I. What is Digital Currency

Digital currency is a type of currency that exists only in digital or electronic form. It is also known as digital money, electronic money, electronic cash, or online cash. It has no physical entity and cannot be touched, stored, or manipulated like traditional currencies. Consumers and businesses can use digital currency for transactions, but not all countries or communities accept it. For example, Bitcoin, a typical representative of digital currencies, is created and held in electronic form. It is not controlled by a single institution and is generated through software that solves mathematical problems on computers running around the world.

II. Characteristics of Digital Currency

(I) Non-physicality

Digital currency only exists in the digital world. Unlike paper money and coins with physical forms, transactions need to be completed through computers, e-wallets, or mobile devices connected to the Internet or a specified network.

(II) Decentralization or Centralization

Digital currencies can be divided into decentralized and centralized types. Well-known cryptocurrencies such as Bitcoin and Ethereum belong to the decentralized digital currency system and have no single control center. On the other hand, digital currencies corresponding to legal tender, such as central bank digital currencies (CBDCs), are issued and managed centrally by central banks and government agencies and belong to the centralized system.

(III) Value Transfer

Digital currency can not only be used for regular commodity trading but also expands the concept of value transfer. For example, in a game network, the game coins used by players can extend the lifespan of game characters or give them extra abilities. This is not a traditional trading transaction but still realizes value transfer.

III. Types of Digital Currency

(I) Cryptocurrency

Cryptocurrencies use cryptography to secure and verify transactions in the network and manage and control the creation of currency. Bitcoin and Ethereum are typical cryptocurrencies. Their regulatory situations vary in different jurisdictions. Since they are unregulated and exist only in digital form, they are also regarded as virtual currencies.

(II) Virtual Currency

Virtual currency is an unregulated digital currency controlled by developers or creation organizations with different stakeholders, or it may be algorithmically controlled by specific network protocols. For example, the tokens in game networks, and their economic systems are defined and controlled by the developers.

(III) Central Bank Digital Currency (CBDC)

Central bank digital currency is a regulated digital currency issued by a country's central bank and can be used as a supplement or alternative to traditional legal tender. Different from legal tender that exists in both physical and digital forms, central bank digital currency exists only in digital form. Currently, countries such as England, Sweden, and Uruguay are considering launching digital versions of their national legal tender.

IV. The Development Status of Digital Currency

With the emergence of distributed ledger technology, privately issued digital currencies such as Bitcoin and Ether have been widely adopted and used. This has prompted central banks around the world to explore the launch of central bank digital currencies, and some countries have even introduced them to the public. According to the Central Bank Digital Currency Tracker of the Atlantic Council, the Bahamas, Nigeria, and seven member states of the Eastern Caribbean Central Bank have launched and actually used retail central bank digital currencies. In addition, 14 countries, including China, Saudi Arabia, Singapore, South Africa, and Sweden, are conducting pilot projects for central bank digital currencies. Among them, China's digital yuan "e - cny" has received much attention and has been piloted and distributed in some cities, but the national promotion time has not been determined yet.
In the United States, the Federal Reserve has been studying the feasibility of central bank digital currency for many years and has cooperated with the Bank for International Settlements to publish a series of articles discussing the basic principles, core characteristics, system design, interoperability, user needs, adoption, and impact on financial stability of central bank digital currency. On January 20, 2022, the Board of Governors of the Federal Reserve System released a discussion paper on the potential benefits and risks of creating a US central bank digital currency (sometimes called "digital dollar" or "Fedcoin"), which has sparked widespread public attention and discussion on digital currency.

V. The Future Prospects of Digital Currency

The future of digital currency is full of potential but also faces many uncertainties. On the one hand, digital currency is expected to achieve safer, faster, and lower-cost payments, including cross-border payments, stimulate financial innovation, and expand financial inclusion, benefiting more individuals and businesses that cannot enjoy traditional banking services. On the other hand, digital currency also has some risks and challenges. For example, its price fluctuates greatly, and transactions are easily affected by market sentiment; it is vulnerable to hacker attacks and has security risks; some digital currencies may be used for illegal transactions and money laundering, and the regulatory difficulty is relatively large.
In the future, will digital currencies change in value based on purchasing power and supply and demand like traditional currencies? Will financial institutions compromise to cryptocurrencies such as Bitcoin or create their own digital currencies? Will large technology companies such as Google and Amazon enter the digital currency field? Which of these newly emerged and existing digital currencies can survive the fierce competition? These questions all await answers with the passage of time. But it is certain that digital currency has become a force that cannot be ignored in the financial field, and its development will profoundly affect the future economic pattern and financial system.