El Salvador has accepted Bitcoin as legal tender across the country. Despite the speculation surrounding the recent drop in the value of digital currencies like Bitcoin, plenty of people consider it a realistic alternative to Fiat currency.
Is it realistic to integrate digital currencies with Fiat or use them as an alternative?
Well, there are solid arguments for and against the concept. If you’re interested in finding out what is digital currency and the different benefits or drawbacks it might have, consider reading ahead.
Analysing Digital Currencies
Digital currency is any currency that’s only made available in electronic or digital form. There are, of course, derivatives and some that are even backed by Fiat. However, digital currencies are exclusively useable on digital platforms and have no tangible format.
To be named as such, a digital currency should also be useable to pay for services and purchase goods. From here on out, the variety of use cases depends entirely on buyer and seller preferences. For example, online gambling portals might limit specific payment methods, restricting certain, or all, digital currencies.
Digital currencies are often easy to track, especially when it comes to decentralised blockchain ledgers like Bitcoin. Every single transaction has information that’s available to everyone.
Types of Digital Currency
Working with digital currencies can get tricky. All of them share at least one characteristic: they’re exclusively digital. But, to use an understatement, they can vary greatly. Some are centralised, while others avoid authority entirely. Others might be backed by Fiat or another commodity, while some might use algorithms to maintain a specific value.
Before diving too deep into the different attributes, there are three types of digital currency to consider. Central Bank Digital Currencies (CBDCs), Virtual Currencies, and Cryptocurrencies.
Central Bank Digital Currencies
Despite popular belief, not all digital currencies are cryptocurrencies. Central banks can issue regulated digital currencies, typically used to replace or supplement the country’s Fiat money. This isn’t to be confused, though, with the digital representation of Fiat, as CBDCs are entirely digital.
It’s also important to consider where public spending goes, as it can heavily impact how people perceive a CBDC.
Virtual currencies aren’t the same as cryptocurrencies. These are unregulated value units controlled entirely by the founding developers. A network protocol can also control them.
The most common example of a virtual currency is a gaming network token. The value of these tokens can be changed, at any time, by the developers.
Cryptocurrencies use cryptography to verify transactions on a network displayed on a ledger. The most well-known examples are Bitcoin, Ethereum, Tether, and Ripple.
They’re not so simple, though. Each cryptocurrency has a different set of protocols. So, it’s essential to do some research before investing in any of them. It’s common to see what’s known as “rug pulling.” This is where a developer launches a token and sells all their token assets once it hits a specific value.
The risk associated with cryptocurrencies is one of the primary drivers of scepticism regarding digital currency. And, it’s not just volatility that scares people away. With no regulation, any loss of assets is permanent. You can’t just call a representative to get funds back if you make a mistake or lose your “password” or “key phrase.”
On the other hand, with no regulation, your assets are entirely yours. Regardless of your actions, nobody can take control of your cryptocurrency without knowing your key phrase. This, of course, leads to the argument that cryptocurrency promotes criminal activity.
The tipping point here is regulation. And it’s the most controversial part of cryptocurrencies overall. Whereas the digital currency, as an idea, considers regulation and deregulation both viable options.
Digital Currency Companies
Unsurprisingly, most digital currency companies at the moment are involved with cryptocurrencies. This includes Coindesk, Coinbase, and Binance. There is also a multitude of digital wallet companies that offer holdings in both crypto and Fiat. They also permit exchanging either version of currency.
At the moment, a vast number of countries are currently researching and looking into CBDCs. It’s actually quite surprising, considering the public’s investment in crypto.
Australia has Project Atom currently in the proof of concept phase of their CBDC. South Africa is piloting Khokha and is in the research phase of CBDC, along with Hong Kong, Thailand, and Palestine.
Canada has E Dollar in development, and the United States of America is working on Project Hamilton. Ireland and Germany are both looking into the Digital Euro. And the United Kingdom is researching RSCoin and United Kingdom CBDC.
Currently, the only officially launched and implemented CBDC is e-Naira in Nigeria. However, given the fact that so many other governments are researching or testing digital currencies, it’s extremely likely that it’ll eventually become the norm.
Public Opinion on Digital Currency
One in five adults has invested in, or used, cryptocurrency. So, there’s some merit to the idea of implementing digital currencies. But, polls show that just 19% of people view digital currency in a positive light.
The industry is still young, so these numbers aren’t too telling. The truth is that people are very sceptical of what can happen in a world that uses digital currency.
Regardless, given the ease of use that comes with forms of digital currency, it’s highly likely the public sector will eventually opt for, and find ways to integrate it in the long run. This, in spite of the risks that come with it.
It doesn’t have to be a guessing game, though. You can use tracker intelligence to keep an eye on market trends, competitor movement, and much more.
Risks of Digital Currency
Fear is one reason people want to avoid digital currency. Many say they’re afraid of government control regarding regulated digital currencies. Others don’t want to lose all their money to a mistake or because they forget a password.
Many imagine scenarios where opinions that don’t match the government’s view might result in being locked out of an account. In contrast, others argue that it’s a better way of preventing criminal activity.
Even in the case of deregulated digital currency, volatility may persist. It’s a troubling thought to imagine losing your savings value to a fluctuating currency.
The Future of CBDC
Where cryptocurrencies and virtual currencies might drop the ball, CBDCs seem to pick it up. There’s some hesitation regarding switching from paper to digital, still. Public opinion is changing quickly, though, leading more people to consider at least trying any form of digital currency.
It seems to all come down to a person’s first experience with digital currencies. Random losses or dips in value will push people away. Earnings or stable savings will keep people in.
Reach out if you’re uncertain of what to expect from digital currencies. We provide business intelligence solutions for the public and private business sectors, and we’re happy to answer any questions you might have!