Types of Digital Currencies: Features & Pros and Cons

Cryptocurrencies are one of a kind of digital currency that uses cryptography to regulate the generations of new units and secure transactions. Blockchain technology is mainly used by cryptocurrencies to verify all transactions.

There is no known central authority to monitor and control the transactions of cryptocurrencies because of their autonomous smart contracts. Currently, Ethereum is known as the most popular platform for smart contracts.

The most important examples of cryptocurrencies are Bitcoin ($BTC) and Ethereum ($ETH) because of their prices and market cap dominating the crypto ecosystem. Depending upon the geo location, cryptocurrency may are may not be regulated.

In recent years we’ve seen some major growth in crypto currencies and their usage. Cryptocurrencies are known to be volatile in nature and it is advised to always be well-informed and up-to-date before investing in cryptocurrencies.

Virtual currency is another form of digital currency which are mainly unregulated mainly controlled and issued by its developer. This type of digital currency is only accepted electronically among the group or members of a specific virtual community.

This type of digital currency can be algorithmically controlled by a defined network and protocol. The main example of a virtual currency is a gaming network token whose nature and usability are defined and controlled by its developers.

Like any other digital assets, these virtual currency are also completely digital in nature and does not pose any kind of physical attributes. Transactions involving virtual currencies only occur through secure, dedicated networks using the internet.

Virtual currencies help increase transaction speeds as they remove intermediaries from the process, but they are also vulnerable to hacks and online scams. All virtual currencies are digital currency but all digital currencies are not virtual currency.

Central bank digital currencies are regulated forms of digital currency that are only issued by the central bank of any given country. These are usually issued with a view of supplementing or completely replacing fiat or traditional circulated currency.

Fiat currencies exist in both physical and digital forms whereas a  CBDC exists only in a digital form. England, Sweden, and Uruguay are a few of the nations that are considering the idea of launching a digital version of their national fiat currencies.

The use of CBDCs has been suggested as a means of increasing the speed and security of centralized payment systems and helping lower the costs and mishaps of handling cash. This will also help in promoting greater financial inclusion for everyone that are without access to conventional banks.

CBDC would function similarly to actual fiat currency. “If someone gives you  CBDC, it’s as if they are handing you physical money, like a $10 bill. You’d have that equivalent of 10$ money in your account and, that’s yours to use.

It is very different from electronic payments such as Paypal and ACH transfers because if you send money through PayPal is just a commitment that money is arriving. Your balance will show the amount but the actual money is not there.

According to the IMF, More than 100 countries have explored the idea of CBDCs at one level or another. Only a handful of countries and territories have CBDCs or at least have concrete plans to issue them in the near future.

Differences between cryptocurrencies, virtual currency, and CBDS are as follows:

Advantages of digital currencies are what make them very popular in current times. Below are the advantages of using digital currencies and moving on from fiat currency.

Faster payments and transaction time

With the use of digital currency, we can complete payments much faster than current means, like ACH or wire transfers. These traditional ways usually take days for financial institutions to confirm a transaction.

Since digital currencies usually exist within the same network and work without intermediaries, the amount of time required for transfers with digital currencies is extremely efficient.

Cheaper international transfers

 International currency transactions are usually very expensive because of the high charges implemented to move the funds between the borders. Currency conversion also plays a part in making it complicated.

Anyone with an internet connection can perform the transfer of money to any part of the world. These services are very useful for people who do not have access to banking institutions for remittance purposes.

Can be accessed 24/7

Existing money transferring activities often take more time usually on weekends and outside normal business hours because the banks are closed. But With these digital currencies transactions can be performed more efficiently on any day and at any time.

You don’t have to rely on the banking hours to make any transfers like it used to be. Just with the help of a phone or a computer and internet services transactions can be performed.

Support for the people with no bank accounts

According to the FDIC in a 2019 survey Around 7 million American households still do not have a bank account. They still have to pay costly transaction fees to cash their paychecks and or to perform remittance activities.

If they have access to CBDC then the people with no bank accounts can also access their money and make payments without any additional charges.

More efficient government payments

If the government developed a CBDC then it can be used to send payments like child benefits, tax refunds, and food stamps to people instantly. This will omit the process of mailing them the checks or figuring out prepaid debit cards.

This will be both a time-saving and hassle-free way to transact in bulk as well. Further government will save more money performing the activities as it requires less workforce.

Disadvantages of Digital Assets also need to be identified before blindly jumping into it. Therefore below are the lists of some major disadvantages of digital as of now:

Too many options to choose from

The current popularity of cryptocurrency can also be its downside. Every day there are so many digital currencies being created in so many different blockchains that all have their own kind of limitations.

It will still take some more time to determine which digital currencies may be suitable for certain use cases, including whether some can be used at all to scale for mass adoption. These things still need to be solved properly.

Steep learning curve

Before adopting digital currency there is still a lot of understanding to be done from a user perspective. Since it is a relatively new field, many users need to be educated and some old-generation people might be slow learners of new changes.

Many educational seminars about digital assets' usability must be conducted on the national level so that everyone is aware of it. Educating everyone might be a challenge.

Storage and Infrastructure Issues

While there is no need for any kind of physical wallet, digital currencies require their own set of storage and processing facilities. Internet connections and smartphone access are a must to access and store your funds.

Similarly, online wallets with the best security system are a must to store and safeguard your digital assets. This might need some extra research on the users' part.

