Whether you are looking for digital currency for your business or a form of currency to invest in, you are likely to come across some different types of digital currencies. They include virtual currency, central bank digital currency, and cryptocurrencies. Generally, these types of digital currencies are stored on digital computer systems and are then exchanged over the internet.
History
Despite its flaws, digital money has come a long way from the early days of electronic check writing. One of the first companies to pioneer the digital financial domain was PayPal. The company has been able to capitalize on the digital age by offering a full suite of online and mobile services to its clientele. The company has earned a stellar reputation for its technological expertise, as well as its dedication to customer service.
The latest entrant to the digital currency fraternity is a bitcoin-based payment system. This innovation, while perhaps not a complete overhaul of the existing system, marks a major milestone in the history of digital money.
Types
Various types of digital money are being developed. These digital assets are different from traditional assets, such as gold, silver and precious metals. These assets can be privately created or backed by a central bank.
These currencies can be traded online. The purchase power of these currencies is based on the user community. Several countries have launched digital currency pilot projects. Currently, there are over 20’000 cryptocurrencies in circulation with an equivalent market value of US$1.07 trillion.
Cryptocurrencies are digital assets that are created using cryptography and a digital ledger system. This ledger system is supported by a network of computers called a blockchain. Each transaction is recorded and verified by the blockchain algorithms.
Public Policy Principles
During its 2020 G7 Presidency, the United States formally established its G7 Digital Payments Experts Group (DPEGG). The group, which includes representatives from the Federal Reserve, Bank of England, European Central Bank, Bank of Japan, and the World Bank, has already put forward a set of public policy principles for retail central bank digital currencies (CBDCs). The group is also in the midst of developing a visionary strategy on the best way to engage with the G7 on the future of the monetary system.
The Federal Reserve has also participated in the nebulous world of international payments forums hosted by the Bank of International Settlement (BIS), and the Federal Reserve Bank of New York (FRBNY) has launched the foxy, a think tank dedicated to designing and evaluating new financial technology products for central banks.
Cybersecurity
Almost half of the G20 central banks are exploring the possibility of issuing Central Bank Digital Currency (CBDC). However, this innovation poses significant cybersecurity risks.
These risks are real and require policymakers to consider the implications of introducing CBDCs on the current infrastructure. They need to understand how CBDCs interact with the current financial infrastructure, and whether or not there are risk management frameworks in place. These frameworks could include existing statutes, risk management frameworks, and new technical frameworks.
The government-issued digital currency system could become a prime target for those seeking to destabilize the financial system. It could contain vast amounts of sensitive data. This could give hackers the opportunity to steal user identities and private information.
Double-Spending Problem
Whether you’re interested in a centralized or decentralized digital cash system, the problem of double spending is an important consideration. It’s one of the primary reasons why cryptocurrencies use blockchain technology.
Double spending happens when the same funds are sent to more than one recipient at the same time. This can happen with online transactions using digital money, and offline transactions using actual cash.
One way to combat double-spending is by using a central clearing counterparty. This can be done by assigning a bank as a centralized authority for digital currency transactions. This reduces commissions on these transactions.
Other solutions include centralized crypto currency solutions that mimic peer-to-peer exchange. However, these systems have their drawbacks. One major drawback is the cost of maintaining a centralized authority.
Criminals
Among the most notable types of criminal activity facilitated by cryptocurrency are ransomware attacks and frauds against investors. In these cases, the anonymity of cryptocurrencies makes them attractive to criminals on the dark web.
While digital money has only recently become mainstream, it’s already become a lucrative target for criminals. The Department of Justice recently issued a report on the growing use of cryptocurrencies for criminal purposes. It describes criminals’ use of digital money for illegal transactions and illustrates how they are evading U.S. sanctions.
The report also highlights the growing threat to law enforcement. Law enforcement is becoming increasingly adept at identifying and tracking online criminals. However, it is a complicated process. Law enforcement agencies often work with domestic and international partners to conduct criminal investigations.