How is digital currency going to work?

Digital currency — also known as cryptocurrency or central bank digital currency (CBDC) (depending on who issues it) — is a new way of handling money using digital technology instead of physical cash. Here’s a clear breakdown of how it works 👇

🪙 1. What Digital Currency Means

A digital currency is money that exists only in electronic form.
There are two main types:

1. Cryptocurrencies (e.g., Bitcoin, Ethereum):
   • Created and managed by decentralized computer networks using blockchain technology.
   • Not controlled by any government or central authority.
   • People store and transfer them through digital wallets.
2. Central Bank Digital Currencies (CBDCs):
   • Issued and regulated by a country’s central bank (like the Reserve Bank of India or the Bank of England).
   • Acts as official digital money — like your regular currency but completely digital.
   • Backed by the government, so it’s stable and legal tender.

⚙️ 2. How It Works (Step-by-Step)

For Cryptocurrencies:

1. Blockchain ledger: Every transaction is recorded on a public digital ledger called a blockchain.
2. Wallets: You hold your money in a digital wallet secured by cryptography.
3. Verification: Transactions are verified by miners or validators using computing power.
4. Transfer: When you send money, it’s approved by the network and recorded permanently.

For CBDCs:

1. Issued by central bank: The central bank creates digital money directly (no physical printing).
2. Stored in wallets or apps: People hold it in official government-approved digital wallets.
3. Transactions: You can pay anyone instantly through digital platforms — like UPI, but directly linked to the central bank.
4. Tracking and control: The central bank can monitor transactions to prevent fraud or illegal use.

💡 3. Why Digital Currency Is Becoming Popular

• Faster and cheaper transactions (no middlemen like banks in some cases).
• Secure and transparent — blockchain reduces fraud.
• Financial inclusion — helps people without access to traditional banking.
• Supports innovation — like smart contracts and decentralized apps.

⚠️ 4. Challenges and Risks

• Privacy concerns: Governments could track every transaction.
• Cybersecurity threats: Wallets and exchanges can be hacked.
• Volatility (for crypto): Prices can change dramatically.
• Regulation issues: Different countries have different rules.

🌍 Example

• India: RBI is testing the Digital Rupee (e₹).
• UK: Exploring a Digital Pound (sometimes called “Britcoin”).
• China: Has already launched the Digital Yuan (e-CNY).