Digital currencies are precisely what they sound like: currencies kept and transferred electronically. They are an internet based medium of exchange or currency distinct from physical coins and banknotes, but allows for borderless transfer-of-ownership and instantaneous transactions.
Real digital currencies date back to 1990s.The first digital currency was E-gold, created in 1996 and backed by gold. Liberty Reserve was another digital currency that was founded in 2006; the currency allowed users to convert euros or dollars to Liberty Reserve Euros or Dollars, and exchange them freely with one another at a fee of 1%. Both services were believed to be used for money laundering. Consequently, they were inevitably shut down by many governments such as the USA.
Emerging in 2005, QQ coins and Q coins were used on Tencent QQ’s messaging platform as a kind of commodity-based digital currency. In China, Q coins were so effective that they were believed to have had a disrupting effect on the Chinese Yuan. Current interest on cryptocurrencies has resulted to renewed curiosity in digital currencies. Introduced in 2009, Bitcoin has become the most widely accepted and used digital currency.
In 2016, the city of Zug in Switzerland started to accept bitcoin as a mode of payment. As part of a Bitcoin pilot project, occupants of Zug are now allowed to pay their fees, fines, and taxes with the digital currency. To reduce risk, the city instantly changes bitcoin into Swiss currency. The payments are also limited to 200 francs to lower the level of risks during the trial phase. The project makes Zug the world’s first city to allow bitcoin payments from people for government services and utilities.
There is a misunderstanding around the terms “digital” and “virtual”. Mistakenly, people often use them interchangeably. In reality, virtual currencies are a form of digital currency. Put simply, all virtual currencies are digital, but the inverse is incorrect.
There are two main types of digital currencies: virtual currency and cryptocurrency. According to a study carried out by European Central Bank in 2012, a virtual currency is “a type unregulated, digital money, which is issued and controlled by its developers, and accepted and used by the members of a specific virtual community”. In 2013, The US Department of Treasury defined virtual currency as “a medium of exchange that functions like a currency in some areas, but does not have all the features of real currency”. On the other hand, cryptocurrency is a medium of exchange that uses cryptography to secure the transactions and to regulate the creation of additional units of the currency.
Digital currency has several disadvantages. Many of those currencies have no widespread usage and banks do not offer or accept services for them. Second, there are worries that cryptocurrencies are very risky due to their extremely high volatility. In addition, regulators in some countries have warned against their use and some have taken measures to dissuade users.