Hacking  and scamming Potential

Their digital provenance puts digital currencies a risk of potential hacking and online scams. Hackers can steal your digital currency remotely online from your digital wallets are change the protocols to practically make them unusable

We hear the use of hacking and crypto scamming more and more these days and government agencies are still trying to prevent it. Therefore a secured digital asset management system is still a work-in-progress.

Limited Acceptance

As we all know digital currency is still not commonly accepted throughout the business industries as a means of payment. This is still a stumbling block for the future of digital currency as it’s slowing its evolution.

Though digital currency is gaining popularity more and more these days it is currently still difficult to make it a major mode of payment because of its acceptance issues. They are still very limited in their everyday usability.

Countries that have official digital currency are growing and as many as 130 countries are currently planning to launch their official digital currency. The growing demand for digital currency and its benefits has forced governments to launch their own digital currency.

Following is the list of countries that have launched their digital currency pilot project:

• The Bahamas
• Nigeria 
• China
• Jamaica
• UAE
• Ghana
• Singapore
• Thailand
• Eastern Caribbean
• The USA

The Bahamas

As early as 2020, This island nation became the first central bank in the world to launch a central bank digital currency called the Sand Dollar. The digital version of the Bahamas dollar is known as the Sand dollar.

This island nation currently has fully operational digital currency and people are using it for daily activities.

Nigeria

Nigeria launched its CBDC project on October 25, 2021, under the leadership of its president Muhammad Buhari called eNaira. eNaira is backed by law and the full sovereignty of Nigeria and accepted by Nigeria as a legal tender.

China

China has been exploring digital currency since 2014 but only launched its central bank digital currency program in 2020. Its digital currency is e-CYN and was introduced during the Winter Olympics where players and visitors could exchange their foreign fiat for e-CYN

Jamaica

Bank of Jamaica introduced central bank digital currency in June 2022 in a country's move to provide a cashless alternative to its economy. Its digital currency is officially known as jam-Dex and is accepted as a legal tender.

UAE

After Jamaica in October 2022, the central bank of the United Arab Emirates confirmed that it has completed the world's largest pilot program of CBDC transactions with the help of regulators from the People’s Bank of China's digital currency institute.

This project mBridge has already shown faster, more cost-effective, and more secure cross-border money transfers using central banks' money.  This project was identified as a G20 economic priority.

Ghana

In August 2021, the Central Bank of Ghana partnered with Giesecke+Devrient (G+D) to introduce its pilot project to launch its own CBDC. G+D is helping with technology as they are developing solutions as per the requirements of the country.

Singapore

The monetary authority of Singapore launched Ubin+ in November 2022, which is an expanded collaboration with international organizations for cross-border foreign exchanges utilizing CBDC.

Ubin+ will mainly focus on its business studies model and governance structure for international foreign exchange.

Thailand

Thailand’s central bank in year 2022 announced that they are expected to test their CBDC from late 2022 to the middle of 2023 for an alternative payment system. During this program, CBDC will use cash-like transactions for goods and service payments.

Eastern Caribbean

Eastern Caribbean launched its very own CBDC pilot on 12 March 2019 called XCD an international code for EC dollars. This pilot consists of securely minted their own digital currency representing EC dollars called DCash.

USA

The USA still has to introduce its own digital currency pilot project, It was recently announced that they are developing their own bank-to-bank digital currency. It was confirmed during the Singapore FinTech Festival on 4th November 2022.

Investing in central bank digital currency (CBDC) will only be possible way will be by holding the country's currency in your personal bank account. similar to holding a country's cash in your hand.

However, it is not possible for a foreign individual to hold the country's CBDC in their digital wallets. For example, a USA citizen can currently access The Bahamas Sand-Dollar in their wallet.

Every individual is required to obtain a verified username and a bank account of the particular country CBDC. Citizens of different countries cannot have the CBDC currency of another country.

Still, experts do believe this will likely be changed in the near future as more and more countries are likely to introduce their own CBDC. It is just a matter of time till everyone gets along.

Future scenario of digital currency looks very bright as we have seen cryptocurrencies like Bitcoin and Ethereum very aggressive and still look to grow even more once the bearish sentiments of the market vanish. 

Despite Countries like EL Salvador being huge adopters of cryptocurrency, the high volatility and complex nature of these currencies are making them impractical for daily application.

Many companies have made an effort to control the volatility of the crypto market by introducing stablecoins whose values are fixed to the price of a dollar. This process is done by depositing equal amount of money as the coin is issued in the market.

CDBC will be more and more likely to be introduced may more countries and we will see significant growth in the near future. The non-volatile nature of CBDC will more likely make this digital currency stable.

Digital currencies are assets that are only used for electronic monetary transactions that do not pose any kind of physical form. But they can be exchanged for regular fiat currency or other assets.

Even though the most popular form of digital currencies are cryptocurrencies like Bitcoin and Ethereum, many countries are planning to issue their very own CDBC (central banks digital currency)  as a legal tender. Some have already launched their CBDC.

CBDC could be the main mode of future payments, and it will be interesting to monitor how the market evolves as more central banks have begun to explore and adopt this technology.

It has the potential to massively revolutionize the financial world by introducing a digital currency that is more secure, more efficient, and transparent than any other. Fiat currencies will most likely be a thing of the past.