Digital currency is a category of currency that exists electronically. Currencies are a form of money with 3 main functions:
- unit of account
- medium of exchange
- store of value
They are digital representation of currency, instead of physical representation like coins and dollar bills.
Characteristics of Digital Currencies
Digital currencies can be used to exchange for funds or other digital currencies. They are a digital representation of value that can be used for payment or investment purpose. Unlike digital assets, digital currencies are a more specific area of asset class that focuses on medium of exchange, a unit of account and store of value.
Added advantages that digital currency has over physical currency include, but not limited to:
- instantaneous transactions
- automatic update of accounting ledger
- cross-border transfer of ownership
3 Types of Digital Currencies
Virtual currency is type of digital money that is unregulated and accepted among a specific digital ecosystem or community. It has similar characteristics as traditional fiat money, except that is it not legal tender and not issued by a central bank.
Privately issued Cryptocurrency
Private issued cryptocurrency is a digital currency issued on DLT and secured with cryptography. Hence the term, “crypto” and “currency”.
Central bank issued digital currency (CBDC)
CBDC is a digital form of fiat money. Fiat money is money established that government regulation or law. It is issued by the state or central bank. Other terminologies include digital fiat currency or digital base money.
Base money is money in the economy. That includes money held by commercial bank’s reserves, total money circulating in the public and cash that is held in the bank’s vault. It is money that is liquid, meaning you can change them to other assets without difficulty.