Digital currency is a growing approach to transfer money to different countries. Digital currency uses encryption and cryptography, which are mathematical techniques that in themselves are not new; they have been used since the days of the ancient Greeks to send secret messages. But digital currency uses encryption and cryptography in a way never before tried, by central banks that control currencies in all their zeroes and ones.
Digital currency has three features which make it attractive to people with the technical skills needed for it. People who have these skills are called coders or software engineers. Digital currency is not just for young people; it is also for older people and especially women, who are underrepresented in software engineering jobs.
Digital currency is based on math and computer science, which in themselves aren’t new; they have been used since the days of the ancient Greeks to send secret messages. But digital currency as a technology relies on two other things: cryptography, which is the art of secrecy; and block chain, which is the public database where everyone can see all transactions that have occurred so far.
Without those two things, digital currency would be like email: a very useful tool but nobody would ever want to use it instead of writing letters or using cash or using an ATM card.
This is where I take it off the rails a bit.
It is true that digital currency has been an approach to transferring money for about fifty years. It has been used for payments, including for internet access, and it has also been used as a kind of bank account, or a form of investment. Unfortunately, it has never really worked very well. In part that’s because the computers involved are not fast enough; in part it’s because digital money is hard to use securely; and in part it’s because there’s always someone trying to beat the system by making counterfeit digital cash (otherwise known as “cash”).
The fact that there are so many different kinds of digital currency is useful. It shows you don’t have to choose between them. Digital currencies do things a bit differently, but they all work the same way: they make it possible to transfer money from place to place.
We are now entering an era where digital currencies will become the primary way to transfer money around the world. This doesn’t mean that cash will go away, but it does mean that digital currencies will become more important.
So if you want to understand what’s going on in digital currency, you need to know about digital currency.
Digital currencies are digital in the sense of being purely digital, without any physical connection between the currency and its users. Bitcoin is the most famous example. But there are many others, including Liberty Reserve (an anonymous payment system which shut down in 2013), Bitgold (a digital currency backed by gold), and Ripple (a company that created a way for banks to make instant payments to one another).
However, it is not just digital currencies that are emerging. There are also digital bank accounts, which allow people to make instant payments from their accounts without handing over their actual bank account numbers.
These are all related to each other in interesting ways. Digital currency has something to do with digitization; digitization has something to do with the Internet, which led some people to believe that money could be digitized as well; and digitization has something to do with banking, because new financial instruments have recently been invented based on banking transactions.
The most famous digital currency is Bitcoin. It has no government or central bank and no single owner. The system is based on the cryptographic concept of public key cryptography, which is used to encrypt messages by using the private key of a user and the public key of the recipient. Furthermore, it uses a shared ledger to keep track of all transactions made on the network.
It works as follows: If Alice wants to send some bitcoin to Bob, she needs to create a transaction ‘out’ from her digital wallet, which contains a list of Bob’s address in the digital currency system. She then sends that transaction to the blockchain (a large decentralized ledger) where it is verified for validity and included in an ‘in’ transaction sent from Bob’s wallet. If it clears, Bob now has new bitcoin at Alice’s address.
The word “digital” used here is a technical term, and it doesn’t necessarily mean what you think it means. A digital currency is one that exists only in some computer system; it has no physical form. There is no sense in which paper money is “digital” any more than there’s much sense in which the U.S. dollar is: it only exists as a number in a bank account somewhere.
Digital currency is sometimes called virtual currency because nothing physical—no coins or bills, no metal coins—is involved. But that doesn’t make it inherently virtual. You can use an electronic device to make a coin appear, for example, by shining a laser on it from behind, as long as the coin isn’t too heavy to be held steady by hand and isn’t too small to pass through the device’s detectors: you could, for example, make a coin that weighs 1 gram and has its edges sharp enough not to be detected by the detector but not sharp enough to cut things at random.*
You might call this kind of thing “digital money”, but that wouldn’t be quite right either. Like digital checks or digital money transfers under credit cards, creating something digitally doesn’t mean making it out of thin air: it means using code to tell
A digital currency is a way of making money without printing it out, like the dollar bill.
There are at least two kinds of digital currency. One is a kind of database: accounts in a computer database. It can be used to track money from one account to another, just as bank accounts do now. The other kind is a kind of currency: digital money that can be exchanged for dollars or euros and so on.**
Bitcoin and some other currencies are based on this second kind of digital currency; they are usually called “cryptocurrencies.” People have been thinking about this kind of digital currency for a long time, ever since I started programming computers in 1964. That’s where the term blockchain comes from.* But the name wasn’t coined until around 2008, when Bitcoin came onto the scene and got everyone excited about it.