Digital cash
Electronic currency that behaves like cash.
5-mark Exam Answer
Digital cash is an alternative payment system in which unique, authenticated tokens generated by an algorithm represent cash value that can be used in the real world. According to Laudon and Traver, Bitcoin is the best-known example, and it is distinct from virtual currencies which circulate within internal communities.
- 1.Algorithm-generated authenticated tokens
- 2.Bitcoin is the best-known digital cash
- 3.Anonymous like real cash
- 4.Mined via peer-to-peer network
- 5.Distinct from virtual currencies
Digital cash typically is based on an algorithm that generates unique authenticated tokens representing cash value that can be used 'in the real world.' Bitcoin is the best known example of digital cash. Bitcoins are encrypted numbers (cryptocurrency) generated by a complex algorithm using a peer-to-peer network in a process referred to as 'mining' that requires extensive computing power.
Like real currency, Bitcoins have a fluctuating value tied to open-market trading. Like cash, Bitcoins are anonymous — they are exchanged via a 34-character alphanumeric address that the user has, and do not require any other identifying information. This anonymity has made Bitcoin attractive to cybercriminals and illicit markets, but it is also used legitimately.
Virtual currencies, on the other hand, typically circulate primarily within an internal virtual world community, such as Linden Dollars used in Second Life, and are typically used for purchasing virtual goods. This distinction between digital cash and virtual currency is important even though the terms are often used synonymously.
Digital cash has faced security challenges (high-profile heists at exchanges like Mt. Gox) and regulatory pressure from governments concerned about money laundering and unregulated currencies.
Bitcoin: powerful computers mine new coins by solving cryptographic problems; a user then transfers Bitcoin to another user's 34-character address without a bank as intermediary — anonymous, peer-to-peer, and with fluctuating real-world value.
Digital cash is an anonymous, algorithm-driven alternative to traditional currency, exemplified by Bitcoin, and is distinct from virtual currencies confined to internal communities.
The exam interface follows the university paper pattern: Section A & B carry 5-mark questions; Section C carries objective questions.