Impact of Virtual Money: Transforming the Digital Economy


Virtual money

Currently there are different ways of managing and using money. It is no longer just about physical transactions recorded in account books, but about computer systems and even complex cryptographic algorithms.

Next, we will explore the uses of virtual money, their role in society, and the regulatory framework under which they operate

What is virtual money?

Virtual money (or digital currency) refers to any means of payment that exists in a purely electronic form. Virtual money is not tangible like a bill or a coin. It is posted and transferred through online systems.

A well-known form of virtual money is Bitcoin, a cryptocurrency. We’ll talk about it in moments.

Virtual money can also represent fiat currencies, such as dollars or euros. It is exchanged using information technologies such as smartphones, credit cards, and online cryptocurrency exchanges. In some cases, it can be converted into physical money through the use of an ATM.

Virtual money differs from cash because it streamlines the process of monetary transactions. For example, the technological property of virtual money can make cross-border currency transfers easier and faster compared to standard money.

This form of money also streamlines the process of implementing monetary policy for central banks. 

The use of cryptography in some forms of virtual money makes the transactions they are involved in tamper-proof and censorship-resistant. This means that they cannot be controlled by governments or financial entities.


Alt: Digital money, electronic financial payments, transactions and movement

How does virtual money work?

People use virtual money for many things. This includes receiving paychecks through direct deposit, moving money from one account to another through electronic fund transfers, or spending money with credit and debit cards

Although physical currency is still advantageous in certain situations, its role has been diminishing over time. Many consumers and businesses believe that electronic money is safer and more convenient because it cannot be lost, and it is widely accepted by merchants across the country.

Consequently, the financial market has established a strong infrastructure for electronic money transactions, which is facilitated primarily through payment processing networks such as Visa and Mastercard

Banks and financial institutions partner with e-money network processors to issue their customers branded cards that facilitate these electronic transactions from bank accounts to merchants. Electronic money can also be easily used through electronic commerce, allowing consumers to conveniently purchase goods and services online

 ¿What problems does virtual money solve? 

Several systems already transact with digital versions of money. For example, credit card systems allow users to purchase goods and services on credit. Bank transfer systems allow the movement of cash across borders.

These transactions are costly and time consuming because they involve the use of disparate processing systems. The SWIFT system, a network of payment systems made up of various banks and financial institutions around the world, is an example of this type of set.

Each transfer made through the SWIFT network has a cost. SWIFT’s member institutions also operate under a patchwork of regulations, each specific to a different financial jurisdiction

Furthermore, these systems are based on the promise of future payments, which guarantees delays in each transaction.

One of the goals of virtual money is to eliminate the delay and operational costs of these transactions through the use of distributed ledger technology (DLT).

In a DLT system, shared nodes or ledgers are connected to form a common network to process transactions. This network can also be extended to other jurisdictions and minimize transaction processing time. It provides transparency to authorities and stakeholders, improving the resilience of a financial network by eliminating the need for a centralized database of records.

Ensuring the Legitimacy of Virtual Money

Virtual money also solves the problem of double spending by using an algorithmic consensus system. Basically, it is responsible for ensuring that a “ticket” of virtual money is not spent twice by the same person.

A centralized setup of currency production and distribution, like the one that currently exists with central banks, uses a system of serial numbers to ensure that each note is unique. Some forms of virtual money, such as central bank virtual currencies (CBDCs) or virtual money issued by individuals, reproduce the role of a central authority to ensure the solvency and integrity of transactions, albeit in a digital context.

Other types of virtual money are decentralized. They remove the role of central authorities to oversee production and the intermediaries needed to distribute currency. Cryptography is used. Blind signatures hide the identity of the transacting parties, and zero-knowledge proofs encrypt transaction details. Examples of this type of virtual money are cryptocurrencies such as Bitcoin and Ethereum.

Differences between Digital Currency and Cryptocurrencies

Digital currency is the electronic form of fiat money issued by governments. They are used for contactless transactions between parties, such as when you electronically transfer an amount from your bank account to someone else’s.

When you pay from your bank account or digital wallet, which stores the value corresponding to real fiat money through an electronic transfer mechanism for a product or service, you are using a digital currency. When you withdraw money from an ATM, the digital currency is converted into liquid money

Cryptocurrencies, on the other hand, are a store of value secured by encryption. They are often referred to as digital currencies. There are several digital currencies such as Bitcoin, Ether and Dogecoin

All of these cryptocurrencies are privately owned or created and are not yet regulated in most countries. They are created using advanced blockchain technology.

Here are some of the most relevant differences between Digital Currency and Cryptocurrencies:


Digital currency does not require encryption, but users should protect their digital wallets (banking apps) with strong passwords to minimize the risk of theft or hacking. Users must also protect their debit/credit cards with passwords. They can use any of these means to make digital currency transactions from their bank accounts.

Cryptocurrencies are protected by strong encryption. To trade cryptocurrencies, you must first have a bank account and digital currency in it. You will have to exchange the digital currency through an online exchange to obtain cryptocurrencies of the corresponding value.


