Digital currency

Digital currency refers to any money or money-like asset managed on digital computer systems. This includes assets exchanged over the internet. It can be stored in centralized electronic databases owned by banks. It can also exist on distributed databases or within digital files. Some digital currencies are kept on stored-value cards. Unlike traditional fiat currency, digital money lacks a classical physical form. You cannot hold printed banknotes or minted coins in your hand. Instead, it has an unclassical physical form. This form comes from the information and processing power of servers. It also involves computer-to-computer and computer-to-human interactions. This digital nature allows for nearly instantaneous transactions. It also greatly lowers the cost of distributing money. For example, in the UK, only 3% of the money supply consists of notes and coins. About 79% is electronic money held as bank deposits.

Digital currency systems are categorized by how they are controlled. Centralized systems have a single point of control over the money supply. A bank is a common example of a centralized authority. In contrast, decentralized systems have control that is predetermined or agreed upon democratically. This means no single entity manages the entire supply. Within these systems, there are several distinct sub-types. One major type is virtual currency. The European Central Bank defines virtual currency as unregulated digital money. These are usually controlled by their developers. They are often used within specific virtual communities. Another type is cryptocurrency. Cryptocurrencies are a sub-type of digital currency and digital assets. They rely on cryptography to manage asset transfers. They use peer-to-peer networking and decentralization to function.

Cryptocurrencies often use a specific mechanism called a blockchain. A blockchain is a digital ledger or record-keeping system. It uses cryptography to edit database entries called shards. These shards are distributed across many separate servers. Some systems use a proof-of-work or proof-of-stake scheme. These schemes help create and manage the currency. Because they use these distributed ledgers, they can be decentralized. This allows users to transfer value across borders easily. The speed of a transaction does not depend on the location of the payer or the payee. This is a major difference from many traditional systems.

The history of digital currency began with early electronic payment ideas. The Sabre travel reservation system was one such precursory idea. In 1983, David Chaum published a paper on untraceable payments. This paper introduced the concept of digital cash. Chaum founded DigiCash in Amsterdam in 1989 to commercialize these ideas. However, DigiCash filed for bankruptcy in 1998. In 1996, e-gold became the first widely used internet money. It grew to serve several million users. The US Government eventually shut it down in 2008. Other milestones include Coca-Cola offering mobile payments in 1997. PayPal also launched its USD-denominated service in 1998. These developments paved the way for modern digital finance.

A major turning point occurred in 2009 with the launch of bitcoin. Bitcoin marked the start of decentralized blockchain-based digital currencies. It has no central server and no tangible assets held in reserve. This makes it resistant to attempts by governments to regulate it. There is no central organization that can turn it off. Other notable examples include Tencent QQ's Q coins in 2005. These were commodity-based digital currencies used on a messaging platform. They were so effective in China that they caused speculation. This speculation had a destabilizing effect on the Chinese yuan. Another service, Liberty Reserve, was founded in 2006. It allowed users to exchange dollars or euros for its own units. This service was later prosecuted by the U.S. government.

Modern users often interact with digital currency through mobile digital wallets. These wallets facilitate easy contactless payment transfers. In 1994, the Mondex and National Westminster Bank provided an "electronic purse" in Swindon. In 2005, the Mobipay system launched in Spain using mobile phones. Venmo launched in 2010 as a mobile payment system using SMS. It became a popular social app for paying small expenses like coffee or rent. Google Wallet was released in the United States in 2011. Apple Pay was announced in 2014 for iPhone users. These tools allow people to carry credit and debit cards on their phones. They represent the practical, everyday application of digital money technology.

Governments are also creating their own digital currencies called CBDCs. A Central Bank Digital Currency is a universally accessible form of digital money. It holds the same value as a nation's paper currency. CBDCs are held in the form of tokens. They are different from regular online bank accounts. This is because they are established directly through a country's central bank. The liabilities are held by the government rather than a commercial bank. Approximately nine countries have already established a CBDC. These are used to exchange value and manage financial risks. However, CBDCs raise questions about whether currency should be easily trackable. If it is traceable, the government gains more control. There are also technical debates regarding anonymity and whether to use tokens or accounts.