Put simply, digital money can be defined as a form of currency that uses computer networks to make payments. The breathless media coverage of the future potential of cryptocurrencies like Bitcoin has made digital money a hot topic.
One of the main differences between digital currency and physical currency, such as cash, is that digital currency has no identifying characteristics that make it unique. If you take a look at all the bills you might have in your wallet or purse, you will quickly notice that each bill has a serial number, a unique string of letters and numbers that marks the uniqueness of that bill.
But as we know, digital objects, such as songs or pictures, are easily reproducible indefinitely on the Internet. What prevents us from reproducing digital money in our bank accounts so easily?
Most of us have always used digital money. It is not the digital nature of cryptocurrencies that differentiates them from digital money, but rather the way they secure ownership of digital property that marks them as transformative.
The problems of digital money and who owns it are likely to increase in complexity, with far-reaching implications in everyday life. The Counter Currency Laboratory, a new initiative based in the University of Victoria’s Department of Anthropology, was established to explore these questions. Our research documents the present and future of money and its effects on the way we live.
Commercial banks and payment networks, such as those that use credit cards, safeguard the uniqueness of our digital dollars. These institutions ensure that we don’t go around spending the same digital dollar more than once. Once we spend digital money, banks deduct it from our accounts so it can’t be spent again.
The first widely used form of digital money was credit cards with magnetic stripes. The use of a magnetic stripe encoded with identifying information was first introduced nearly 50 years ago. This form of digital money was widely used in the 1970s and 1980s, spurred by the invention of electronic point-of-sale terminals connected to computer networks operated by Visa and Mastercard.
But how exactly does this digital money work? When paying for something in a store, the shopper taps their credit card on the digital terminal and the merchant’s bank forwards the credit card details to the network. This credit card network requires payment authorization from the cardholder’s bank. The cardholder’s bank validates the cardholder details and available credit amount and then approves the purchase.
Hundreds of millions of these digital money transactions happen every day. While this transaction involves a buyer, a seller, two banks, and a credit card network, no physical money is actually being exchanged. Rather, a series of messages are transmitted that result in a debt owed by the buyer to their bank and a credit on the merchant’s bank account.
In this sense, the digital money used here is not a material medium of exchange, such as banknotes or coins, but rather an account recording unit. This digital currency is a credit or debit in the bank-managed digital ledgers of both the merchant and the consumer. Other forms of digital money, such as debit card transactions or electronic wire transfers, work in a similar way.
No central authority
Cryptocurrencies like Bitcoin differ from the forms of digital money that are already commonly used by consumers around the world. The main difference is that when payments are made, a blockchain replaces the relationship between the two banks.
A blockchain is a list of records containing transaction data that are kept in a distributed ledger, which is a digital ledger record for Bitcoin transactions. Copies of the ledger are stored and maintained by the thousands of computers participating in the cryptocurrency network.
Digital currency poses the problem of double spending. How can you ensure that the same money on an individual’s account is not spent more than once? Blockchain technology solves this problem without resorting to a central authority.
In commonly used forms of digital money, computer servers that facilitate the credit card network prevent double spending. These servers ensure that a cardholder cannot use the same digital dollars used to buy groceries at the supermarket to buy a round of drinks at the pub as well.
In the Bitcoin network, any attempt to spend the same Bitcoin twice would be collectively invalidated by all computers on the network, which would prevent any attempt to spend the same digital currency in two places.
Perhaps the actual revolutionary development brought about by cryptocurrencies is not their digital nature, but rather the fact that they allow the transfer of ownership of digital assets without resorting to centralized authority.
The infinite replicability allowed by the Internet has challenged the notions of ownership that have long supported modern civilization. The blockchain and distributed ledgers maintain the order of intellectual property on the internet. Indeed, it is these aspects of cryptocurrency that can have the most lasting impact on how we live together, both in cyberspace and in real space.