Digital currency, as the name suggests, is a form of currency that is only available digitally. Unlike traditional currency, it doesn’t exist in physical form (such as banknotes or coins) and is stored and transferred electronically. Digital currencies can be used to “redeem” virtual and physical goods and services, and in some cases it’s possible to convert digital currencies into “real world” money and vice versa.
There are various types of digital currencies, including but not limited to cryptocurrencies like Bitcoin and Ethereum, virtual currencies (only valid within the confines of the virtual world, online game or social network that it was created for) and digital-based money such as Utoken and Ven.
Most recently, there has been a massive boom of cryptocurrencies with Bitcoin leading the way and hundreds more being launched each year. What makes cryptocurrencies different from other types of digital currencies is the underlying blockchain technology, a cryptographically protected distributed ledger, that is used to manage them. Cryptocurrencies are not issued or controlled by any central bank or government and are generated through a very resource-heavy process called mining.
Unlike centralised digital currencies, one of the biggest advantages of cryptocurrencies is the promise of privacy and anonymity. Although transactions are recorded and publicly available, they’re linked only with an electronic address. This anonymity has also made cryptocurrencies extremely popular among criminals, making it the de facto currency of the Dark Web and arguably the driving force behind the rise of large scale ransomware attacks in recent times.
But although there’s the notion that cryptocurrencies are secure, they’re most definitely vulnerable as with any other digital currency. There have been an increasing number of cases whereby third-party cryptocurrency wallet-services have been hacked and robbed. Whilst the protocol itself is secure, there exists various points of failure that can be taken advantage of, making it possible for cryptocurrencies to be stolen or lost.
Digital currencies have existed for a long time, one of the first being E-gold which was founded as early as 1996. However as we’re closing in on a cashless society, the lines between physical and digital currencies will continue to blur. Electronic money is already becoming ubiquitous while some retail stores are now accepting Bitcoin payments.