Category: 3. Digital Currency and Example of Blockchain.

The disadvantages of digital currencies are as follows:

They do not solve all storage and infrastructure problems

While they do not require physical wallets, digital currencies have their own set of requirements for storage and processing. For example, an Internet connection is necessary as are smartphones and services related to their provisioning. Online wallets with robust security are also necessary to store digital currencies.

They are susceptible to hacking

Their digital provenance makes digital currencies susceptible to hacking. Hackers can steal digital currencies from online wallets or change the protocol for digital currencies, making them unusable. As the numerous cases of hacks in cryptocurrencies have proved, securing digital systems and currencies is a work-in-progress.

They can be volatile in value

Digital currencies used for trading can have wild price swings. For example, the decentralized nature of cryptocurrencies has resulted in a profusion of thinly capitalized digital currencies whose prices are prone to sudden changes based on investor whims. Other digital currencies have followed a similar price trajectory during their initial days. For example, Linden dollars used in the online game Second Life had a similarly volatile price trajectory in its early days.

The advantages of digital currencies are as follows:

They have fast transfer and transaction times

Because digital currencies generally exist within the same network and accomplish transfers without intermediaries, the amount of time required for transfers involving digital currencies is extremely fast. As payments in digital currencies are made directly between the transacting parties without the need for any intermediaries, the transactions are usually instantaneous and low-cost. This fares better compared to traditional payment methods that involve banks or clearinghouses. Digital-currency-based electronic transactions also bring in the necessary record keeping and transparency in dealings.

They do not require physical manufacturing and cannot be soiled

Many requirements for physical currencies, such as the establishment of physical manufacturing facilities, are absent for digital currencies. Such currencies are also immune to physical defects or soiling that are present in physical currency.

They can ease implementation of monetary and fiscal policy

Under the current currency regime, the Fed works through a series of intermediaries—banks and financial institutions—to circulate money into an economy. CBDCs can help circumvent this mechanism and enable a government agency to enable disburse payments directly to citizens. They also simplify the production and distribution methods by obviating the need for physical manufacturing and transportation of currency notes from one location to another.

They can make transaction costs cheaper

Digital currencies enable direct interactions within a network. For example, a customer can pay a shopkeeper directly as long as they are situated in the same network. Even costs involving digital currency transactions between different networks are relatively cheaper as compared to those with physical or fiat currencies. By cutting out middlemen that seek economic rent from processing the transaction, digital currencies can make the overall cost of a transaction cheaper.

Digital currency is an overarching term that can be used to describe different types of currencies that exist in the electronic realm. Broadly, there are three different types of currencies:

Cryptocurrencies

Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network. 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

Virtual currencies 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

Central bank digital currencies (CBDCs) 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. 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.

Digital Currencies	Virtual Currencies	Cryptocurrencies
Regulated or unregulated currency that is available only in digital or electronic form.	An unregulated digital currency that is controlled by its developer(s), its founding organization, or its defined network protocol.	A virtual currency that uses cryptography to secure and verify transactions as well as to manage and control the creation of new currency units.

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash.

KEY TAKEAWAYS

• Digital currencies are currencies that are only accessible with computers or mobile phones because they only exist in electronic form.
• Typical digital currencies do not require intermediaries and are often the cheapest method for trading currencies.
• All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
• Some of the advantages of digital currencies are that they enable seamless transfer of value and can make transaction costs cheaper.
• Some of the disadvantages of digital currencies are that they can volatile to trade and are susceptible to hacks.

Understanding Digital Currency

Digital currencies do not have physical attributes and are available only in digital form. Transactions involving digital currencies are made using computers or electronic wallets connected to the internet or designated networks. In contrast, physical currencies, such as banknotes and minted coins, are tangible, meaning they have definite physical attributes and characteristics. Transactions involving such currencies are made possible only when their holders have physical possession of these currencies.

Digital currencies have utility similar to that of physical currencies. 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 the United States to make payments in digital currency to a counterparty residing in Singapore, provided they are both connected to the same network.

Characteristics of Digital Currencies

• As mentioned earlier, digital currencies only exist in digital form. They do not have a physical equivalent.
• Digital currencies can be centralized or decentralized. Fiat currency, which exists in physical form, is a centralized system of production and distribution by a central bank and government agencies. Prominent cryptocurrencies, such as Bitcoin and Ethereum, are examples of decentralized digital currency systems.
• Digital currencies can transfer value. Use of digital currencies requires a mental shift in the existing framework for currencies, where they are associated with sale and purchase transactions for goods and services. Digital currencies, however, extend the concept. For example, a gaming network token can extend the life of a player or provide them with extra superpowers. This is not a purchase or sale transaction but, instead, represents a transfer of value.

