Is digital currency the future of money?
Money is the anchor of modern society. Barter which began with items like animal skins, salt, weapons, etc., over time gave way to money, the medium of exchange based on paper and coins . The evolution of money gave birth to digital currency. Digital currencies are a global superset for currencies such as digital currency, electronic money, electronic money, electronic money, cybermoney, and virtual currency, which includes cryptocurrencies. Digital currency can also mean traditional monetary assets in digital format.
From a legal standpoint, there are basically two types of digital currencies; Central bank digital currency (CBDC) denominated in a sovereign currency, which issues a digital form of its fiat currency and the digital currency of the non-central bank controlled by the developer (s), founder (s) or a defined network protocol.
What is virtual currency?
Virtual currency is a currency created and held within the blockchain network without central control or centralized banking authority. Virtual currency transactions are typically instant and run at lower costs compared to traditional payment methods that require banks or clearing houses to guide transactions. Electronic transactions based on virtual currency do not have a central clearing house but are supported by the necessary record keeping, ensuring transparency of all transactions. Virtual currencies can be monetary systems linked to cryptocurrencies, coupons or rewards. The first cryptocurrency, Bitcoin, was created in 2009 by an unidentified person (s) using the pseudonym Satoshi Nakamoto. Cryptocurrencies are unregulated and rely on cryptography as a system of management, control, verification, security, and mechanism for creating new currencies. Besides Bitcoin and Ethereum, other virtual currencies are Litecoin (LTC), Cardona (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), ChainLink, Binance Coin (BNB), Tether (USDT), Monero (XMR) etc.
Cryptocurrencies are open to the general public and anyone can join and start a transaction. The volatility and lack of control in this area, however, means that unscrupulous people can create situations to defraud people. Additionally, cryptocurrencies are unstable. One way to solve this problem is to use so-called stable coins, for example, a reserve asset (external benchmark) such as the US dollar or the price of commodities like gold which uses different methods to achieve the stability of the price. In addition, some entities support cryptocurrency, for example Facebook’s currency called Diem (formerly known as Libra).
What is central bank digital currency (CBDC)
The CBDC is a digital currency issued and regulated by a central bank as a legally mandated monetary authority for a particular territory. The CBDC is centralized and uses an electronic registration or token issued by a central bank. The Bank for International Settlements (BIS) recommends 14 characteristics for the CBDC, the overriding characteristic being that it aligns with the financial stability objective of a central bank as a critical monetary institution of a country.
Many central banks are still looking to issue CBDCs. China is at the forefront and recently started issuing CBDCs to its citizens as part of a pilot program. According to https://www.atlanticcouncil.org/cbdctracker/, which tracks 83 countries / currency unions in terms of CBDC status, revealed the following: 5 countries have now fully launched a digital currency, 14 countries are in pilot phase, 16 developing countries and 32 researching countries, ten countries are inactive, two have canceled and four countries are still working on options. The Bank of Ghana is expected to start piloting the fully cedi-backed digital currency in 2021.
Virtual currency versus digital currency
Virtual currencies are different from digital currency in several ways. Digital currency is just a form of digital currency issued by a bank in digital format, such as a digital dollar, digital euro, or digital yuan. Second, virtual currencies are more volatile and lack the security offered by digital currency since central banks do not support them. Digital currency can be issued by central banks without any limit compared to cryptocurrency like Bitcoin, which is limited since the number of Bitcoins cannot exceed 21 million, a limit encoded in Bitcoin’s source code and enforced by the nodes of the network. Finally, the price of cryptocurrency is set by supply and demand, while the value of digital currency is based on legal tender.
This author expects more and more countries to start issuing CBDCs, and this is likely to run alongside traditional currency. Ultimately, the prediction is that this CBDC will be the country’s official currency in the long run. Traditional paper-based currency and coins are nearing the end of their lifespan, and there will be fierce competition between the CBDC and the replacement cryptocurrency. Ultimately, some form of digital currency, regulated or unregulated, will surely prevail.
Kwami Ahiabenu, II is a consultant in technological innovations