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Fiat Currency: This is Commodity money that gets its value from its worth, like with precious metals (e.g. gold and silver), salt, or even shells. Fiat money has attributed value because a government declares it legal tender – it has no intrinsic value. Digital Currency: These are digital assets that are a medium of exchange between two parties. They allow direct transactions between individuals without the intervention of an intermediary, such as a central bank or federal government. Digital currency is a form of currency that is available only in digital or electronic form. It is also known as digital money, electronic money, electronic currency, or cybercash. A typical example is eNaira, bitcoins, Ethereum, dogecoin, etc. It is worthy to note that:
- Digital currencies are currencies that can only be accessed with computers or mobile phones because they only exist in electronic form. It has no tangibility.
- They do not require mediators and are often the inexpensive method for trading currencies.
- All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. The eNaira is a digital currency but it is not a cryptocurrency.
- The advantages of digital currencies are that they enable seamless transfer of value and can make transaction costs cheaper.
- The disadvantage of digital currencies is that they are volatile to trade(the price value can dip and surge wildly). They are also susceptible to Hacking.
- They only exist in digital forms I.e it has no physical equivalent.
- It can transfer value.
- It can be centralized (produced and distributed from a single system) and decentralized.
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Types of Digital Currencies
Digital currency is a general term used to describe different types of currencies that exist in the electronic realm. Broadly, there are three different types of currencies:- Cryptocurrency: Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network. Cryptography means secure communications techniques that allow only the sender and intended recipient of a message to view its contents. Cryptography is also used to manage and control the creation of such currencies. Bitcoin and Ethereum are examples of cryptocurrencies. Depending on the jurisdiction, cryptocurrencies may or may not be regulated.
- Virtual Currencies: These are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders involved in the process. Virtual currencies can also be algorithmically controlled by a defined network protocol. An example of a virtual currency is a gaming network token whose economics is defined and controlled by developers.
- Central Bank Digital Currencies: They are called CBDCs for short. They are regulated digital currencies issued by the central bank of a country. A CBDC can be a supplement or a replacement to traditional fiat currency( normal banknotes). Unlike fiat currency, which exists in both physical and digital form, a CBDC exists purely in digital form. England, Sweden, and Uruguay are a few of the nations that are considering plans to launch a digital version of their native fiat currencies. Nigeria also launched a digital version of Naira called Electronic Naira.
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