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. And after the creation of first digital money, the digitalization of money is exploding day by day from the last few years. The advent of digitalization brings a revolution in both money and payment system. All over the world, there are about 2000 plus digital currencies. Many countries already started developing their own form of digital currencies like China, Canada, and Singapore, etc. So, 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? People all around the world widely debated on the issue that digital money has the potential to displace paper money. 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. All around the world, people are using online money transfer and payment by sitting at their places without going anywhere. 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 all around the world.
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. 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. As trade with the usage of paper money became difficult whereas digital money is far easier to circulate across the world. So, with the advancement, 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. 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, James & Landau, 2019, p 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-users 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, 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 expected to completely shift to the use of digital money (Davies et al., 2016, pg 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. With the development in technology changes started occurring in the financial institutions. At the same time, the banks started banknotes as the substitutes of coins. And on all the levels like national, regional, and international, the paper money substituted the place of coin. According to Adam Smith at that time, “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 the same happened in the case of money. The money developed in a digital form termed as digital money or virtual currencies (Didenko and Buckley, 2019, pg. 31, 35, and 43).
The purpose of digital cash is to attain the basic role of money like costless 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 and Levin, 2019, pg. 14). Two design ideas are presented to explain the mechanism of digital currency. The designing process includes two 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 the 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 focus on decentration and financial disintermediation (Xu, Zeng, and Deng, 2018, pg. 4-5).
The development in the field of digital technologies become a major factor influencing the key process of establishing reform of the economy and money supplies. 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 crypto-currency 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 and Griffoli, 2019, pg. 5 and 12). The key feature of b-money is that its redemption guarantee is backstopped by the government.
Another emerging type of digital money is “E- money” that can be redeemed in currency at face value on demand (Krasota et al., 2019, pg. 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 includes the claim on the assets on the things like gold or shares of the portfolio, examples of gold-backed i-money is Digital Swiss Gold (DGS) and Novem (Adrian and Griffoli, 2019, pg 5 and 12).
Digital currency spread all over the world including countries like China, Switzerland, Germany, Poland, Australia, Israel, the US and Sweden, and many others. All the countries are making their digital currency and some are already started using the digital currency (Dabrowski and Janikowski 2018, pg 26 and 29). As in the present era the world is facing economic chaos, civil war, and governmental collapse in the developing countries. “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, pg 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 and Dobrauz, 2019, pg. 6). With the maturation of the bitcoin market, the companies related to bit-coins 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, pg 10-13). The research always neglected the development of electronic money but the emergence of bitcoin in 2018 grasp 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 of IMF (International Monetary Funds) to remove the possible insecurities in digital currency usage (Plassaras, 2013, pg 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 crypto-currencies for five 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 and Manheim, 2019, pg 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, pg 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. There is also the issue of the exchange rate associated with the use of bitcoin as the exchange rate of bitcoin dollars wildly fluctuates (Moore, 2013, pg 1-2).
Keeping all the merits and demerits in the view it can be easily said that despite the demerits of digital money usage has grown widely (Adrian and Griffoli, 2019, pg 13). The security issues can be solved by further research on the development of the security system for digital payments (Baron and Mahony, 2015, pg 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 and Doyle, 201, pg 8). All the aspects support the replacement of paper money with digital money all around the world.
References
Brunnermeier, M. K., James, H., & Landau, J. P. (2019). The digitalization of money (No. w26300). National Bureau of Economic Research.
Davies, C., Doyle, M. A., Fisher, C., & Nightingale, S. (2016). The future of cash. RBA Bulletin, December, 43-52.
Didenko, A. N., & Buckley, R. P. (2018). The Evolution of Currency: Cash to Cryptos to Sovereign Digital Currencies. Fordham Int’l LJ, 42, 1041.
Xu, Z., Zeng, Y., & Deng, S. (2018). Research on the Evolution and Key Mechanism of Digital Currency Based on” Block Chain.
Bordo, M. D., & Levin, A. T. (2019). Digital cash: principles & practical steps (No. w25455). National Bureau of Economic Research.
Adrian, M. T., & Griffoli, M. T. M. (2019). The rise of digital money. International Monetary Fund.
Krasota, T., Bazhenov, R., Mironova, I., Abdyldaeva, U., & Bazhenova, N. (2019, July). Monetary History and Money Types in Digital Economy. In ” Humanities and Social Sciences: Novations, Problems, Prospects”(HSSNPP 2019). Atlantis Press
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Holtmeier, M., & Sandner, P. (2019). The impact of crypto currencies on developing countries.
Tanaka, T. (1996). Possible economic consequences of digital cash.
Koumbarakis, A., & Dobrauz-Saldapenna, G. (2019). Central Bank Digital Currency: Benefits and Drawbacks. Available at SSRN 3429037.
Teo, E. G. (2015). Emergence, growth, and sustainability of bitcoin: the network economics perspective. In Handbook of digital currency (pp. 191-200). Academic Press.
Plassaras, N. A. (2013). Regulating digital currencies: bringing Bitcoin within the reach of IMF. Chi. J. Int’l L., 14, 377.
Dion-Schwarz, C., Manheim, D., & Johnston, P. B. (2019). Terrorist Use of Cryptocurrencies: Technical and Organizational Barriers and Future Threats. Rand Corporation.
Dodgson, M., Gann, D., Wladawsky-Berger, I., Sultan, N., & George, G. (2015). Managing digital money.
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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.
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Adrian, M. T., & Griffoli, M. T. M. (2019). The rise of digital money. International Monetary Fund.
Reflection Questions
Provide one example of a place where you have used rhetorical appeals or source material to support your argument. How does this enhance your essay? (2-3 sentences)
All the essay is from the high quality research articles and except the counter arguments the paragraphs that are on the benefits and growth of digital currency support my argument. I used a source reference in the paragraph where I discussed the benefits of digital money usage in the growth of the economy and decline of poverty to strengthen my side.
Touchstone 4 is a revision of this draft. What kind of feedback would be helpful for you as you revise? Are there parts of your draft that you’re uncertain of? (3-4 sentences)
I tried my level best to make a good draft. I just wanted to know if I successfully followed the outline of the essay and wrote a meaningful and organized argumentative essay. The feedback will be very helpful for me and highly appreciated.