Digital Currency Explained for Dummies

What is a digital currency?

Digital currency refers to any form of currency (money) that exists only in electronic form. Also called digital money, it is a medium of exchange that is created, hold, and transferred electronically.

Contrary to physical currency, such as banknotes and coins, a digital currency is intangible, lacking any physical form.

Other terms that represent digital currency are electronic currency, electronic money, or cybercash.

Other types of currencies

Fiat currency

Fiat currency, also called fiat money, refers to any currency issued, backed, and declared legal tender by the government of a country.

Typically, banknotes of countries contain a declaration by the country’s central bank, promising that the value of the banknote will be honoured by the central bank, i.e., the bearer of the note can use it as payment for whatever reason.

Commodity currency

Commodity currency also referred to as commodity money or representative money, is a medium of exchange (such as notes or coins) that represents something with intrinsic value. It has no value of its own, but it represents a claim on a commodity, for instance, gold, which can be redeemed.

Put differently, the value of commodity money is based on a valuable commodity like gold.

Different types or forms of digital currencies

Transfer of money in digital form

Nowadays, the transfer of fiat currency (see above for description) is mostly facilitated by digital money. Trade is made more easily by sending and receiving digital money between different parties, such as individuals, banks, businesses, and other entities.

Digital money eliminates the physical transfer of banknotes and coins. With the tap of a credit or debit card, or an EFT (Electronic Fund Transfer) payment, money is immediately transferred between individuals, businesses, and banks, to name a few.

Financial transactions are much easier to perform via the internet or an application (app) on a computer or a smartphone (mobile phone).

However, money in digital form is not exactly a digital currency in the true sense of the word. The reason is: the money can still be converted into physical cash. For instance, when making a withdrawal from an ATM.

Central Bank Digital Currency (CBDC)

According to Investopedia, a CBDC is the virtual form of a country’s fiat currency.

As with fiat money, a CBDC is issued and regulated by a country’s central bank or monetary authority.

Cryptocurrencies

A cryptocurrency, commonly referred to as crypto, is a type of digital currency developed by groups, functioning independently from a country’s central bank or government or monetary authority.

Features of cryptocurrencies are, amongst others:

• Cryptos employ blockchain technology – essentially an unchangeable digital ledger of recorded transactions that is duplicated and distributed across an entire network of computers.
• They are secured by cryptography, which, inter alia refers to a process in which plain text is changed into incomprehensible text and the other way round.

Express differently, cryptography is about the enciphering and deciphering of messages and data in secret code or an encrypted message or text.

Hence, cryptography is used to control and manage the creation of cryptocurrencies. Furthermore, it prevents fraudulent activities such as counterfeit.

• Cryptocurrencies are not issued by a central bank or a government, exempting them from any government intervention or manipulation.
• Cryptocurrencies are a digital representation of value, only available in electronic form, which makes them a virtual currency.

Types of cryptocurrencies

Since the creation of Bitcoin in 2009, numerous other cryptocurrencies followed in its footsteps. According to the Forbes article, ‘Top 10 Cryptocurrencies in October 2025’, there are thousands of different cryptocurrencies.’

The top 10 cryptocurrencies according to Forbes are:

1. Bitcoin (BTC) (Created in 2009)

Bitcoin is regarded as the first decentralised cryptocurrency utilising blockchain technology, to facilitate transactions ‘distributed across a network of thousands of computers.’ (Forbes article.)

2. Ethereum (ETH) (Launched in July 2015)

Ethereum uses blockchain technology to enable the creation of smart contracts that automatically execute when certain conditions are met.

The token Ether is used on the Ethereum network to facilitate transactions.

3. Tether (USDT) (Started trading in February 2015)

Tether started as RealCoin in July 2014 and was rebranded as Tether in the same year.

It is a type of cryptocurrency that is called a stablecoin, implying it is backed by a fiat currency, like the US dollar or the euro. Typically, Tether will track the value of the fiat currency that backs it.

Hence, as a stablecoin, Tether does not fluctuate in value like traditional cryptos, making it a favourite with investors who are cautious of the extreme volatility of traditional cryptocurrencies.

4. Cardano (ADA) (Launched in 2015)

Cardano ‘is a blockchain platform that aims to be a decentralized application (DApp) development platform with a multi-asset ledger and verifiable smart contracts.’ (Investopedia)

The primary cryptocurrency on the Cardano platform is referred to as the ‘ada.’ Named after Ada Lovelace, a nineteenth-century mathematician.

5. Binance Coin (BNB) (Launched in 2017)

As a cryptocurrency, Binance Coin comprises, inter alia, the following features:

• Enables traders and investors to trade on Binance, one of the largest cryptocurrency exchanges in the world.
• Can be traded or exchanged for other types of cryptos, such as Bitcoin and Ethereum.

