Beyond cryptocurrency, digital money is one of the predominant forms of currency in use today
This article by Daromir Rudnyckyj, University of Victoria, originally appeared in Conversation and is reprinted here with permission.
Simply put, digital money can be defined as a form of currency that uses computer networks to make payments. 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 money and physical currency, such as B. cash, is that digital money lacks any identifier that makes it unique. If you take a look at banknotes that you may have in your wallet or purse, you will quickly notice that each banknote has a serial number – a unique sequence of letters and numbers that signifies the uniqueness of that banknote.
But as we know, digital objects like songs or images are just infinitely reproducible on the internet. What prevents us from reproducing the 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 distinguishes them from digital money, but how they ensure ownership of digital property that marks them as transformative.
The issues surrounding digital money and who owns it are likely to grow in complexity and have far-reaching implications for everyday life. The Counter Currency Laboratory, a new initiative based within the University of Victoria’s Department of Anthropology, was set up to study these questions. Our research there documents the present and future of money and its impact on the way we live.
Commercial banks and payment networks, like those that use credit cards, protect the uniqueness of our digital dollars. These institutions guarantee that we will not spend the same digital dollar more than once. Once we spend digital money, banks withdraw it from our accounts so it can’t be spent again.
The first widespread form of digital money was credit cards with magnetic strips. The use of a magnetic stripe encoded with identifying information was first introduced almost 50 years ago. This form of digital money became widespread in the 1970s and 1980s, fueled by the invention of electronic point-of-sale terminals connected to computer networks managed by Visa and Mastercard.
But how exactly does this digital money work? When paying in a store, the shopper taps their credit card on the digital terminal, and the retailer’s bank transmits the credit card information to the network. This credit card network requests authorization of the payment from the cardholder’s bank. The cardholder’s bank validates the cardholder’s details and the amount of available funds, then authorizes the purchase.
Hundreds of millions of these digital money transactions take place every day. Although this transaction involves a buyer, a seller, two banks, and a credit card network, no physical money is actually exchanged. Rather, a series of messages are sent, resulting in the buyer incurring debts with their bank and being credited to the merchant’s bank account.
In this sense, the digital money used here is not a material medium of exchange such as bills or coins, but an accounting unit. This digital money is a credit or debt on the digital ledgers maintained by the banks of both the merchant and the consumer. Other forms of digital money, like debit card transactions or e-transfers, work similarly.
No central authority
Cryptocurrencies like Bitcoin differ from the forms of digital money already used by consumers around the world. The main difference is that when it comes to payments, a blockchain replaces the relationship between the two banks.
A blockchain is a list of records of transaction data kept in a distributed ledger, which is a digital record of the ledgers for bitcoin transactions. Ledger copies are stored and maintained by thousands of computers participating in the cryptocurrency network.
Digital money raises the issue of double spending. How to ensure that the same money in a person’s account is not spent more than once? Blockchain technology solves this problem without resorting to a central authority.
For commonly used forms of digital money, the computer servers that enable the credit card network prevent double spending. These servers ensure that a cardholder cannot use the exact same digital dollars used to buy groceries at the supermarket to also buy a round of drinks at the pub.
On the bitcoin network, any attempt to spend the same bitcoin twice would be invalidated collectively by all computers on the network, preventing any attempt to spend the same digital money in two places.
Perhaps the real revolutionary development that cryptocurrencies have spawned is not their digital nature, but that they allow ownership of digital assets to be transferred without recourse to a central authority.
The infinite reproducibility enabled by the Internet challenged notions of property that have long underpinned modern civilization. The blockchain and distributed ledger maintain the order of intellectual property on the internet. In fact, it is these aspects of cryptocurrency that may have the most lasting impact on how we live together, both in cyberspace and in real space.
Daromir Rudnyckyj, Professor, Anthropology, University of Victoria
This article was republished by The Conversation under a Creative Commons license. Read the original article.