Digital currency/digital money
Digital currency/digital money, also known as electronic money/currency, is a type of currency that is made available in digital form, which is unlike the physical form of currency, notes, and coins. It is similar to physical currencies since one can use it to perform instant transactions like the purchase of goods and services. Examples of digital currencies include cryptocurrencies, central bank digital currency, and virtual currencies. Digital currencies are recorded electronically on a stored-value card. Network money is another form of electronic money that allows the transfer of through a computer network, precisely the internet. Digital money is categorized into centralized or decentralized control. Centralized is where the control of money is done from a central point, whereas decentralized is where the money supply is controlled from various sources.
Virtual currency is an example of an unregulated digital currency that can only be available in electronic form. This type of money can only be stored through mobile and computer applications, digital wallets, or through designated software. Virtual currencies are held within the blockchain network and do not have a centralized banking authority controlling it. They are a representation that may be issued, handles, and regulated by the founding organization or private developers. Virtual currencies are represented in the form of tokens, and they lack a legal tender. Due to the lack of a specific centralized regulatory authority, virtual currencies are bound to have fluctuating price movements as well as a full swing in their valuation.
They are also only influenced by the consumers’ sentiments as well as psychological trading. Virtual currencies rely on a trust system for them to work effectively. Circulation of a virtual currency can only be used up to a specific limit. They may also be circulated among a few members who belong to a specific virtual group or online community.
There are several risk implications of virtual currencies; one of them is the risk of cyber fraud. Just as the physical currencies are prone to theft, virtual currencies (which are as crucial as physical currencies) also attract many criminals. They can hack their way into crypto exchanges and drain all the currencies in a targeted wallet. They may also decide to infect different computers with malware that will lead to the theft of these currencies. As transactions are conducted via the internet, hackers are always on the lookout to hack these computers. It is, therefore, advisable for investors to depend on third parties to help them protect their computers and their currencies from people with ill intentions. The software needs regular updating to protect the system from theft. There is no turning back from transactions once they are transferred from one account to another. This means that transactions are irreversible after confirmation. Therefore getting the stolen currencies back is not possible. They are gone for good. On the other hand, a thief might decide to take the key to a wallet and impersonate the owner of the account, thus granting him/her full access to the monies in that wallet.
Another risk associated with virtual currencies is only traded when demand/need arises. These currencies are also infinite, meaning that there liquidity concerns. The fact that there can be no limit to what an individual can own makes it more likely to be manipulated by market variations. The currency, therefore, appears volatile compared to physical currency due to its limited acceptance. Another risk implication is regulatory risk. While other countries are more accepting of virtual currencies, others prevent their usage, claiming that these transactions break anti-money laundering regulations. A specific anti-money laundering regulation is hard to impose on virtual currencies as they are complex, they have a lot of participants, including senders, processors and the recipients, and they also lack a centralized control. Virtual currencies are too faced by operational risks when there is a centralized system controlling operations; transactions are normally validated so that when there is an error, they could be reversed in an organized manner. However, this is not the case for virtual currencies. Virtual accounts usually are secured cryptographically; this means that to access these currencies, kept in an account, one needs to use a specific key. When the keys belonging to an account are stolen or lost or when the account has been deleted from the owner, they no longer have the ability to access their monies.