Digital currency can offer a wide range of advantages over traditional methods of payment, including faster payments and greater transparency, but there are also some drawbacks to take into account as well, like security issues and how volatile some currencies can be.
Let’s take a look at some of the pros and cons of digital currency in more detail to understand why some people are all for its use, and why some are still against it in certain circles.
What are the benefits of digital currency?
Faster transactions: Digital currencies allow for much faster transactions than those performed through traditional financial institutions. For instance, transferring funds overseas can sometimes take days for the money to be released into the receiver’s account through a traditional bank, but digital currencies make this much quicker, if not immediate.
No fees: Though the money in your account is technically yours, banks still need to make a profit by charging you the likes of ATM fees, transfer fees, and closing fees. There are also often fees for spending your money abroad. You can have complete ownership of a digital currency and use it however you want, in most cases with zero fees.
Payment tracking: Digital currencies are designed to offer transparency for tracking funds in the way that they’re designed, especially cryptocurrencies that use blockchain technology. This means you can look and see where your money is at any time thanks to the records stored after every transaction. Legacy institutions simply can’t offer this level of service.
Protection against fraud: Buying things online in the usual way means that your personal and payment details are stored by companies, leaving them vulnerable to fraud if they’re ever stolen. Digital currencies offer direct transactions with anonymity that means your personal information never needs to be shared.
Better accessibility: One of the big advantages of digital currency is the accessibility it offers. Anyone in the world with an internet connection can log on and acquire funds or mine for their coin of choice. This is different to traditional institutions who often put barriers in the way that limit accessibility, whether that’s a credit check or a minimum contribution.
No inflation: Many digital currencies are not subject to inflation by design. For instance, bitcoin has a maximum number of coins that can exist (21 million), which means there is a fixed supply. Traditionally, inflation devalues money based on the premise that banks are always creating more of it, so its value drops. Bitcoins, on the other hand, will become more valuable over time as the limit is neared, making them a deflationary currency.
What are the drawbacks of digital currency?
Asset prone to volatility: Currently, most digital currencies are decentralised, so they’re not backed by a government or central bank. This means that they are not stable and open to a lot of volatility, which means they can lose or gain value very quickly. Those who trade in digital currencies can possess something worth a lot one minute, but if the value dips, they can lose value rapidly. If CBDCs backed by banks or governments are issued in the future, then they could be a much more secure solution.
Security issues: While digital currencies remove the need for storing your personal details online, the currency you own may still be vulnerable to hacks. There have been a number of cases of companies holding currency having it stolen in an attack. Traditional banks can also offer a wider range of security and compensation for those that have their funds stolen.
Lack of regulation: The established financial industry is heavily regulated, which helps to add stability and ensure there is no unacceptable activity. Digital currencies currently exist on the outside of this regulation for the most part, which provides the user with freedom but also means they are prone to more unsavoury practices.
More accessible for criminals: While digital currencies being more accessible has benefits, there are also downsides. Most worrying is that this increased access can open the currency up to criminal elements looking to exploit it for their needs. Authorities are most concerned about digital currencies being used for money laundering or to fund illegal activities.
Uncertainty for the future: Unlike traditional forms of payment that have stood the test of time and look to have a solid future, digital currency is still new and very much in the early stages of development. Because of this, the outlook is uncertain, and there’s no guarantee that the funds you hold digitally will continue to be usable or retain value.