As digital currency is the electronic form of fiat money, it is always backed by a centralized authority. In India, the Reserve Bank regulates the rupee and all digital currency transactions are supervised by the authorities.

The cryptocurrency is based on a decentralized system and independent of any centralized regulation. But all transactions are recorded in a decentralized ledger that is available to everyone.


The digital currency is usually stable and it is relatively easy to manage its transactions due to its greater acceptance in the world market. The cryptocurrency is very volatile and is barely gaining ground. There are not many companies that have started accepting cryptocurrency payments.

Details of digital currency transactions are only available to the sender, recipient and banking authorities. All details of cryptocurrency transactions are in the public domain under a decentralized ledger

Advantages and Disadvantages of Virtual Money

Virtual money makes everyone’s life easier, but it can also have certain disadvantages..

Let’s examine them.

Advantages of virtual money

Today’s financial infrastructure is a complex system of many entities. Carrying out a transaction between financial institutions takes time and money because they work in different technological systems and regulatory regimes.

The main advantage of digital money is that it speeds up the speed of transactions and reduces costs.

Other advantages of digital money are the following:

  • Digital money eliminates the need for physical storage and custody that is a feature of cash-intensive systems. No need to invest in a wallet or bank vaults to make sure your money isn’t stolen.
  • Digital money simplifies the accounting and recording of transactions thanks to technology. Therefore, manual accounting and entity-specific ledgers are not required to maintain records of transactions.
  • Although it has already shortened the time and cost required to transfer money across borders, digital money has the potential to further revolutionize the industry by cutting out the middlemen and further reducing the costs associated with cross-border transfers.
  • Digital money eliminates intermediaries in the application of monetary policy and allows groups of people who were previously excluded from the economy to be included. For example, the unbanked can continue to participate in an economy using digital money present in their online wallet or on their mobile phones.
  • In the case of cryptocurrencies, digital money transactions can be censorship-resistant, that is, they can be impervious to tracking by the government or other authorities.

Disadvantages of Virtual Money

The disadvantages of digital money are the following:

  •  Digital money is susceptible to being hacked. Although it eliminates the need for physical custody, digital money’s origins in technology ensure that this form of money becomes a target for hackers, who can steal from digital wallets. A seamless financial infrastructure made up of digitally connected entities can be brought down by hackers. The SWIFT hacks of 2018, which affected multiple countries, are one example.
  • The use of digital money can compromise user privacy. Cash is anonymous and it is almost impossible to track and trace its users. Instead, digital money can be traced. While the use of Internet cookies enables targeted advertising, the implications of digital money tracking are far reaching. For example, organizations or governments could blacklist or freeze accounts without users’ permission. They could also instigate double counting in bank accounts, inflating expenses and lowering the grand total.
  • Digital money has its own costs. For example, digital wallets are needed to store digital money. Cryptocurrencies also require custody solutions that act as insurance against hackers. Systems using blockchains also have to pay transaction fees, or costs associated with processing the transaction, to miners.
  • Digital money presents several challenges on the governance and political framework front. This form of money is uncharted territory for policymakers, and problems in its ecosystem have already begun to surface. For example, in the crypto world, the integrity of stablecoins is already in question after it was discovered that Tether, the most used stablecoin in the cryptocurrency markets, had commingled funds from clients and companies and used funds from their reserve – to guarantee a 1:1 peg to the US dollar – to cover its debt obligations.


A digital bank is an organization that can offer online banking, which was historically only available at a bank branch.

According to the FFIEC (Federal Financial Institutions Examination Council), electronic banking is the “automated delivery of new and traditional banking products and services directly to customers through electronic and interactive communication channels.” The “banking products and services” to which it refers are:

  • Deposits, withdrawals and money transfers
  • Management of checking/savings accounts
  • Application for financial productsloan management
  • Payment of bills/invoicesaccount services

In essence, a digital bank must be able to offer all the banking functions that have traditionally been carried out at bank headquarters, in branches and through bank cards at ATMs.

The earliest forms of digital banking experience date back to the introduction of ATMs and cards that were launched in the 1960s.

When the Internet and digital networks became widespread in the 1990s, online banking suddenly emerged as a viable option, and what we know as modern digital banking began to appear.

The advancement of smartphones in the millennium opened the door to even more advanced transactions. Today, it is believed that 76% of individuals use online banks regularly as of 2020.

Security of banks and digitalcurrencies

Hay algunas personas que todavía desconfían de la seguridad de los bancos exclusivamente There are some people who are still wary of the security of digital-only banks, lamenting the loss of physical bank branches and questioning the digitization of such important financial services. However, the reality could not be more different.

Digital banks have always made security one of their top priorities and as such have adopted much more innovative and technologically secure protocols than many traditional banks

Digital banks often seek the most technological methods of payment and in-app authentication and provide them to customers through partners.

This includes practices such as:

  • Identity Verification
  • Face recognition
  • Fingerprint scan
  • Speech recognition

In terms of banking regulatory bodies, most digital banks are usually covered by the Financial Conduct Authority (FCA) and/or the Financial Services Clearing Scheme (FSCS), which adds another layer of security, providing a greater peace of mind for already satisfied customers.

Editorial: Marcelo Frette

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