Digital Currency

An alternative, non-tangible form of currency

What is Digital Currency?

Digital currency is a payment system that is not based on fiat currency, but rather an alternative non-tangible currency. In practice, digital currency serves a similar practice to other currencies in terms of acting as payment in transactions.

 

Digital Currency

 

Unlike cash, digital currency lacks a physical form, therefore allowing for instantaneous transactions. Such a unique characteristic allows digital currency to facilitate transactions across international borders. It is important to note that digital currency is not considered legal tender.

 

Summary

  • Digital currency is a payment system that is not based on fiat currency, but rather an alternative non-tangible currency.
  • The four types of digital currency are (1) currency possessing intrinsic utility, (2) tokens, (3) centralized digital currency, and (4) decentralized digital currency.
  • Blockchain supports decentralized digital currency through a peer-to-peer validation process.

 

Types of Alternative Currencies

 

1. Currency possessing intrinsic utility

This type of currency is not dependent on governance and possesses actual intrinsic value. Examples include gold, silver, bronze, and even prepaid phone cards.

 

2. Tokens

Tokens possess less intrinsic value, primarily because its use is highly specialized. Local currencies are considered to be tokens. BerkShares is an example of a local currency that is used in The Berkshires region of Massachusetts.

Berkshares can be used to purchase goods and services, pay salaries, and support local charitable organizations. Ultimately, it helps retain more value in an economic region.

 

3. Centralized digital currency

Centralized digital currency is commonplace in contemporary society. They are defined by a centralized governance structure that overlooks transactions. Common examples of centralized digital currency include air miles, central bank digital currency, digital wallets, and other forms of customer loyalty points.

Under IFRS, loyalty points and other forms of centralized digital currency are initially recognized by the issuer as a contract liability, and therefore impact the statement of financial position. Upon customer redemption of loyalty points, the business will debit contract liability and credit revenue.

 

4. Decentralized digital currency

Decentralized digital currency includes various forms of cryptocurrency. The primary identifier of such a type of alternative currency is that it is not bound by centralized governmental oversight.

It is supported by a decentralized ledger of transactions across a peer-to-peer (P2P) network and allows participants to confirm transactions without a central clearing authority. Examples of cryptocurrency include Bitcoin, Ethereum, etc.

 

What is Cryptocurrency?

Cryptocurrency is a method of exchange that is journalized in the blockchain and is encrypted to control the monetary supply and to verify the transfer of funds in a transaction. The three major factors that define cryptocurrency are:

 

How Does Blockchain Work?

When a cryptocurrency transaction begins, the transaction is initially broadcasted to a P2P network that is made up of nodes – otherwise known as computers. Thereafter, the nodes validate the transaction and the identities of the users involved.

It is at this point the cryptocurrency is recorded through the creation of a data block that is a composite of multiple transactions. The new block is then permanently added to the blockchain. Finally, the transaction is completed.

 

Advantages of Using Blockchain-Enabled Digital Currency

  1. Accurate tracking
  2. Increased transparency
  3. Permanent ledger
  4. Cost reduction

 

What Stops Blockchain-Enabled Digital Currency From Being Adapted?

  1. Regulatory implication
  2. Difficulty in implementation

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Digital Ledger Technology
  • Fiat Money
  • IFRS Standards
  • Ethereum

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!