Digital Cash: Advantages and Disadvantages

There is a proliferation of electronic payment systems in the 21st century. Debit and credit cards have become the norm, and cash has become obsolete. However, many people still prefer to use cash because of some benefits that it offers. Up until now, people have been facing a choice between using the electronic medium and using cash. However, with the new concept of digital cash, it is now possible to combine the advantages of both digital technologies as well as cash.

In this article, we will try to understand what digital cash is and what its advantages and disadvantages are.

What is Digital Cash?

Digital cash can be defined as any electronic system which allows for storage, transfer, and spending of electronic cash. These systems are mostly owned by private companies.

In simpler words, people can use physical cash to buy digital credits. These credits can then be stored in an electronic wallet and spent when required. Electronic cash is different from mobile wallets. People can only use mobile wallets if the counterparty also uses the same wallet. This is not the case with digital cash. Digital cash is meant to be just like cash. This means that the counterparty does not need to have any systems in place to accept digital cash. There is no special hardware or software that needs to be installed to use digital cash. If such a requirement does exist, the arrangement can no longer be called digital cash. It can instead be classified as a mobile wallet.

Digital cash is becoming more common because of the convenience and independence that it offers. The advantages and disadvantages of digital cash have been explained in detail in this article.

How does Digital Cash Work?

As mentioned above, in order to use digital cash, the end user needs to open an account with a bank. They then need to ask the bank to provide them with e-cash in lieu of their cash. For instance, the bank may deduct $1000 from the account and issue 1000 digital coins of $1 each.

The bank uniquely marks each coin that it issues. This is done to ensure that each coin is spent only once by a single user. Once it is spent, it reaches a different consumer and gets a different number. This electronic marking makes the digital cash system viable. In the absence of this marking, duplication would make the system unviable.

There are several protocols that banks have developed in order to ensure that the digital cash system works seamlessly. Some of these protocols have been mentioned below

Account Opening: In this case, the bank takes in cash and issues marked digital tokens

Withdrawal: This is the opposite of the account opening. Here the electronic tokens are extinguished, and cash is provided to the customer

Payments: Here, digital coins are extinguished. However, the value of these coins is transferred to the counterparty. This value may be in the form of digital coins or in the form of bank currency depending upon the customer’s preference.

Advantages of Digital Cash

There are several advantages to using digital cash. Some of them have been mentioned below.

  • Lower Cost: Firstly, the cost of using digital cash is extremely low. Normal bank transactions require huge amounts of infrastructure. There are bank branches, tellers, clerks, electronic systems, all of which combine to make transactions possible. This infrastructure can only be used for banking transactions. On the other hand, digital cash does not warrant any special infrastructure. It can use basic services such as the internet to make the same transactions possible. Hence, the need for dedicated infrastructure is removed. This brings down the cost of transactions.
  • Long Distance Transactions: With physical cash, sending money to the other side of the world can be very expensive. This is also the case with electronic cash since intermediaries like SWIFT get involved and hence have to be paid a fee. However, digital cash can be sent around the world without too much of a hassle. The cost to send money to the next door neighbour and to a person on the other side of the world is the same in a digital cash system.

Disadvantages of Digital Cash

The digital cash system also presents some formidable problems. Earlier, double spending was the biggest problem. However, over time, it has been solved by using marked electronic tokens. The problems which still exist are as follows:

  • Not Traceable: The digital cash uses the internet, which makes traceability difficult. Hence, the system provides anonymity. This can be a good thing but also a bad thing. For instance, criminals could use the digital cash system to launder their money to different countries. The lack of traceability is a major problem for governments and legal authorities. It does not have any significant impact on the user community.
  • Forgery: Digital cash systems pose some unique risks. Since cash is digital, it is likely that hackers might break into the system. They may generate more coins even though they have not paid anything to earn that cash. When excessive coins are generated, the value of the other coins in the system is reduced. Hence, this risk affects both the users as well as the banks equally.

To sum it up, digital cash is a relatively new system. However, it promises a lot of convenience and safety and hence, is being adopted rapidly.

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