What is a digital currency?
Digital currency is money that exists in an electronic form. Many of us still imagine money as physical banknotes and coins. But the vast majority of money in the world today is digital. In fact, only 8% of the world’s money exists in a physical form.
Most trade is global. People no longer have to rely on local options for their lifestyle and shopping choices. Business people are just as likely to find a business partner on another continent as in the same city. Physical money is simply outdated for the needs of a fast-paced, digital society. That’s why money is increasingly digitized.
You can’t put digital money in your pocket or hand it to a cashier in a shop. To do this with the physical form of currencies like euros, pounds or dollars, you’d need to go to a bank or cash machine to withdraw your funds. Digital money can only be transacted and owned in digital form. This means that we need to use digital accounts that are connected to a payments network in order to spend or transact with digital currencies.
Most electronic money is a digital representation of the physical money used every day around the world. Every time you order online or pay your rent through online banking, you are using digital currency. Most of this digital money is issued and managed by institutions like national central banks. For electronic forms of currencies like dollars that are issued by governments, otherwise known as fiat currencies, banks are needed to validate transactions. Banks do this by checking that payments are made and that currency used in the transaction hasn’t already been spent on something else.
Why do we need digital currency?
Digital currency has a lot of benefits. Digital payments make things easier and cheaper. We can now purchase products and services in different countries at the click of a button. Workers can send money to their families on the other side of the world.
Lots of digital currency companies were formed in the early 1990s to try and help improve the digitalization of the monetary system. The only problem was the people didn’t know much about the internet or what it was capable of, so it took a long time for consumers to realize that e-commerce was possible let alone trustworthy. Consequently, most of the early digital payments companies went bankrupt. Digital currency payments only truly kicked off when PayPal was invented, which made e-commerce easy for both consumers and businesses. Thanks to digital currency, we now live in a world where anything can be obtained at the click of a button.
Electronic money is particularly useful for the traditional financial system because the usual liquidity requirements for banks do not apply. Normally, banks have to have a certain amount of physical money on-site, but there are no restrictions for digital money. This means that banks can shift billions in transactions and payments without ever having to handle physical cash.