Digital cash

From CEOpedia | Management online

Digital cash can be described as an electronic version of notes and coins. It is an electronic system that allows for the storage, transfer, and spending of electronic cash. With the rise in electronic means of payment and the ongoing rise of alternative currencies such as bitcoin, Litecoin and so on. The idea behind the creation of digital cash is so that people can use physical cash(banknote) to purchase digital credits. Digital credits can then be stored in an electronic wallet and spent when required. The work of making cash digital means creating an object that is acceptable to transact over networked computers and easy to verify, and that can carry the information about what it is and what it is worth. Digital cash has become more common because of the convenience and independence that it offers. There are several benefits to issuing digital cash compared to banknotes or paper cash (Brunton 2019, p.1). Digital cash does not recognize national borders. The trans-nationality of digital cash has its benefits and loopholes. The ability of digital cash to flow freely across national borders encourages real-time transfers and could have significant repercussions internationally by causing financial crisis, altering foreign exchange rate and offset money supplies. One major advantage of digital cash is its increased efficiency opening new opportunities, especially for small businesses. It will encourage potentially, the worsening of problems over taxation and money laundering. Digital cash systems can be used by any individual with access to the Internet On the other, hand credit card payments are limited to authorized stores, digital cash makes person-to-person payments possible.

History of Electronic Money

As early as 1200 AD, Italian merchants made payments by adding and subtracting figures on bank balance sheets without exchanging physical currency. Today, balance sheet entries exist as data in computer memory. Electronic money encompasses both a digital representation of legal tender and electronic coin accepted by merchants on the Internet called the cornerstone of digital money. Current trends foreshadow a fundamental shift in banking from personal face to face service to electronic media form (Hoffman 1997, p.807).How does Digital Cash Work?

  • Deposit-The customer opens an account with the bank. The bank takes cash in form of deposits and issues marked digital tokens. Which is registered to the account. For example, the user deposits $200 the bank issue 200 digital coins at the rate of $1 each.The bank uniquely marks each coin that is issued to the customers. This is to ensure that each coin is spent once by a single user. This electronic marking makes the digital cash system secured and viable to prevent duplication (Hoffman 1997, p.818).
  • Withdrawal- The electronic tokens can be withdrawn and physical cash is provided to the account holder.
  • Payments -The digital credit is transferred to the other party who could be a merchant for goods or services purchased.

Advantages of Digital Cash

Below are some advantages to using digital cash (Bardo, Levin 2019, p.14):

  • Lower cost- Payment a key feature of digital cash would be to serve as an efficient medium of exchange at practically zero cost. Transactions could be transmitted instantaneously and securely at practically zero cost, simply debiting the payer’s digital cash account and crediting the payee’s digital cash account.
  • Lower risk of fraud- The scope and scale of fraudulent transactions could be mitigated by straightforward and convenient methods such as two-step identity verification.
  • Real-Time Clearing & Settlement -Real-time clearing and settlement would be crucial for facilitating secure payments and would eliminate counterparty risks by finalizing such transactions within minutes rather than hours or days.

Disadvantages of Digital Cash

The digital cash system also has its disadvantages and lapses. It is not considered a perfect system because of some major loopholes (Hoffman 1997, p.800).

  • Traceability -This is a major problem for legal authorities and the government as digital cash can not be traced. Digital cash is an online system, which makes it difficult to trace. The digital cash system provides anonymity to users. It is considered a disadvantage as criminals and top government officials could use the digital cash system to launder money to different countries.
  • Security -Digital cash systems is a system that is frequently used for illegal activities. Being a system that operated on the internet it is porous which means it can be easily accessed by hackers.

Similarities between Digital cash and Paper cash

Digital cash shares a unique similarity to paper cash in the sense that neither the paper on which paper money is printed nor the digital coin represents the value. The value is conferred on a piece of paper or a particular string of bits if, and only if, an institution is willing to accept responsibility for them (Hoffman 1997, p.801). As digital cash becomes convenient, ubiquitous, a secure store of value, a stable unit of account and serves as a practically costless medium of exchange, the demand for paper currency may likely diminish quite rapidly.

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Author: Linda Akam