Digital Currencies: A Beginners Guide To Understanding Digital Currencies

Ekene Eyimegwu

3 years ago

The Nigerian Naira (NGN) is the official currency and legal tender of the Federal Republic of Nigeria. The Central Bank of Nigeria has to manage and distribute the Nigerian Naira and attempt to maintain price stability with it. Currencies are portions of the national money supply, consisting of banknotes and government-issued paper money and coins, that do not require endorsement in serving as a medium of exchange. There are two types of currency:

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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.

For digital currencies are, their distinguishing attribute is that they are not physical and are available only in digital form. Transactions involving digital currencies are made using computers, mobile devices, or electronic wallets connected to the internet or designated networks. In contrast, physical currencies, such as banknotes and minted coins, are tangible, meaning that they have substantial physical attributes and characteristics while digital currencies do not. Transactions involving fiat currencies are made possible only when their holders have physical possession of these currencies but it is not so with digital currencies. Digital currencies have the same uses as physical currencies because they can be used to purchase goods and pay for services. They can also find restricted use among certain online communities, such as gaming sites, gambling portals, or social networks. Digital currencies also enable instant transactions that can be seamlessly executed across borders. For instance, it is possible for a person located in Nigeria to make payments in digital currency to a counterparty residing in Russia, provided they are both connected to the same network. Digital currencies have the following Characteristics,

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.

Digital currencies are not subject to inflation like fiat currency rather it has a fixed supply. They have intrinsic value beyond the trust of their community unlike the fiat currency that its value is placed on the central bank of Nigeria. Digital currencies don’t lean on a system of debts, its value boils down to how effective it is as a medium of exchange, and can be spent and received by anyone, anywhere, and at any time without the need for a bank or a government to endorse them. This is what makes them so revolutionary. The Central Bank of Nigeria and other financial institutions banned digital currencies such as cryptocurrency transactions in Nigeria. Even with the ban, Nigerians can bypass the embargo by using peer-to-peer enabled wallets, Creating an Ecobank Ghana account, coinbase and PayPal, Internal Naira transfer, and Remittano Naira. Although Digital currencies have some disadvantages such as being volatile in value (it can have wild price swings during trading), susceptible to hacking (Hackers can steal digital currencies from online wallets or change the protocol for digital currencies, making them unusable), and not solving storage and infrastructure, but also have advantages that make it worthwhile. It makes transaction and transfer time faster and since they don’t have physical manufacturing, they can’t be soiled. They also make the implementation of fiscal and monetary policy easy and make transaction costs cheaper. Featured Image Source: The Indian Express

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