Digital currency, also called digital currency, electronic money or electronic currency, unlike cash such as banknotes and coins, is not a physical object that can be touched or handled with the hands, because it is an intangible object or rather, information, stored electronically in the electronic memory of computers. Digital currency is an electronically issued currency whose transferability into fiat currency is not guaranteed by the State.
Don’t get confused by these two basic terms: e-money and digital currency. Electronic money is the digital equivalent of cash. Electronic money is a payment instrument through which the monetary value is stored electronically on a technical device in the customer’s possession. The amount of stored monetary value is decreased or increased, as appropriate, each time the owner of the device uses it to carry out a purchase, sale, loading or unloading transactionTransaction Exchange of value, property, or data between two parties.. Digital currency, on the other hand, is an electronically issued currency whose transferability into fiat currency is not guaranteed by the State. Let’s see more in detail.
How digital currency works
Every time you pay with your credit card at the supermarket or make a wire transfer to the dealership that sold you the car, you are essentially moving digital currency from your checking account to the supermarket’s checking account or the dealer’s checking account. If you have $10,000 in your checking account and you wire $1,000 to the dealer who sold you the car, your bank updates this account information, setting the balance to $9,000, and informs the dealer’s bank that you he sold the car. The bank of the dealer who sold you the car, in turn, updates the dealer’s current account balance, increasing it by 1000 dollars. Obviously the operations just seen are much more complex than that and take place thanks to the intervention of special software managed by the the national and international banking system.
Centralized and decentralized digital currency
Digital currency can be centralized or decentralized. Centralized digital currencies are often issued by a private actor. Examples of digital currencies are: E-gold, Liberty Reserve, WoW Gold, Linden Dollar. When a digital currency is issued by a central bank, we call it Central Bank Digital Currency (CBCD). A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government. Examples of CBDC are: Sand Dollar, e-CNY, Digital Euro, Project Stella. Centralized digital currency is regulated by governments. Decentralized digital currency, on the countrary, is not issued by a central bank and is not bound by centralized government supervision.
A bit of history
In 1989 David Chaum (an American computer scientist and cryptographer), founded DigiCash, an electronic cash company. However it filed for bankruptcy in 1998 saying that It was hard to get enough merchants to accept DigiCash, so that you could get enough consumers to use it, or vice versa.
Over the years, a whole series of startups began creating digital currencies that were supposed to power the Web and replace notes and coins. However, first one and then the other, all these startups failed. No one seemed to want these digital currencies: not the banks, not the merchants, not even the consumers. This probably happened because no one trusted a currency created and managed by a private individual and not by a central institution controlled by governments.
E-gold was the first widely used Internet money, introduced in 1996, and grew to several million users before the US Government shut it down in 2008. e-gold has been referenced to as “digital currency” by both US officials and academia.
In 1997, Coca-Cola offered buying from vending machines using mobile payments.
PayPal launched its USD-denominated service in 1998.
In 2009, bitcoin was launched.
Regulamentation
In the United States, electronic money is governed by Article 4A of the Uniform Commercial Code (1952) for wholesale transactionsTransaction Exchange of value, property, or data between two parties. and the Electronic Fund Transfer Act (1978) for consumer transactions. Since 2001, the European Union has implemented the E-Money Directive “on the taking up, pursuit and prudential supervision of the business of electronic money institutions” last amended in 2009. As of 2016, over 24 countries are investing in distributed ledger technologies. In addition, over 90 central banks are engaged in DLT discussions, including implications of a central bank issued digital currency.