Digital Fiat Currency and Global Trends

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Digital Fiat Currency and Global Trends
1. Introduction
As humanity evolves, so does the means of exchange. The earliest form of exchange, bartering, entailed the exchange of goods with other goods. A lot of complications and disagreements accompanied inefficient bargaining, which necessitated the invention of a different form of exchange. Money, used as a unit of measuring currency and a medium of exchange then replaced the traditional form of exchange and has since evolved to the current era of digital currency. The evolution of the medium of exchange has caused a lot of disruption in almost every part of human lives, with the emergence of banking systems being a major milestone. Any other note, piece of hardware, or symbolic object can act as currency, but that which is backed by the government and recognized as a legal tender qualifies as a fiat currency used in the global economy. The disruptive technologies of the 21st century have led to the emergence of new forms of currencies and as a result, there is an emerging debate on the use of Digital Fiat Currency (DFC). As a matter of fact, some jurisdictions have started rolling out DFCs, which have performed quite well. One thing that is for sure is that the DFC is going to bring about major disruptions to major global trends, and in the worst-case scenario, it might drive the traditional banking institutions out of business. Nonetheless, the positive impacts of DFC outweigh the disadvantages and it is worth embracing the radical change.
2. History of Digital Currency
Digital currency entered the economic world in a rather peculiar manner, inspired by skeptics and pioneers of computer technologies. Privacy concerns were the main driving forces for the skepticism towards the digital era (Kenny par.2). Computers and computer technologies reigned in the global environment from as early as the 1960s, and by the 80s, computers started playing a significant role in workplaces and homes. Not only did the skeptics advocate for safe communication in the digital world, but also safe and secure transactions (Kenny par.3). The idea gave rise to the concept of untraceable digital currency where the sender and receiver remain anonymous, unlike the electronic transactions using a credit card that had already been used. Digicash, created by cryptographer David Chaum in 1989 (Kenny par.3), became a breakthrough in the development of the digital currency. The idea was purely based on the concept of secure and untraceable transactions.
Digicash failed to impress many in the e-commerce business, and most of the shoppers preferred the traditional payment systems, leading to its demise in 1998 (Kenny par.7). Despite the failure, Digicash laid down the foundation for the future development of other digital currencies, with its concepts, algorithms, and formulas replicated in subsequent digital currencies. Hashcash digital currency replaced the depleted Digicash but also diminished sooner than expected due to higher processing power that resulted in inefficiency. Aside from Digicash, more attempts to publish digital currency including HashCash and b-money, the notable champions for the decentralized payment systems being Wei Dai and Nick Szabo. Their failed attempts gave birth to the most successful and widely recognized cryptocurrency, Bitcoin, created in 2008 and officiated in 2009, a little after the financial crisis (ITBiometrics par.6).
May 2010 marked the first successful transaction using bitcoin, boosting the legitimacy of the new form of currency. By the year 2011, bitcoin had started racing the dollar as a means of exchange, and additional cryptocurrencies started to emerge. Bitcoin mining had become the norm among digital traders, and Mt. Gox, a major bitcoin trading company suffered a major setback in the trading business when the platform was hacked and over 2000 bitcoin stolen. Subsequent hacks to the bitcoin intermediary nearly caused them bankruptcy. The loopholes that had been identified by hackers led to widespread security concerns of the digital currency. The frontrunner in the crypto world has utilized different technologies to enhance the security of digital currencies. Ethereum network, for instance, utilizes smart contracts to ensure secure transactions, whereas bitcoin and similar cryptographic technologies make use of blockchain. Currently, there are close to 2000 tradable cryptocurrencies, with bitcoin, Ethereum, and XRP at the forefront.
3. Enablers of Digital Currency
3.1 BlockChain
Blockchain technology is best described as a digital ledger that stores data in units called blocks, which are then liked together to form a chain. Although almost all sorts of data can be stored in form of a blockchain, transaction information has been heavily featured with the technology, much of its success being associated with the well-known cryptocurrency, bitcoin (Hassani et al. 51). Blockchain technology can also be viewed as a special type of decentralized database that keeps accurate and irreversible timelines of data transfer. Other domain areas where blockchain has been successfully applied include inventory management, legal contract, and medical researches. More researches and application of the technology continue to emerge, bearing in mind that the technology is among the industry 4.0 techs of the 21st century. Some of the positive attributes of using blockchain with digital currency are its transparency, security, and the speed with which transactions are executed.
3.2 Cryptography
Cryptography is a communication technique that has existed since the ancient times which ensures the information being shared are only understood by two entities, the sender and the receiver (Hassani et al. 53). Different types of cryptography have been created, and the most commonly used with the digital currency are the symmetric and asymmetric cryptographic algorithms. Hash functions and digital signature are core components of cryptographic techniques that some digital currency technologies have employed to help conceal the details of an electronic transaction. The autonomy and anonymity often associated with cryptocurrencies are a result of the rigorous cryptographic techniques used in collaboration with other technologies.
