Digital Currency Payment System

Digital currency payment system differs significantly from traditional EFT. In EFT, sensitive information like credit card numbers, bank account numbers, etc. are sent over the network. But in the case of Digital Currency Payment Systems (DCPS), only the monetary value is transferred similar to sending a Rs 100 note through post. Hacking this information is outright theft and companies having DCPS should take counter measures but they will be totally different from credit card frauds. The main advantage of Digital Currency is that security for the transactions can be enhanced through encryption methods and trusted third parties. Peer to peer money transaction either online or offline is also possible. Digital currency can be treated as a monetary innovation. Figure 18.4 shows how a digital currency payment system works.

Money as a medium of exchange

Earlier cash crops, cattle, precious objects and all other valuable goods were used at some point of time or the other for exchange as money. But none of these goods were convenient to act as a medium of exchange. Therefore coins and later, paper currency came into being as the medium of exchange.

Until the later part of 19th century, precious metals made into coins, were used as money. When paper currency came into being, it was issued by private banks and government agencies. Bank credits were transferred as bills of credit, whose value depended on issuer's credit worthiness. By the beginning of 20th century, these private agencies and banks were gradually phased out and respective governments began to issue notes. For example, in the United Sates, the government began to issue Federal Reserve Notes by late 1930s. The paper notes do not have any intrinsic value, but the issuing bank or government promises to convert it into another form of stored value on demand. Therefore, value of proper currency depends on the confidence public has on the authority that issues the currency.

The digital currencies and payment systems should have the monetary properties of cash and the requirements of digital communication networks. Following are some fundamental properties, which digital currencies should have:

Monetary value
Convenience
Security
Authentication
Non refutability
Accessibility and Reliability
Anonymity

Monetary value

Digital currency should have a value, which can be exchanged for other goods and services. It should be transferable and one should be able to use it to pay for other obligations. Digital currency does not have an intrinsic value and therefore it has to be linked to another system of value. The most common method is to base the value of digital currency on bank deposits, credits or pre payments using the real currency. As digital currency becomes more and more acceptable, the full functionality of a currency like exchangeability and transferability may be achieved.

Convenience

Digital currency should be convenient to use, store, access and transport. It should be scalable and interoperable and compatible with different platforms and operating systems.

Security

Digital currencies should be very secure because they are more susceptible to theft. Some online digital currencies use encryption technology. Others use smart cards which store the digital currency in tamper proof hardware. These smart cards should withstand accidents and careless handling like washing, etc.

Authentication

Digital currency is verified by authenticating the digital signatures of banks or payers attached to the digital currency or by contacting a, trusted third party each time a transaction is made.

Accessibility and reliability

Digital currency has the advantage over physical cash because it can be transported over a network conveniently. A person may have digital cash at his home PC and can access it through modem and telephone line from anywhere. As a network is used for payment, digital payment systems should be reliable and easy to access.

Anonymity

Unlike non cash transactions, cash transactions are anonymous. An anonymous payment system is required to hide customer purchasing pattern and other related information. The degree of anonymity can vary between different digital currencies. Some systems can hide only payee information, while others can,,, hide bank's information or both. In case of strong anonymity, it becomes difficult to trace the user's identity. But, in case of weak anonymity, the user's identity can be traced. Anonymity is a controversial aspect because it may result in tax evasion, money laundering and other criminal usage of this currency. But anonymity in digital currencies reduces transaction costs by eliminating third party verifications and prevents information from being exposed to third parties or merchants, which may be used for price discrimination against consumers/users.

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