Digital cash

Although the terms digital cash and virtual currencies are often used synonymously, they actually refer to two separate types of alternative payment systems. 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 (sometimes referred to as cryptocurrency) that are 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.

Bitcoins have attracted attention as a potential money laundering tool for cybercriminals and illicit drug markets like Silk Road, and have also been plagued by security issues, with some high-profile heists. Nonetheless, there are companies now using Bitcoins as a legitimate alternative payment system.

Virtual currencies, on the other hand, typically circulate primarily within an internal virtual world community, such as Linden Dollars, created by Linden Lab for use in its virtual world, Second Life. Virtual currencies are typically used for purchasing virtual goods.