DEFINITION of 'Digital Currency'

A digital currency is a form of currency that is available only in digital or electronic form, and not in physical form. It is also called digital money, electronic money, electronic currency, or cyber cash.

BREAKING DOWN 'Digital Currency'

Digital currencies are intangible and can only be owned and transacted in by using computers or electronic wallets which are connected to the Internet or the designated networks. In contrast, the physical currencies, like bank notes and minted coins, are tangible and transactions are possible only by their holders who have their physical ownership.

Like any standard fiat currency, digital currencies can be used to purchase goods as well as to pay for services, though they can also find restricted use among certain online communities, like gaming sites, gambling portals, or social networks.

Digital currencies have all intrinsic properties like a physical currency, and they allow for instantaneous transactions that can be seamlessly executed for making payments across the borders when connected to supported devices and networks. For instance, it is possible for an American to make payments in a digital currency to a distant counterparty residing in Singapore, provided that they both are connected to the same network required for transacting in the digital currency.

Digital currencies offer numerous advantages. As payments in digital currencies are made directly between the transacting parties without the need of any intermediaries, the transactions are usually instantaneous and zero- to low-cost. This fares better compared to traditional payment methods that involve banks or clearing houses. Digital currency based electronic transactions also bring in the necessary record keeping and transparency in dealings.

Difference between Digital, Virtual, and Crypto Currencies

Since they exist in a lot of variants, digital currencies can be considered a superset of virtual currencies and cryptocurrencies.

If issued by a central bank of a country in a regulated form, it is called the “Central Bank Digital Currency (CBDC).” While the CBDC only exists in conceptual form, England, Sweden and Uruguay are few of the nations that have considered plans to launch a digital version of their native fiat currencies.

Along with the regulated CBDC, a digital currency can also exist in unregulated form. In the latter case, it qualifies for being called a virtual currency and may be under the control of the currency developer(s), the founding organization, or the defined network protocol, instead of being controlled by a centralized regulator. Examples of such virtual currencies include cryptocurrencies, and coupon- or rewards-linked monetary systems.

A cryptocurrency is another form of digital currency which uses cryptography to secure and verify transactions and to manage and control the creation of new currency units. Bitcoin and Ethereum are the most popular cryptocurrencies. Since cryptocurrencies are unregulated, they are also considered to be virtual currencies. (See also, 'Bitcoin Is Like Regular Currency': St. Louis Fed.)

Essentially, both virtual currencies and cryptocurrencies are considered as forms of digital currencies.

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