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Digital Money

Any form of money or payment that exists only in electronic form

What is Digital Money?

Digital money, or digital currency, is any form of money or payment that exists only in electronic form. Digital money lacks a tangible form such as a bill, check, or coins. It is accounted for and transferred using electronic codes in computers. As technology becomes increasingly prominent, payments are becoming more digital, resulting in less use of tangible money.

 

Digital Money

 

Digital Money Explained

New forms of technology now allow for more secure and seamless use of digital money. Digital money can be transferred and exchanged with technologies like credit cards, smartphones, and online cryptocurrency exchanges.

Cryptocurrency refers to a type of digital money that is secured by cryptography, making it almost impossible to counterfeit or double-spend. It exists through decentralized networks based on blockchain technology, which is essentially a ledger that is stored through a network of computers. The significant feature of cryptocurrencies is that they are not issued by a central bank or government, which makes them free from the hindrance of government intervention or manipulation.

The history of digital money dates back to the invention of the internet. There were difficulties getting the population to adopt the use of digital money in the early days; however, as people become more comfortable with technology, and the technology itself becomes more safe and secure, more people are now willing to utilize digital monies. PayPal is considered one of the first successful companies to bring the idea of easy-use digital financial transactions to mass adoption.

 

Examples of Digital Money

The most common form of digital money is the money that is held by banks and central government deposits. The institutions hold a certain level of capital in order to weather economic stress; however, the money does not sit in a safe in some physical location.

Instead, it is housed electronically in the form of digital money. Banks and central governments handle transactions, including millions or billions of currencies, but are devoid of the use of physical cash.

Another prominent form of digital money is cryptocurrency. As explained earlier, it is a form of digital money that exists through a blockchain network. Some forms of cryptocurrency include:

  • Bitcoin
  • Ethereum
  • Ripple
  • Litecoin

 

Digital Money within Financial Services

Nowadays, a growing number of banks and other financial service companies facilitate digital money transfers and other online transactions that wire or transfer money between parties across long distances. Digital money’s assisted in the globalization of economies around the world since trade is made more easily by sending and receiving digital money.

Digital money eliminates the need to physically transfer money; furthermore, banking is made much more convenient by allowing people to perform their personal banking without even the need to visit a physical branch or carry cash.

On the other hand, banks are reducing their retail employee headcount to meet the trend of digital money. Many branches are closed since they become redundant when more people increasingly bank with digital money. It comes at a cost, however, as the banks are not able to maintain personal relationships with customers and create any sort of loyalty. In addition, banks cannot cross-sell their other products without in-person sales opportunities.

 

Risks of Digital Money

Payment fraud is one significant risk that can be attributed to the increasing use of digital money is payment fraud. Payment fraud can be committed in many forms. However, in general, it includes fraudulent or unauthorized transactions completed by a cybercriminal. Some common forms of payments fraud include:

  • Fraudulent payments
  • Illegal payments
  • Internal manipulation
  • Data theft
  • Breach of embargos and sanctions

 

Because money is not transferred physically, it is impossible to know who is on the other side of a transaction. It gives rise to opportunities for cybercriminals to gain access to sensitive information or scam people through digital money.

Although payment security’s been increasing, the complexity of which cybercriminals commit fraud is becoming increasingly complex as well. Payments fraud activity is continuing to rise, and it shows no signs of declining.

Modern-day cybercriminals are becoming craftier than ever, continuously exploiting new weaknesses and devising different methods of manipulating digital money. Scammers are very persistent in their efforts to attack payment systems. If they face challenges on a particular method, they will just pivot and shift their focus to alternative payment methods.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Blockchain
  • Ethereum
  • Numeraire
  • Virtual Currency

Financial Analyst Certification

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