One of the benefits of digital currency is that it enables seamless transfer of value and can make transaction costs cheaper. Another disadvantage of digital currencies is that they can fluctuate in trading and are easily infiltrated by criminals.
Benefits of Digital Currencies
The benefits of digital currency are as follows:
They have instant transfer times and transactions
Because digital currencies are often present on the same network and enable transfers without mediators, the amount of time required for digital transfer transactions is much faster. Since payments in digital currencies are made directly between trading companies without the need for any intermediaries, transactions are usually faster and less expensive. This is more expensive compared to conventional payment methods involving banks or payment centers. Digital-based electronic functions also provide the required record keeping and transparency in interaction.
They do not need physical activity and cannot be contaminated
Many tangible financial requirements, such as the establishment of virtual production facilities, do not exist in the form of digital currencies. Such types of money are also incapable of physical protection or pollution that exists in real money.
They can simplify the application of monetary and financial policy
Under the current monetary policy, the Fed operates through a series of brokers – banks and financial institutions – to distribute money to the economy. CBDCs can help prevent this process and enable government agencies to enable direct payments to citizens. They also facilitate production and distribution methods by eliminating the need for physical activity and the transfer of monetary notes from one place to another.
They can make the cost of making it cheaper
Digital currencies enable direct interaction within a network. For example, a customer can pay a store owner directly as long as they are available on the same network. Even the costs involved in selling digital currency between different networks are cheaper compared to those with virtual or fiat currencies. By eliminating entrepreneurs seeking economic rent from processed transactions, digital finance can make all labor costs cheaper.
Disadvantages of Digital Money
The disadvantages of digital finance are as follows:
They do not solve all the problems of storage and infrastructure
While they do not require virtual wallets, digital currencies have their own set of storage and processing requirements. For example, an Internet connection is required along with smartphones and related services. Strong online wallets are also needed to save digital money.
They are at risk of being robbed
Their digital presence makes digital money easy to steal. Cybercriminals can steal digital money from online wallets or change the rules for digital currencies, unlikely to be used. As evidenced by numerous cases of cryptocurrencies, the acquisition of digital systems and funds is an ongoing process.
They can vary in value
The digital currencies used for trading can have wild volatility. For example, the segregation of cryptocurrencies has resulted in a myriad of digital currencies whose values are prone to sudden changes based on investor preferences. Other digital currencies have followed a similar price trend during their early days. For example, the Linden dollars used in the Second Life online game had the same variable price in its early days.
Digital Currency Types
Digital currency is an all-encompassing term that can be used to describe the different types of currencies available in the electronic space. In general, there are three different types of funds.
Cryptocurrencies are digital currencies that use cryptography to protect and secure online activities. Cryptography is also used to manage and control the creation of such funds. Bitcoin and Ethereum are examples of cryptocurrencies. Depending on the location, cryptocurrencies can be regulated or not regulated.
Cryptocurrencies are considered tangible currencies because they are not regulated and exist in digital form only.
Real estate is an uncontrolled digital currency that is controlled by an engineer or an organization that includes various stakeholders involved in the process. Virtual currencies can also be controlled algorithmically by a defined network protocol. An example of a virtual currency is a game network token whose economy is defined and controlled by engineers.
Central Bank Digital Currencies (CBDCs)
Central bank digital currencies (CBDCs) are digital currencies issued by the central bank. CBDC can be a supplement to or replace traditional fiat currency. Unlike fiat money, which is available both physically and digitally, CBDC exists in a digital way only. England, Sweden, and Uruguay are a few countries considering plans to launch a digital version of their native currency.