Money is the anchor of modern society. The exchange, which began with items such as cowhide, salt, weapons, etc., over time provided exchange media based on currency, paper, and coins. The development of money has given birth to the digital currency. Digital currencies are a common superset for currencies such as digital money, electronic money, e-money, electronic currency, cyber money, and virtual currency, which also includes cryptocurrencies. Digital currency can also mean traditional financial assets in digital form.
In legal terms, there are roughly two types of digital currencies; Central bank digital currency (CBDC) denominated in a sovereign currency that issues its digital currency and non-central bank digital currency controlled by the developer (s), founder (s) or defined network protocol.
What is a virtual currency?
A virtual currency is a currency that is created and held in a blockchain network without central control or centralized banking institutions. Virtual currency transactions usually take place immediately and at a lower cost compared to traditional payment methods that require banks to manage the transactions. Virtual currency-based electronic transactions do not have central clearing houses, but are supported by the necessary accounting to ensure the transparency of all transactions. Virtual currencies can be cryptocurrencies, coupons, or bonus monetary systems. The first cryptocurrency, Bitcoin, was created in 2009. by unknown persons using the pseudonym Satoshi Nakamoto. Cryptocurrencies are not regulated and are based on cryptography as a system for management, verification, control, security and the creation of a new currency. Apart from Bitcoin and Ethereum, there are other virtual currencies Litecoin (LTC), Cardona (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), ChainLink, Binance Coin (BNB), Tether (USDT), Monero (XMR ), etc.
Cryptocurrencies are open to the public and anyone can join and start a transaction. However, the volatility and lack of control in this area means that unscrupulous individuals can create situations of fraud. In addition, cryptocurrencies are unstable. One way to solve this is to use so-called stable coins, such as reserve assets (an external benchmark), such as the US dollar, or a commodity price, such as gold, which uses different methods to achieve price stability.
What is the Central Bank Digital Currency (CBDC)?
The CBDC is a digital currency issued and regulated by the central bank as a legally authorized financial institution in a given territory. The CBDC is centralized and uses an electronic record or token issued by the central bank. The Bank of International Settlements (BIS) recommends 14 features to the CBDC, the main one being that it is in line with the central bank’s objective of financial stability as a national critical financial institution.
Many central banks are already developing the CBDC. China is ahead of everyone and has recently started issuing CBDCs to its citizens as a pilot program. According to the address https://www.atlanticcouncil.org/cbdctracker/ , which monitors 83 countries / monetary unions for CBDC status, found that 5 countries have now fully adopted the digital currency, 14 are in the pilot phase, 16 are in the development phase and 32 are in the research phase, ten countries are inactive, two have withdrawn and four are still looking for opportunities.
Virtual currency versus digital currency
Virtual currencies differ from digital currencies in many ways. A digital currency is simply a currency issued by a bank in digital format, such as a digital dollar, a digital euro, or a digital yuan. Second, virtual currencies are more volatile and lack the security of a digital currency because they are not supported by central banks. Central banks can issue central currency without restrictions compared to a cryptocurrency such as Bitcoin, which is limited as the number of bitcoins cannot exceed 21 million. This is the limit encoded by the Bitcoin source code and set by the network nodes. Finally, the price of a cryptocurrency is determined by supply and demand, while the value of a digital currency is based on a legal tender.
More and more countries are starting to issue CBDCs and are likely to go hand in hand with the traditional currency. Ultimately, this CBDC is predicted to be the country’s official currency in the long run. The traditional paper currency and coins are nearing the end of their lives, and there is a fierce competition between the CBDC and the cryptocurrency. By the end of the day, one form of digital currency, whether regulated or unregulated, will certainly win.