Will Digital Currency Replace Paper Currency?
In 2009, the first digital currency was created in the form of Bitcoin by a man named Satoshi Nakamoto. From the last few years, the digitalization of money is increasing rapidly. The advent of digitalization brings a revolution in both money and payment systems. All over the world, there are over 2000 digital currencies. Many countries already started developing their own form of digital currencies like China, Canada, and Singapore. With the growing digitalization of money, the currency became a debate topic as either the digital currency will successfully replace the paper currency in the future. With the advancement in technology in the present era, scientists are trying to make things easy and accessible to everyone. People consider digital money and payment methods convenient as compared to hard currency payments. The increase in online businesses and payment methods are promoting the digitization of money. Therefore, keeping all the evidence in mind, it is obvious that the digital currency will one day replace paper currency globally.
Money as defined in traditional terms is an asset that plays a role as a store of value, unit of account, and medium for exchange (Brunnermeier et al., 2019, p. 7). In the past, diffusing the hard currency across the region during trade was difficult and doubtful. For the diffusion of currency across the geographic regions digital networks are always preferable. In trading, the usage of digital money is far easier to circulate across the world as compared to paper money. So, with the advancement in technology, the use of digital money increases day by day. In the present digital era, all the economic interactions are done within the range of “Digital Currency Area”. The digital currency area is a network in which all the payments and transactions are made digitally using currency specific to that network (Brunnermeier et al., 2019, p. 2). The digital currency may or may not be governed by national boundaries. The digital currency will create new links and new boundaries and may change the whole foundation of the monetary system worldwide. The currency types will increase by the introduction of digital money, as digital money has the potential to reform the economic system and exchange system (Brunnermeier et al., 2019, para. 12-14).
Paper currency has strong demand in the economy for paying and value storage. Paper money as a means of payment has some important attributes that the end-user value. Paper cash is universally accepted, provides easy simultaneous exchange and direct settlements. It is easy for the person-to-person direct payments and useful in the absence of electronic payment methods when the internet or electricity is not available. Cash has fewer fraud cases as compared to the digitized payments. But on the other side, there are many drawbacks to paper cash as well. Paper money can be inconvenient in large transactions, as the bulk money is difficult to carry, and also security risk is associated with large amounts of money. Keeping large amounts of money at home has a lot of storage and security issues. Due to inflation, the value of cash holding will also erode with time. According to the “Survey of Consumers’ Use of Payment Methods of 2013 (Consumer Use Survey)”, usage of paper money is decreasing as compared to other digital payment methods. Cash is mostly used by people for smaller payments and transactions only. Since 2013, it was observed that the use of ATM and debit cards for cash withdrawal declined, which is the indication of the declining use of paper money. Consumers all over the globe are moving away from cash transactions, and this rapid shifting may completely replace the paper money with digital money in the future (Davies et al., 2016, p. 7-8).
The earliest form of money that is the metallic coins appears for the first time in 2200 B.C according to the history of money. In the 18th century, the development of technology changes started occurring in financial institutions. At the same time (18th century), the banks started banknotes as the substitutes of coins. At all the levels like national, regional, and international, the paper money substituted the place of coin. In the 18th century, Adam Smith who was Scottish economist also known as “Father of Economics” said that, “a prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince.” With the development of technology, many telecommunication networks, private as well as the public, have emerged, and money also modified from hard to digital form. The modified (digital) form of money is termed as digital money or virtual currencies (Didenko & Buckley, 2019, p. 31, 35, and 43).
The basic purpose of digital cash includes; cost less money exchange, a stable unit of account, and a secured store of value. The principle of digital currency is to link bank reserves with non-bank digital currency creating a single circuit (Bordo & Levin, 2019, p. 14). The designing process of digital currency includes two major aspects: financial efficiency and risk. Financial development in the present era presented the trend of decentration and financial disintermediation due to the influence of the internet. Financial relation formed by the efficient transference of information in the age of the internet is called Decentration. Blockchain technology guarantees the decentration of electronic money. The technological transformation in the blockchain provides two technical ways to a digital currency based on account and non-account. Many countries dock with financial institutes in the design of electronic money. Decking is of two types, one in which the central bank directly docked with the customer, second commercial banks deal with the customers on the system of the central bank. Both models are the realistic reflection of the debate focused on decentration and financial disintermediation (Xu et al., 2018, p. 4-5).