Let’s Get the terms Right

If you were to look up the term ‘cryptocurrency’ you would get something like or similar to the following definition: A digital or virtual currency, that uses cryptographic encryption techniques to generate units of the currency and verify transactions. It is important to add however, that many use the term ‘digital currency’ interchangeably with ‘cryptocurrency’. Why it is important to make a distinction will be covered later, but first let’s substantiate the claim that the terms are used interchangeably.

If you were to type ‘digital currency’ into Google’s news search you would most likely receive articles about cryptocurrency and in particular Bitcoin. As can be seen below. I’ve taken the first 20 articles from google news (week of 20th feb), and taken their text using it in a word matrix. As can be seen from the matrix below ‘Bitcoin’ is the most popular topic associated with the term ‘digital’.

2.2 Advancing a clear definition

It would be very easy for anyone interested in digital currency right now to focus on Bitcoin which is actually only a tiny element of what is covered by the term ‘digital currency’. To define cryptocurrency well we first need to understand what separates it from other digital currencies.

Digital Currency as a broad term can contain anything that represents value in a digital manner. Digital currency can contain firstly what we would call electronic ‘money’, money that is simply a digital representation of government issued fiat currency. Fiat currency is government backed, so whilst it has no intrinsic value, i.e it is not tied to a commodity such as gold, it is considered legal tender.

Digital currency can also cover virtual currency – electronic currency that it is not considered legal tender. Virtual currencies are controlled and created by their developers, with value being appreciated in a specific community. A prime example would be Nintendo points, users can either earn units of currency or points by completing game challenges or by exchanging fiat currency for them. Once bought, Nintendo points are only useful in the Nintendo ecosphere and seldom used elsewhere.

With the above understood, the final area of digital currency to examine is Cryptocurrency – a decentralised virtual currency. It is a virtual currency because its units are not considered legal tender, but is separate from other virtual currencies because its units are created and handled without any overseer required.

The international monetary fund and the European bank have only recently put together a taxonomy of digital currency. A visual representation of how I have defined terms has been provided below.

2.2.1 Taxonomy of Digital Currency

2.2.2 Digital currency before Bitcoin

If we understand that Digital currency is just an electronic representation of any asset, it is useful to point out and understand that digital currency can be traced back to the 1960s. Here are the main highlights I’ve found from research:

But first, what is Blockchain?

Blockchain technology allows for the creation of a decentralised public record of digital information. The data (the block) is stored in a public database (the chain) and can consist of any information. It is the first digital technology that offers a way for unsecured parties to refer to a common, indelible (append-only) digital record. Blockchain already has many varied applications, and here’s some examples:

1.Bitcoin One of the more famous examples of Blockchain in action is Bitcoin. This is  a digital currency (commonly called a cryptocurrency). This entirely electronic form of funds can be transferred securely  directly from user to user without the need for intermediaries – essentially there is no central bank or administrator needed. Bitcoin is not the only currency based on Blockchain technology. Bitcoin Atom (BCA) is a fork of Bitcoin and provides a truly decentralised way of exchanging cryptocurrencies without trading fees and no exchange hacks.

2.Spotify Following acquisition of Mediachain Labs in late 2017, Spotify are using a decentralised database (blockchain technology) to correlate artists with license agreements and tracks. Use of Blockchain in music looks to create a more transparent record of rights ownership that will solve long-standing issues within the industry, whereby artists and labels have not been fairly acknowledged.

3.Maersk A cooperative Blockchain effort called TradeLens has been created by Maersk and IBM. An open and neutral industry solution, it is underpinned by Blockchain technology and supported by major industry players. The platform promotes a more efficient, predictable and secure exchange of information across the global supply chain. What’s more, TradeLens also sports a custom smart-contract service for executing complex shipping orders with fewer middlemen.

4.Aeternity æternity is a scalable Blockchain platform, that can be used for many applications requiring high-speed transactions. These can include smart contracts, secure document exchanges and nano/micro payments. The technology promises to facilitate mass adoption of Blockchain to support everything from IoT, IoV, FinTech, Video Gaming, The Unbanked and Trust-free Exchanges.

5.Matchpool The Matchpool platform incentivises ‘matchmakers’ to connect members of communities such as Airbnb, Uber or dating services. Matchpool uses cryptocurrency payments as a means for incentivising the communities, to provide value to the rest of the network. Guppy tokens, also known as GUP, are used to make payments inside the Matchpool app. Guppy tokens can be purchased and earned on the platform or traded on exchanges.

