What is Digital Money?

Digital money is money that can be traded electronically. It can be used for online purchases or can be transferred from one account to another. Whenever you swipe your card instead of paying cash, you are using form of digital money.

Digital money is also recognized as digital cash, digital currency, electronic money, electronic cash, electronic currency or e-money. Direct deposit and Electronic Funds Transfer are some of the known examples of digital money.

Theoretically, digital money is a system that debits and credits money electronically. It is used to exchange value with another system or itself. Furthermore it is a term for cryptography and technologies that enable it. This system includes digital stored value system, computer networks and internet.

The most successful example of digital money or e-money is Hong Kong’s Octopus card system. In the beginning it was used as transit payment system. Now it has developed into broadly used electronic cash system.

How does Digital Money System Work?

There are two factors that play a vital role in making digital money transaction successful. These two factors are public key cryptography and digital signatures. It will be very difficult to know all the functioning of these two factors. But we will study it in short.

The public key encryption keys always come in pairs with private keys. The public key will be known to everyone while private key is acknowledged by only owner. These keys are used to encrypt and decrypt data. The data encrypted by the private key will be decrypted by public key. And data encrypted by public key will be decrypted by private key.

The bank and the customer both will have these keys. The bank encrypts any transaction like money order with its private key. While to decrypt it, the customer will use the public key of bank.

On the other part, when customer wants to deposit or withdraw money, he will use his private key to encrypt the transaction. And the bank will use customer’s public key to decrypt and verify the transaction.

Also all the transactions are signed with use of digitally signature for identification and security.

What is Private or Electronic Currency?

Occasionally to refer to the provider, the term electronic money is used. These private systems issue their own private currency. To provide extra security, the private currency may use gold like digital gold currency.

Some systems like Paypal, WebMoney, Gogopay and Wirex sell their electronic currency to the user directly. While systems like Liberty Reserve sell their electronic currency through other digital currency exchangers.

But for the Octopus Card in Hong Kong, the functioning is very much similar to any other bank operation. Whenever the Octopus Card Limited obtains money for deposit from user, it is deposited in bank. This is same as re-depositing money to central bank by a bank that had issued debit card.

Which are the Different Types of Digital Money?

There are two types of digital money – identified e-money and anonymous e-money.

Identified e-Money

The identified e-money holds all information about transactions. It can have the information of the person who withdrew the money from bank. Similarly, the bank can trace the money as it passes from one user to another. This function is similar to that of any credit card.

Anonymous e-Money

Anonymous e-money has similarity in function with real currency or cash. After taking out anonymous e-money from bank, it can not be tracked. One can use it, spent it or give out without leaving any trace. While generating anonymous e-money blind signatures are used.

Online e-money and offline e-money

Online and offline e-money are the subtypes of both identified and anonymous e-money.

In case of online e-money, the interaction with a bank is required to carry out any transaction with third party.(like you payment to seller using internet banking account.) While in case of offline e-money one can perform a transaction without any direct involvement of bank. The most complicated form of e-money is offline anonymous e-money. This is due to the double spending problem.

How is the e-money System Developing?

To expand the digital e-money system there are few directives as follows:

• The system should be capable for using through a broad range of hardware.
• For internet methods, linked accounts should be used. They are used for exchange with micro payment system in large companies.

What are the Concerns regarding Digital Money?

Digital money gives us many advantages like –

• Increased effectiveness of transactions.
• Less transaction charges.
• Confidentiality and ease
• New business opportunities.

However there are many concerns and issues regarding the use of digital money.

• The transfer of digital currency can bring up problems like charging tax.
• The money laundering will become easy.
• Exchange rate instability.
• Shortage of money supplies.

The cyberspace laws and regulations control the transactions. They also keep an eye on these transactions for any signs of troubles. These issues can only be tackled by them.

In former days, the currency used was gold, silver or even cattle. Today money is used in form of coins and notes. But the quantity of liquid money is less compared with digital money that these banks hold in their records.