Many new types of digital money have emerged with the development in the field of digital currency. Digital money is of different types like Central Bank Digital Cash (CBDC), cryptocurrency, b- money or bank money, e-money or electronic money, and i money or investment money. Central Bank Digital Cash is the counterpart of central bank cash. In contrast to the cash, Central Bank Digital Cash is not unidentified and is capable of protecting users’ data from third parties. The technology of CBDC is centralized and can offer interest. The second type of digital money created by nonbanks is a cryptocurrency that is dominated in its unit of account and is issued on the blockchain. Cryptocurrency is referred to as public coins including both bitcoins and Ethereum. Third and most widely used claim-based money is known as b-money. B-money covers commercial bank deposits. All around the world, the payments are directly transferred from one bank account to another in the same or different country. B-money is associated with debt-like instruments and the money transfer is commonly done with the help of centralized technology like debit cards and wire transfers (Adrian & Griffoli, 2019, p. 5 and 12). The key feature of b-money is that its redemption guarantee is backstopped by the government. All three digital money types include the use of digital banking systems in money storage, money transfer, and payments (Adrian & Griffoli, 2019, p. 5 and 12).
Another emerging type of digital money is “E- money” that can be redeemed in currency at face value on demand (Krasota et al., 2019, p. 4). Electronic money or e-money is offered by new private sector providers. Electronic money is just like b- money but in contrast, their redemption guarantees are not backstopped by the governments. The last type of digital money is i- money or invest money that is issued by private investment funds. I -money is potentially a new means of payment. Investment money is similar to electronic money but in contrast to e-money it offers variable value redemptions into currency and thus i- money is an equity-like instrument. I- money entails a claim on the assets, typically on the things like gold or shares of the portfolio, examples of gold-backed i-money are Digital Swiss Gold (DGS) and Novem (Adrian & Griffoli, 2019, p. 5 and 12).
The digital currency has already spread all over the world including countries like China, Switzerland, Germany, Poland, Australia, Israel, the US, and Sweden. Many countries like China, the US, and Germany started using digital currency while others like South Asian countries still lack any strong digital money system (Dabrowski & Janikowski 2018, p. 26 and 29). The world is facing economic chaos, civil war, and governmental collapse in developing countries. In the present time of economic downfall and recession, “Digital money can be helpful in providing significant benefit by overcoming the deficiency of social trust and increasing the approach to financial aid. Digital money increases financial inclusion and provides better traceability of funds and removes poverty from society” (Holtmeier and Sandner, 2019, pg 7-9). Many countries started making their own digital currencies. Different types of digital money are considered to be supported in the growth of developing countries. With the usage of digital money, financial transactions are efficient that in turn enhance the business opportunities (Tanaka, 1996, p. 8, 9, and 11).
Economic growth and advancement in digitalization is a favorable jurisdiction of digital currency. The digital money like Central Bank Digital Currency (CBDC) reduces the transaction costs for retail as well as payments of institutions. The consumers that do not have bank accounts can make digital payments at very low or no cost. The privacy increases in the case of conventional digital currency as they are more anonymous than the present commercial bank’s card payments (Kaumbarakis & Dobrauz, 2019, p. 6). With the maturation of the bitcoin market, the companies related to bitcoins like software makers, hardware manufacturers, financial exchange, payment system companies, and automated teller machine manufacturers also increased in number. The increase in the number of companies using bitcoin, as a result, increases the growth of digital money (Teo, 2015, p. 10-13). Due to less usage and the least development in the technology of digital money, research always neglected the development of electronic money but the emergence of bitcoin in 2018 grasped the attention and interest of researchers in digital currency. Digital currency does not come under the control of the International Monetary Fund (IMF), the institution that coordinates the international foreign currency exchange market. The digital currency gained so much importance in the field of international commerce that there is a need for the IMF (International Monetary Funds) to remove the possible insecurities in digital currency usage (Plassaras, 2013, p. 21).
With all these benefits, there are still some insecurities associated with the usage of digital money as criticized by many people. Trust in the monetary system is based on the understanding that all the parties included in the transaction are trustworthy and cooperative but in digital transactions, there is no such trustworthy institution. The major risk regarding the use of digital currency is that it is susceptible to use by terrorists. Terrorists use cryptocurrencies for six financial activities like fundraising, illegal drugs, and arms trafficking, remittance of funds, attacking funds, and operational funding. Due to the weak security system in digital money, the system is helpful for terrorist usage (Dion-Schwarz & Manheim, 2019, p. 1-2). Cybercrimes the other demerit of the internetwork is growing rapidly with the advancement in technology and many people daily are facing crimes like hacking, phishing, and virus-related issues. According to the survey conducted by the UK’s Office of National Statistics in 2012 over 8000 people, it was found that “3% people lost money while using the internet and 5-6% faced financial loss by using online credit and debit cards online (Dodgson et al., 2015, p. 5). Criminals have started abusing the digital currency as an exchange platform. Criminals need reliable bank accounts but they need to register without giving their information so the victim can never reach them. Few of the digital companies fulfill the requirements of criminals providing them a forum for committing crimes easily. But according to the research, the crime cases observed in the digital money system are not of large scale-up till now. Another issue associated with the use of bitcoin is the exchange rate of dollars because the exchange rate of bitcoin dollars fluctuates wildly (Moore, 2013, p. 1-2).
