What is Digital Currency and what is the current landscape

Whilst there will always be a need for cash, increasingly businesses and consumers use electronic payment options. From bank transfers through credit and debit cards to e-wallets there are many options. So why has digital currency remained such a hot topic since its inception and does this mean Bitcoin or something else?

The simple answer is that digital currency covers different technologies that are often confused. We live in a world where technology evolves faster each day and language sometimes struggles to keep up. There is no universally agreed definition of digital currency. At the time of writing this blog, Wikipedia defines digital currency as "Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet". To complete the definitions, physical currency that is backed by an underlying tangible asset such as gold is known a Commodity Currency, whilst physical currency that is not backed by a commodity is known as Fiat Currency. Most of the world's largest nations issue currency that is backed by the central banks and so is Fiat Currency rather than Commodity Currency.

Types of digital currency include:

• Asset based digital currency - a digital representative of something tangible that can be traded independently.
• Central Bank based digital currency - a digital version of fiat currency also known as central bank digital currencies (CBCD).
• Cryptocurrency - digital tokens that can be exchanged but have no underlying asset or guarantor and are normally based on a distributed ledger or blockchain technology combined with strong cryptography. Bitcoin is probably the most widely known cryptocurrency.
• Stablecoins – are a hybrid of cryptocurrency and CBCD in that they are not backed by a government but are linked to a real world currency such as the US dollar. Stablecoins may be backed with fiat currency, commodities or pegged to cryptocurrencies or algorithms. In addition some stablecoins claim to be backed with currencies or commodities but investigations have found that the underlying reserves do not fully cover the digital currency issued so they are not fully backed for example Tether who were fined by for only having assets to cover 27.% of the issued digital currency.
• Virtual currency - digital tokens that can be exchanged but have no underlying asset or guarantor and are issued by a single organisation. Examples of virtual currencies are often found in on-line games such as Minecraft or Pokémon Go and typically bought and sold using other types of currency (both digital and physical).

Governments around the world have been monitoring the rise of digital currency for over a decade. In the world's largest economies, the central banks have generally aligned on a view that a digital currency is desirable, but that it needs to be government backed (i.e. a CBDC) to provide economic stability and ensure it is traceable to support tax, legal and other investigations.

Europe

Across the 27 member states of the EU, banking and monetary policy is regulated by the European Central Bank.

In 2021 the ECB published the findings of their 2020 public consultation noting that privacy was the highest requirement (43%) followed by security (18%), use across the Euro zone (11%), no additional cost to use (9%) and off-line usability (8%).

This was the start of the EBC's project to research the need and technical requirements to launch a digital Euro. Whilst a final decision has not yet been made on whether a digital Euro will be launched, the EBC has already confirmed that a potential digital Euro will sit alongside the existing Euro and be a fully interchangeable alternative.

UK

In the UK, banking and monetary policy is regulated by the Bank of England. In February 2023 the Bank of England ran a public consultation titled "The digital pound: A new form of money for households and businesses" to gather views around the need and benefit of creating a digital pound.

Following this consultation the Bank of England said they have not yet made a decision if a digital pound is needed but will spend 2-3 years investigating the technology and policy changes that a digital pound will require. The earliest that a digital pound would be implemented will be the second half of the 2020's.

US

The US has one of the most fragmented regulatory oversight structures in the developed world to oversee banks and financial institutions (FIs). Banks and FIs may be regulated at the State or Federal level depending on the type of charter they have (some are regulated at both the State and Federal level). Overall monetary policy is managed by the Federal Reserve System (more commonly known as the Federal Reserve or simply the Fed).

The Fed published a discussion paper "Money and Payments: The U.S. Dollar in the Age of Digital Transformation" in 2022 and published their summary of all responses received in April 23. The Fed has not reached a conclusion on whether to create a digital dollar.

Not all US states feel that a digital currency is an advantage. For example, in Florida Governor Ron DeSantis signed SB 7054 into law that prohibits the use of a United States federal CBDC “as money within Florida’s Uniform Commercial Code (UCC)."

China

In China, banking regulations and monetary policy is overseen by the People's Bank of China (PBC). In China, the physical currency is known as either Renminbi (RMB) or Chinese Yuan (CNY), and the terms are often used interchangeably. For clarity, Renminbi is the name of the Chinese currency, and the principal unit of the currency is one Chinese Yuan.

China is leading the developed world and was the first developed nation to issue a CBCD. In 2017, the state council approved the development of a digital CBDC, naming the currency the Digital Currency Electronic Payment (DCEP) although it is more commonly known as e-CNY. As of today, the e-CNY is still in extended pilot

Rest of World

Both El Salvador and Central African Republic (CAR) quickly jumped on the digital currency bandwagon and made bitcoin legal tender (CAR revoked this decision after 1 year) but these can be considered very limited experiments as most of the citizens lack access to the internet and are unbanked.

Keeping up-to-date

Technology can move very quickly and no blog will ever be up to date.? There are lots of good online resources that you can check to keep up to date with the progress of digital currency, most of which can be found on the World Bank and IMF Library digital currency homepage.

Disclaimer

All views and opinions are my own

Social tags

#crypto #cryptocurrency #bitcoin #digitaldollar #digitaleuro #digitalpound #CBDC #money #digitalmoney #virtualcurrency #digitalcurrency #teather #stablecoin