Digital Currency

Digital Currency definition: A form of currency that exists only in electronic or digital form.

Digital currency refers to any monetary balance or transactional medium recorded electronically, operating independently of a specific traditional banking system. Unlike physical currencies, like coins and banknotes, digital currencies exist solely in a digital form, facilitating instantaneous transactions and borderless transfer of ownership.

Two main types of digital currencies are centralized and decentralized. Centralized digital currencies are controlled by a singular entity, often a corporation or financial institution, which oversees its issuance and transactions. Examples include the "Central Bank Digital Currencies" (CBDCs) being explored or piloted by various national banks. On the contrary, decentralized digital currencies, or cryptocurrencies, function without a central overseeing authority, leveraging cryptographic methods for secure financial exchanges. Notable examples include BTC, ETH, and XRP, with their respective blockchains being public ledgers of all transactions.

One of the significant appeals of digital currencies, particularly decentralized ones, is the potential for reduced transaction fees and the absence of intermediaries. This dynamic can speed up processes and cut costs. Additionally, the purely digital aspect of these currencies allows them to reach populations without traditional banking means, promoting financial inclusivity.

However, the advantages of digital currencies come with challenges. Their existence only in the digital realm can expose them to cyberattacks, technical issues, and price fluctuations. The lack of comprehensive regulatory frameworks in numerous areas also presents both opportunities and risks for participants.

In summary, digital currency represents a contemporary monetary form, exclusively electronic, offering an innovative approach to financial transactions. It encompasses both well-known cryptocurrencies and evolving concepts like CBDCs, balancing transformative potential with inherent risks.

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Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Nov 9, 2023
This article has been fact checked and reviewed as per our editorial policy.