Keeping all the merits and demerits in the view, it is clear that despite some drawbacks of digital money, the usage of digital money is growing wildly (Adrian & Griffoli, 2019, p. 13). The security issues can be solved by further research on the development of the security system for digital payments (Baron & Mahony, 2015, p. 67). The growth of digital money cannot be stopped now as the present era of technology and digitalization is occurring in all the fields. The use of paper money does not remain viable at all scales (Davies & Doyle, 2016, p. 8). All the aspects support the replacement of paper money with digital money all around the world.
References
Adrian, T., Griffoli, T. M. (2019). The Rise of Digital Money. FinTech Notes, 19(01). doi:10.5089/9781498324908.063
Baron, J., O’Mahony, A., Manheim, D., & Dion-Schwarz, C. (2015). National security implications of virtual currency: Examining the potential for non-state actor deployment. RAND Corporation-NDRI Santa Monica United States.
Bordo., Michael., and Andrew Levin. “Digital Cash: Principles & Practical Steps.” 2019, doi:10.3386/w25455.
Brunnermeier, M., James, H., & Landau, J. (2019). The Digitalization of Money. National Bureau of Economic Research. doi: 10.3386/w26300
Dabrowski, Marek, and Lukasz Janikowski. “Virtual Currencies and Their Potential Impact on Financial Markets and Monetary Policy.” SSRN Electronic Journal, 2018, doi:10.2139/ssrn.3244429.
Davies, C., Doyle, M. A., Fisher, C., & Nightingale, S. (2016). The future of cash. RBA Bulletin, December, 43-52.
Didenko, A., Buckley, R. P. (2018). The Evolution of Currency: Cash to Cryptos to Sovereign Digital Currencies. SSRN Electronic Journal, 42(4). doi:10.2139/ssrn.3256066
Dion-Schwarz, C. (2019). Terrorist use of cryptocurrencies: Technical and organizational barriers and future threats. Santa Monica, CA: RAND Corporation.
Dodgson, M., Gann, D., Wladawsky-Berger, I., Sultan, N., & George, G. (2015). Managing digital money.
Holtmeier, M., & Sandner, P. (2019). The impact of cryptocurrencies on developing countries. FSBC working paper
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Krasota, T., et al. “Monetary History and Money Types in Digital Economy.” Proceedings of the Internation Conference on “Humanities and Social Sciences: Novations, Problems, Prospects” (HSSNPP 2019), 2019, doi:10.2991/hssnpp-19.2019.154.
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Reflection Questions
How much time did you spend revising your draft? What revision strategies did you use and which worked best for you? (2-3 sentences)
I spent almost 5 to 6 hours on revising my draft. My draft was good as mentioned in the comments. I have to work on the clarity of my essay. The most helpful thing was the professor’s comments. I read all the comments one by one and tried to fix all the errors in my essay.
List three concrete revisions that you made and explain how you made them. What problem did you fix with each of these revisions? Issues may be unity, cohesion, rhetorical appeals, content, or any other areas on which you received constructive feedback. (4-5 sentences)
The major revision I did was the clarity of my essay. Some sentences were hard to read and understand and paraphrased the sentences to clarify the meanings. Secondly, I missed the time frame due to which my points were not specific, so I added the time from the literature. The third important revision I did was the addition of references at two places where there is a need to add references.
What did you learn about your writing process or yourself as a writer? How has your understanding of the research process changed as a result of taking this course? (2-3 sentences)
I learned a lot of things in this course from selecting a topic until the revision of my draft essay. I think I am a good researcher as I used credible resources and organized all the points in a good way. I stayed focused on the topic until the end. All the improvements and learning is completely impossible without doing this course, it developed a sense of how to start researching on the topic to write an argumentative essay. I also had some clarity issues, but I will surely be careful next time. This course polished my research and writing skills.