3.3 Smart Contracts
Smart contracts are automated tools used in place of an ordinary contractual process that is self-executing and only allows a certain operation to proceed when a particular condition has been met (Kizza 544). The tools work well with a decentralized architecture like blockchain, explaining why the cryptocurrencies and some of the DFCs are relying on the technology. Smart contracts are more or less the same as stored procedures or automated business rules, only that smart contracts are more autonomous and can span a wider field of operation. The efficiency of smart contracts is heavily reliant on the programmers' level of expertise. The risk with the use of smart contracts is that they are currently not legally binding (Kizza 544) and might raise security concerns when not coded properly. Just as with blockchain technology, smart contracts have featured in fields other than cryptocurrency including supply chain, real estate automobile manufacturing, healthcare, and law. The positive attributes of smart contracts include autonomy, speed, safety, data backup, low costs, and accuracy.
4. The Future of Digital Currency
Cryptocurrencies like Bitcoin and Ethereum continue to gain popularity and demonstrate much potential despite the persistent setbacks. The anonymity, tendency to accomplish cybercriminal activities, and the close association with insalubrious investment activities render the decentralized cryptocurrencies less reputable. Besides, cryptocurrencies are inherently volatile, and this is evident in the numerous hacks that often slash their value in an unprecedented manner. Owing to the efficiency and flexibility offered by digital currencies, there is a need to incorporate them into the economy. Some countries like China, Japan, and Russia are looking forward to the rolling out of DFCs to facilitate virtual transactions.
Unlike ordinary cryptocurrencies, DFC is backed by the government and is recognized as legal tender, just like the traditional currencies. By being backed by the government and its value pegged to traditional and globally recognized currency such as the US Dollar, DFC mitigates the volatility often associated with ordinary digital currencies like bitcoin. DFC also eliminates the need for an intermediary or a middleman to successfully carry out a transaction, increasing the speed while reducing the cost necessary to complete a transaction locally or globally. DFC makes use of blockchain technology, a digital ledger technology capable of keeping a track of transactions without the intervention of a centralized banking system (Lee 775). World economic giants, the United States, China, Japan, and some European states are on the verge of creating the digital version of fiat money. Regardless of the volatilities of the decentralized cryptocurrencies, there is still widespread adoption among members of the public, and embracing the concept of digital fiat currency is one way these countries proactively counter the damning effects of unregulated cryptocurrency.
5. The Current State of DFC
Most jurisdictions around the world are at a standstill when it comes to issues concerning DFC. Some are undecided on whether to create a digital currency of their own or allow the private sector to create one for them and only take part in the regulation and centralization. A huge number of governments are still researching the idea, some are already in the implementation stage, while others have rubbished the idea completely. Nevertheless, the DFC is, in essence, a replica of the ordinary fiat money capable of enhancing efficiency in the digital economy. The ability to have the alternative currencies work interdependently will eventually ensure economic stability.
Africa is often overlooked in so many aspects, more so in regards to development. Surprisingly, Senegal and Tunisia became the first countries to roll out a digital currency backed by the national government. The bank of Senegal (Banque Regionale De Marches) in partnership with eCurrency Mint. created the blockchain-powered digital currency, eCFA (African Business par. 11) that is compatible with several other digital cash systems in the region. The proponents of eCFA have argued that it is capable of enhancing liquidity, interoperability, transparency, and also making it easier for the Central Bank to regulate the digital economy (African Business par. 11). The cryptographic protocols similar to those used with bitcoin guarantees the security of eCFA (African Business par. 11), making it harder for counterfeiting incidences that are rampant with the ordinary fiat currency. The widespread adoption of the Senegalese currency, CFA Franc, across the West and Central Africa as well as the guarantee offered by the French government made it possible for the creation of DFC in Senegal. The technological advancement that is rampant across the African continent also played a big role in the creation.
Marshall Island has been working on producing a fully-fledged digital, state-backed digital currency since 2018 to minimize the overdependence on the US dollar. The digital currency, dubbed Sovereign or SOV is built by a software company called SFB Technologies under the strict observation by a non-profit organization SOV Foundation (Stevens par. 2). The motivating factor for the creation of the digital fiat money SOV is the high costs of transactions that the natives incur while sending dollars to friends and relatives in the United States. Besides, the idea of using the US dollar as the national currency mainly benefits the United States, and SOV would probably bolster the autonomy of the small nation. The delay in officiating the DFC has been influenced by the skepticism by the International Monetary Fund (IMF) that has cited economic, governance, and reputational risks (Stevens par. 2). The nation is, however, determined to roll out SOV sooner. Just like many other digital currencies, SOV has been built on Blockchain to ensure security and scalability.
The Chinese state is on the verge of unveiling an alternative digital currency that is projected to work parallel with the Chinese Yuan. The digital currency, Digital Currency Electronic Payment (DCEP), is ant...