Digital Currency in the Banking Industry

Ashish M. Shaji

18 Jun, 2020

There has been a significant rise in digital currencies which can potentially impact the financial system and the practices of the banking industry. Although in countries like India, physical currency is widely used, and consumers routinely conduct transactions without physical currency. There has been a collaboration between the central banks to think about the impact of digital currency for financial stability.

What is Digital Currency?

Digital currencies are a form of currency that is in the form of digital or electronic and not in the physical form. It may be called digital money, electronic money, or cybercash. These currencies can be accessed only through computers or mobile phones as they are available only in electronic form. They require no intermediaries and are one of the cheapest methods to trade currencies. Example- Cryptocurrencies, Bitcoin etc.

What is Cryptocurrency?

Cryptocurrency is a digital or virtual currency made to work as a medium of exchange. It uses cryptography to verify and secure transactions and to control the creation of new units of a particular cryptocurrency. It is important to note that cryptocurrencies are high-risk investments as their market value fluctuates like no other assets. It is also partly unregulated, so there may be a risk of them being outlawed in certain jurisdictions.

Digital Currency vs Cryptocurrency

Most of you may use the term Digital currencies and Cryptocurrency interchangeably. Digital currencies can contain anything that represents value in a digital manner, whereas cryptocurrencies are decentralized virtual currencies. It is a virtual currency because its units are not considered legal tender.

Digital currencies are centralized, which implies that transaction within a network is regulated in a centralized location, e.g., bank. Cryptocurrencies are decentralized, and its regulations are governed by the majority of the community. Digital currencies are not transparent, but Cryptocurrencies are transparent.

How does Digital Currency work?

The most significant element of how digital currencies work is their blockchain network. All digital currencies are built on Blockchain technology. Blockchain protocol permits digital currencies to be created and used as a viable form of money. Without the blockchain protocol making digital currencies would be impossible.

Digital currency’s blockchain network pertains to a public ledger of all transactions of those currencies that have never occurred. New transactions are grouped into blocks. Every block is validated by multiple users throughout the network before it’s added at the end of the chain. The miners have the responsibility of confirming the transactions inside a new block.

 To confirm the block miners compete with each other to make “hash”. Hash is a unique sequence of cryptographic information. Once the miners complete the hash, the new block is confirmed, and the hash is stored along with it. To regulate the currency and to control inflation, the blockchain software protocol makes it difficult for miners to generate hashes and confirm new blocks as the networks grow.

When Digital currencies are mined on their blockchains or are transferred among the users, then they are required to be stored until their new owner is ready to use them. These are stored in the digital currencies wallets. These wallets can store digital currencies securely for an indefinite period.

Advantages of using Digital Currency

There are some advantages associated with using digital currencies. They are discussed below:

• Faster Transactions

While making big purchases, there are a number of steps and procedures that one needs to fulfil. It also includes getting approval from the bank. This consumes a lot of time. With digital currencies, one can make quick transactions without the need of a middle man.

• Constant Payment Tracking

With traditional banking, you may not be sure where your money is at the given time while making transactions. With digital currencies, you can track your money at any moment.

• Fraud Protection

While purchasing something online one may use their debit or credit cards. It is the most usual ways of paying while paying online. However, there may be a risk where your personal information could be stolen. Using digital currencies cancels that risk as you can send funds directly to anyone without giving your information.

• Zero Fee

Banks may charge fees like ATM charges, transaction fee etc. and it may seem unfair that you have to pay to use your own money. The speciality about digital currencies is that you own it and not the banks. Therefore you don’t require paying any additional fee when using digital currencies.

• Easy Accessibility

The biggest advantage of using digital currencies is that it is very easily available to every person. Moreover, unlike banks and lending companies that require you passing their evaluation criteria to earn funds, digital currencies have no such restrictions.\

Our recommendation: Implementation of Platform-based banking

Disadvantages of using Digital Currency

Some of the disadvantages include the following:

• High Risk

While digital currencies have the potential to earn someone a lot in a quick time, it also has a high-risk factor attached to it for those farming it. This is because the price of digital currencies can change unexpectedly anytime.

• Security Concerns

Digital currencies have been plagued with a lot of security concerns as it is vulnerable to attacks from hackers. There have been instances where a large corporation suffered greatly at the hands of the hackers.

• Unpredictable

As you may know that digital currencies are not controlled by a central governing body, therefore, its fate is quite unpredictable. Some of the countries have started developing their own cryptocurrencies whereas few of the countries have completely outlawed them.

Conclusion

Also, read: Cybersecurity in Digital Banking: Threats, Challenges and Solution