What is Digital Coin?
While it may not be as familiar to consumers as cash, Digital Coin is increasingly a vital part of the world’s financial system. Valued at trillions of dollars, cryptocurrencies are now held as investments, used to pay for goods and services, and even traded on illicit markets like the Dark Web. They have also helped millions of people reclaim their financial independence.
The digital currency movement was catalyzed by the rise of Bitcoin and has since grown to encompass many more types of tokens backed by blockchain technology. Many of these are “stablecoins” that aim to be a replacement for fiat currencies, offering the speed and low transaction fees associated with credit cards or international remittance services like Western Union. Stablecoins can be used in any country with a smartphone and offer the opportunity to bring millions of people into the global economic system who have previously been excluded by traditional banking.
What’s more, digital coins can be transferred quickly and anonymously, with no need for a central authority to approve or charge a fee. This has made them attractive to a range of users, including dissidents in authoritarian countries who raise funds in Bitcoin to avoid state controls and terrorist groups seeking to circumvent sanctions and avoid the U.S. dollar’s dominance as the international reserve currency.
A digital currency can be “hard” or “soft.” Hard electronic money is similar to cash and cannot be reversed unless there is an argument for why a transaction should be reversed. In contrast, soft electronic money allows a payment to be reversed, although there is typically a significant delay between when a payment is submitted for a refund and when it is actually refunded.
Cryptocurrencies are not the first attempts to create a digital coin. Various systems have been attempted in the past, often by libertarian-minded individuals known as Cypherpunks. However, most of these efforts failed because of a key problem: a lack of an effective way to prevent double spending. If a digital coin can be copied and sent to several recipients, it loses its value.
One solution is to have a trusted centralized entity issue, distribute, and verify cryptocurrency units. But this was not acceptable to the Cypherpunks, who wanted a completely decentralized solution. So they created a cryptocurrency that relied on an open-source cryptography protocol to ensure the integrity of transactions.
Unlike existing money transfers, digital transactions work at the same speed 24 hours a day and can be processed instantly, eliminating costly delays caused by bank holidays or closures. They also reduce costs by cutting out middlemen that seek economic rent from processing a transaction.
With their benefits and risks, it is no wonder that many central banks are considering creating their own digital currencies. This is an opportunity for them to harness technological innovations while ensuring financial stability and consumer protection. But the development of a central-bank-issued digital coin will take time and will be complicated by issues like privacy, security, and interoperability with other payment networks.