Digital currency – Wikipedia

Digital currency or digital money is an Internet-based medium of exchange distinct from physical (such as banknotes and coins) that exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies, but the converse is incorrect. Like traditional money these currencies may be used to buy physical goods and services but could also be restricted to certain communities such as for example for use inside an on-line game or social network.[1]

Digital currency can be defined as an Internet-based form of currency or medium of exchange distinct from physical (such as banknotes and coins) that exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies.[2]

Origins of digital currencies date back to the 1990s Dot-com bubble. One of the first was E-gold, founded in 1996 and backed by gold. Another known digital currency service was Liberty Reserve, founded in 2006; it let users convert dollars or euros to Liberty Reserve Dollars or Euros, and exchange them freely with one another at a 1% fee. Both services were centralized, reputed to be used for money laundering, and inevitably shut down by the US government.[3] Q coins or QQ coins, were used as a type of commodity-based digital currency on Tencent QQ's messaging platform and emerged in early 2005. Q coins were so effective in China that they were said to have had a destabilizing effect on the Chinese Yuan or RMB currency due to speculation.[4] Recent interest in cryptocurrencies has prompted renewed interest in digital currencies, with bitcoin, introduced in 2009, becoming the most widely used and accepted digital currency.

According to the European Central Bank's "Virtual currency schemes a further analysis" report of February 2015, virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money. In the previous report of October 2012, the virtual currency was defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.

According to the Bank For International Settlements' "Digital currencies" report of November 2015, digital currency is an asset represented in digital form and having some monetary characteristics. Digital currency can be denominated to a sovereign currency and issued by the issuer responsible to redeem digital money for cash. In that case, digital currency represents electronic money (e-money). Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency.

As such, bitcoin is a digital currency but also a type of virtual currency. Bitcoin and its alternatives are based on cryptographic algorithms, so these kinds of virtual currencies are also called cryptocurrencies.

Most of the traditional money supply is bank money held on computers. This is also considered digital currency. One could argue that our increasingly cashless society means that all currencies are becoming digital (sometimes referred to as electronic money), but they are not presented to us as such.[5]

A virtual currency has been defined in 2012 by the European Central Bank as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community". The US Department of Treasury in 2013 defined it more tersely as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency". The key attribute a virtual currency does not have according to these definitions, is the status as legal tender.

A cryptocurrency is a type of digital token that relies on cryptography for chaining together digital signatures of token transfers, peer-to-peer networking and decentralization. In some cases a proof-of-work scheme is used to create and manage the currency.[6][7][8][9] See also list of cryptocurrencies.

Virtual currencies pose challenges for central banks, financial regulators, departments or ministries of finance, as well as fiscal authorities and statistical authorities.

On 20 March 2013, the Financial Crimes Enforcement Network issued a guidance to clarify how the US Bank Secrecy Act applied to persons creating, exchanging and transmitting virtual currencies.[10]

In May 2014 the U.S. Securities and Exchange Commission (SEC) "warned about the hazards of bitcoin and other virtual currencies".[11]

In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date, commonly called BitLicense.[12] Unlike the US federal regulators it has gathered input from bitcoin supporters and the financial industry through public hearings and a comment period until 21 October 2014 to customize the rules. The proposal per NY DFS press release ... sought to strike an appropriate balance that helps protect consumers and root out illegal activity".[13] It has been criticized by smaller companies to favor established institutions, and Chinese bitcoin exchanges have complained that the rules are "overly broad in its application outside the United States".[14]

As of 2016, over 24 countries are investing in distributed ledger technologies (DLT) with $1.4bn in investments. In addition, over 90 central banks are engaged in DLT discussions, including implications of a central bank issued digital currency.[15]

The Bank of Canada have explored the possibility of creating a version of its currency on the blockchain.[16]

The Bank of Canada teamed up with the nations five largest banks and the blockchain consulting firm R3 for what was known as Project Jasper. In a simulation run in 2016, the central bank issued CAD-Coins onto a blockchain similar Ethereum.[17] The banks used the CAD-Coins to exchange money the way they do at the end of each day to settle their master accounts.[17]

A deputy governor at the central bank of China, Fan Yifei, wrote that the conditions are ripe for digital currencies, which can reduce operating costs, increase efficiency and enable a wide range of new applications..[17] According to Fan Yifei, the best way to take advantage of the situation is for central banks to take the lead, both in supervising private digital currencies and in developing digital legal tender of their own.[18]

The Danish government proposed getting rid of the obligation for selected retailers to accept payment in cash, moving the country closer to a "cashless" economy.[19] The Danish Chamber of Commerce is backing the move.[20] Nearly a third of the Danish population uses MobilePay, a smartphone application for transferring money.[19]

The Dutch central bank is experimenting with a bitcoin-based virtual currency called DNBCoin.[17][21]

Government-controlled Sberbank of Russia owns Yandex.Money - electronic payment service and digital currency of the same name.[22]

South Korea plans national digital currency using a Blockchain.[23] The chairman of South Koreas Financial Services Commission (FSC), Yim Jong-yong, announced that his department will Lay the systemic groundwork for the spread of digital currency.[23]

In 2016, a city government first accepted digital currency in payment of city fees. Zug, Switzerland added bitcoin as a means of paying small amounts, up to SFr200, in a test and an attempt to advance Zug as a region that is advancing future technologies. In order to reduce risk, Zug immediately converts any bitcoin received into the Swiss currency.[24]

Swiss Federal Railways, government-owned railway company of Switzerland, sells bitcoins at its ticket machines.[25][25]

The Chief Scientific Adviser to the UK government advised his Prime Minister and Parliament to consider using a blockchain-based digital currency.[26]

The chief economist of Bank of England, the central bank of the United Kingdom, proposed abolition of paper currency. The Bank has also taken an interest in bitcoin.[17][27] In 2016 it has embarked on a multi-year research programme to explore the implications of a central bank issued digital currency.[15] The Bank of England has produced several research papers on the topic. One suggests that the economic benefits of issuing a digital currency on a distributed ledger could add as much as 3 percent to a countrys economic output.[17] The Bank said that it wanted the next version of the banks basic software infrastructure to be compatible with distributed ledgers.[17]

The National Bank of Ukraine is considering a creation of its own issuance/turnover/servicing system for a blockchain-based national cryptocurrency.[28] The regulator also announced that blockchain could be a part of a the national project called "Cashless Economy".[28]

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Digital currency - Wikipedia