Virtual currencies are common forms of financial activity. A quarter into the 21st century, the average individual has become aware of (and often comfortable using) things like Apple Pay, digital wallets, and cryptocurrency.
The influx of these new forms of payment begs the question: how are these new virtual currencies impacting the established, fiat-driven finance system? Here are some of the most important ways digital currencies are shaking up traditional finance.
What Is Virtual Currency?
Before diving into the details, let’s answer an important question: what is digital currency?
The answer may seem obvious, but there are subtle distinctions that dramatically affect how to answer the question of virtual currency and the traditional finance system. The IRS defines virtual currency thusly:
Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.
For the purposes of this article, we will refer to “virtual currency” as any digital representation of monetary value. In other words, if you aren’t writing a check, using cash, or swiping a credit card, you’re probably using a form of virtual currency. This can include anything from a payment platform like Venmo to a digital banking portal, reward points, gaming currencies, NFTs, and any other digital value-holding asset.
Now that we’ve clarified that point, let’s take a closer look at how these digitally bound currencies are transforming traditional finance.
1. Virtual currency creates more options
Traditional finance has always flowed through a limited number of financial institutions. Historically, banks, credit unions, and brokerage firms have stood between individuals and their money.
Virtual currency is challenging the need for this expensive middleman element. Digital currencies allow individuals to instantly access their funds.
They also enable the transfer of those funds directly between said individuals — something that used to require a bank or similar intermediary. Digipay explains that this doesn’t just increase the options available to consumers. The payment platform adds that it “could lead to lower transaction fees and faster, more efficient transactions.” (More on the cost efficiency of virtual currencies in a bit.)
If you’re looking for ways to increase your financial options, virtual currency opens up a world of possibilities.
2. Virtual currencies lead to new investment opportunities
Investors and entrepreneurs alike are attracted to the idea of virtual currency. The decentralized, accessible nature of digital currency has turned things like cryptocurrency into money-generating investment vehicles.
Even more conservative investors are starting to see the investment opportunities that virtual currency offers. For example, the recent Bitcoin ETF has had a stabilizing effect on cryptocurrency as an investment option.
Nic Puckrin, CEO of the crypto education company Coin Bureau, refers to the ETF as a “new investment vehicle,” adding “Now, large institutions which otherwise would have passed on Bitcoin can easily gain exposure by buying ETF shares.”
Virtual currency is a wholly new way to grow wealth, and one that is attracting those interested in diversifying their assets.
3. Virtual currencies increase accessibility
The accessibility of traditional fiat money has always been an issue. In most cases, consumers had to either carry cash, write a check, or use a credit card.
Virtual currencies make it much easier to access finances from anywhere in the world at a moment’s notice. They can transfer digital dollars between both software and hardware wallets. The former can live on a computer and even a phone, making it instantly accessible, even on the go. Things like Apple Pay and Google Pay have made virtual currency even easier to access when needed.
In the above-linked article, Puckrin adds that the accessibility factor is impacting virtual currency investment, too. He explains, for example, that shares of the aforementioned Bitcoin ETF “are highly liquid and easily accessible through the avenues these institutions use to get exposure to other assets.”
Whether it’s tapping a phone against a payment portal in the store, transferring funds between digital wallets, or buying ETF shares, virtual currency is drastically improving everyone’s ability to access their finances.
4. Virtual currency enhances transparency
Banks have traditionally erected financial fortresses. Consumers were not privy to much of the information that went on behind the scenes. Virtual currencies offer a way to upset the apple cart by accompanying every financial transaction with crystal-clear transparency.
Cryptocurrency is the poster child for digital currency transparency. Cryptocurrencies utilize blockchain technology for each transaction. This means every financial exchange ends up on a digital ledger that is irrevocable and available for anyone to see.
This open-faced approach to finance isn’t just advantageous for consumers. It also makes it easier for businesses to operate. Founder of blockchain company Universa, Alexander Borodich, spoke to this concept years ago when cryptocurrency was just beginning to emerge as a mainstream financial option. “The technology can be integrated into business processes today, not even in the near future,” Borodich explained. “And smart contracts can be created for literally any task: from smart homes and property insurance, to payment cards and logistics.”
Transparency has been a crippling element of finance for centuries. Digital currency is peeling back the curtain for all to see.
5. Virtual currency allows for borderless transactions
One of the simplest advantages of digital currency is that you can send money around the world in an instant. Someone in Singapore can transfer a digital payment to someone else in South Africa faster than it would take them to make a trip to the local bank.
A key factor that makes these seamless transactions possible is the fact that digital finance activity is largely borderless. Many digital currencies can pass back and forth across geographical boundaries without an issue. Options like cryptocurrency, which hold independent value, also don’t require conversion into a local currency until a user wants to cash it out for its fiat value.
Even central bank digital currencies (CBDCs) benefit from this. Ghady Rayess, co-founder of the fintech company FOO, explains that “CBDCs are just as borderless as their privatized counterparts, using blockchain technology to eliminate the need for intermediaries such as banks or foreign exchange services.”
Virtual currency eliminates the multi-step process of exchanging currencies, which is a classic complication of traditional finance systems.
6. Virtual currency generates greater security
The idea that virtual currency is more secure than traditional finance may sound off to some. After all, the identities of those using digital currency are often hidden, giving each transaction a clandestine feel.
But the truth is that virtual currency is often more secure than traditional finance. The blockchain uses on-chain cryptography to record each transaction. In addition, this data ends up stored across multiple computers, decentralizing the information and making it available as needed.
Things like cryptographic encryption make virtual currency a safe and secure way to transfer wealth. It guards against things like fraud and even unscrupulous banking activity that consumers have previously been unable to protect themselves against.
Even in the area of identity, virtual currency is superior. While you may not be able to see who was behind a virtual currency transaction, you don’t have to worry about things like identify theft with a properly encrypted digital financial interaction.
Virtual currency may be a developing area of the financial sector, but there’s no doubt that it is exceptionally safe from the security pitfalls of traditional finance.
7. Virtual currencies reduce transaction fees
Fees are one of the banes of traditional finance. The endless costs and expenses that come with having a third-party financial institution manage money can be prohibitive, both on a corporate and an individual level.
To be fair, digital currencies come with their own costs. Cryptocurrencies are infamous for things like “gas fees.” These are financial incentives offered to crypto validators as a way to carry out transactions on the blockchain.
Gas fees vary depending on things like on-chain congestion and the computational complexity required to swap, buy, or sell a digital currency. In 2021, gas fees for the cryptocurrency Ethereum reached a record of $23 per transaction. It has gotten much higher since then.
Even with occasional expenses like gas fees considered, though, the average cost for most digital currency transactions is minimal — and often free. This is a refreshing change of pace from the fee-happy centralized structure of traditional finance.
Embracing the Shift to Virtual Currency
Traditional finance has faithfully served humanity for centuries. However, there’s no doubt that digital alternatives to the traditional finance system are superior.
From accessibility to transparency, security, borderless transactions, and more, the digital finance world is clearly superior to the financial activity of the past. It’s time for businesses and individuals alike to embrace virtual currency as an inevitable step toward a brighter financial future for us all.
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