to explore this area of policy.
Another option being explored is to issue central bank digital coins (CBDCs), which would be backed by the assets of a country’s central bank. These would be a powerful new tool for governments, allowing them to create digital forms of stimulus payments and other benefits that can be issued directly to citizens—and to reduce the risk of crypto speculation. But CBDCs could also centralize an enormous amount of data and risk in the hands of a single institution, raising questions about privacy and cybersecurity.