6.Siemens New York based LO3 is working with Siemens Digital Grid and Siemens’ start-up financier next47 on the Brooklyn Microgrid project. The initiative enables the local community to produce, consume and purchase power with a transactive energy platform powered by Blockchain technology. The distributed energy supply system allows for more resilient and renewable sources.

7.Loyyal Reinventing how customer incentives are created, rewarded and managed – Loyyal is a cross-sector loyalty and rewards platform. Based on proprietary Blockchain and smart contract technology (making use of the Linux Foundation’s Hyperledger Fabric) Loyyal can handle travel & hospitality, employee incentives and credit card rewards. Loyyal also offers a Blockchain-as-a-Service (BaaS) client version with all-inclusive access to the Platform and enterprise-grade hosting.

8.SimplyVital Health The healthcare industry struggles to share data due to privacy and security issues as well as the added cost of aligning different technologies. Delivering better health data management, SimplyVital Health uses Blockchain to allow patients and providers to access, share and even move their healthcare data. The platform assures safe and secure coordination and communication with other providers and creates a trusted audit trail.

9.De Beers Five leading diamond manufacturers have been working with De Beers during the development of Tracr, the first Blockchain platform that securely tracks a diamond across the full value chain  from mine to cutter, polisher and right through to the jeweller. Where once there was a trust and traceability risk, due to lack of transparency, this industry platform will  deliver peace of mind with auditability, tamper-proof records and data authenticity.

10.Circle Circle is a peer-to-peer payments technology. With a suite of financial products including Poloniex, Circle Invest and Circle Trade, the crypto finance company operates Circle Pay as a bitcoin wallet service to buy and sell bitcoins. Investments of some $250M USD are behind company, backed by the likes of Goldman Sachs, Breyer Capital, Accel and more. Poloniex is one of the world’s largest crypto exchanges. Unlike existing systems that are closed and proprietary, Circle uses open, Blockchain-based standards and protocols to build products, such as the remittance and messaging application that exists to serve the ‘unbanked’.

11.BASF BASF Corporation and arc-net have collaborated to use blockchain technology to record and analyse sustainability in livestock, by connecting every part of the process from farm to fridge. The information will provide an environmental footprint along with full transparency and traceability along the entire value chain. In the future, this project will enable consumers to make informed choices about the meat they eat via an on-pack unique scannable code, providing information on the product’s provenance and environmental footprint.

12.BitGive The BitGive mission is to ‘Leverage the power of Bitcoin and Blockchain technology to improve public health and the environment worldwide.’ The first Blockchain and Bitcoin non-profit charity, the foundation launched the Charity 2.0 Initiative in 2015, which includes a variety of projects aimed at employing blockchain technology to benefit charities worldwide. The flagship project is GiveTrack™, a revolutionary donation platform for non-profit organisations  that delivers transparency and accountability to donors by sharing financial information and direct project results in real time.

13.Ubiquity The Blockchain-secured platform for real estate recordkeeping, Ubiquity provides a secure, user-friendly experience to record property information with a clean record of ownership. The Patent Pending API and SaaS Platform allows a client to input their data and store it on a blockchain of their choice, for an accurate and secure audit of all records.

14.MediLedger Blockchain has the power to revolutionize the pharmaceutical industry. The MediLedger Project is supported by a working group of members including drug distributors and Big Pharma companies. The open, decentralised network records an indelible record of transactions and data to demonstrate regulatory adherence and improve security. Live in the U.S., MediLedger meets the emerging needs of the prescription medicine supply chain by redefining the potential of blockchain for the pharmaceutical sector.

15.AIA Insurance AIA launched Hong Kong’s first blockchain-enabled bancassurance network in late 2017. The platform uses the Hyperledger Fabric, allowing its bank partners to share required policy data and documentation on a real-time basis, reducing the time needed to process insurance applications. AIA also runs its own blockchain accelerator, seeking out ‘high potential start-ups’ in the insurance/insurtech space.

16.Guts A transparent ticketing ecosystem that relies on Blockchain technology, GUTS eliminates ticket fraud and exorbitant prices. The service assures that tickets are sold for for a fair price and also makes the process simple and secure. The digital smart ticket is powered by blockchain technology with a self-updating, rotating QR code that claims to make fraud impossible. Ticket prices are locked and linked to a unique mobile phone number.

As you can see, Blockchain is versatile technology with unlimited potential – these examples merely scratch the surface. If you’re keen for your organisation to unlock the power of emerging technologies, sector specific workshops are an ideal way to help others appreciate the prevalence of technology innovation and adoption in your industry. There’s no better way of opening the eyes and ears of even the most reluctant stakeholders to the value of digital technologies like Blockchain.