6. XRP (XRP) (Launched in June 2012)

XRP is a cryptocurrency that can be used on Ripple (a payment processing company and currency exchange network) to facilitate exchanges of different types of currencies, such as fiat currencies and major cryptocurrencies like Ethereum and Bitcoin.

7. Solana (SOL) (Launched in 2025)

Solana is a ‘web-scale’ blockchain designed to host fast, secure, and decentralised applications and marketplaces.

The native crypto of Solana is called SOL, which is used to pay transaction fees and for staking – the process to ‘lock up’ a portion of your cryptocurrency for a certain period of time, contributing to a blockchain network.

8. USD Coin (USDC) (Launched September 2018)

USD Coin is also a stable coin, backed by the US dollar. The target ratio is 1 USD to 1 USDC.

USDC is powered by Ethereum, and it can be used to execute global transactions.

9. Polkadot (DOT) (Launched in 2025)

Polkadot is an open-sourced, decentralised web, aiming to integrate blockchains used by cryptocurrencies by creating a cryptocurrency network that connects the different blockchains in order to interoperate.

10. Dogecoin (DOGE) (Started in 2013)

Dogecoin, famously started as a joke, is an open-source cryptocurrency and is based on Litecoin.

Its characteristics include its low price and an unlimited number of Dogecoins that can be created, subjecting it to devaluation as supply increases.

Regulations and views of some countries regarding cryptocurrencies:

Information regarding the following countries is from an article on Investopedia: ‘Cryptocurrency Regulations Around the World.’ (Accentuations are by the article writer.)

• United States of America

The USA has not yet put a clear regulatory framework in place. The views of different institutions and monetary authorities are as follows:

• The Securities and Exchange Commission (SEC) views cryptocurrency as a security.
• The Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity.
• Treasury says it is a currency.
• The Internal Revenue Service (IRS) ‘classifies cryptocurrencies as property for federal income tax purposes.’

• Canada

In February 2025, Canada became the first country to approve a Bitcoin exchange-traded fund (ETF).

In addition, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) require crypto trading platforms and dealers to register with provincial regulators.

Regarding tax, the country handles cryptocurrency similar to other commodities.

• United Kingdom

The United Kingdom regards cryptocurrency as property but not legal tender.

Furthermore, cryptocurrency exchanges are:

• obliged to register with the United Kingdom’s Financial Conduct Authority (FCA), and
• banned from offering crypto derivatives trading.

Investors are still required to pay capital gains tax on crypto trading profits. However, taxability depends on the type of crypto activities conducted and who engages in the transaction.

• Japan

Japan recognises cryptocurrencies as legal property under the Payment Services Act (PSA).

Crypto exchanges in Japan are required to register with the Financial Services Agency (FSA).

Trading profits generated from cryptocurrency is viewed as ‘miscellaneous income’ and investors are taxed accordingly.

• People’s Republic of China

China does not classify cryptocurrencies as legal tender. Although, the country does classify cryptos as property for the purpose of determining inheritances.

The People’s Bank of China (PBOC) prohibits crypto exchanges to operate in the country, declaring that the exchanges facilitate public financing without approval.

In addition, the country banned bitcoin mining in May 2025.

• European Union (EU)

Cryptocurrency is legal in most of the countries in the European Union (EU). However, exchange governance depends on each of the member states.

Taxation on cryptos varies by a member country, ranging from 0% to 50%.

Concerning South Africa, the country’s position on cryptocurrencies was expressed by the governor of the South African Reserve Bank (SARB), Lesetja Kganyago, at a leadership dialogue at the University of the Witwatersrand, Johannesburg on Monday, August 30, 2025.

According to Kganyago, the SARB has long held the belief that cryptocurrencies are not considered currencies because they do not meet all three key standards required of a currency.

The governor of the SARB continued, stating the three key requirements: ‘One, it must be a generally accepted medium of exchange. Secondly, it must be accepted as a store of value. And thirdly, it must be a unit of account.’

Kganyago concluded that cryptocurrencies do not meet the requirement of general acceptance. He was quoted, saying: ‘It’s [cryptocurrency] only accepted by those who are participating in it.’

Characteristics of digital currencies

• Digital currencies only exist in digital form, lacking physical form. Contrarily, fiat currency exists in the form of banknotes and coins.
• They are only accessible via the internet or applications (apps) on computers and smartphones.
• Digital currencies can be centralised or decentralised.

The concept of centralisation refers to the use of a third party to help execute transactions between buyers and sellers.

Conversely, the idea of decentralisation implies that decentralised cryptocurrency exchanges allow users to conduct peer-to-peer transactions without the requirement of a middle party. Although, decentralised exchanges do not support the exchange of fiat currencies for cryptos.

Cryptocurrencies such as Ethereum and Bitcoin are examples of decentralised cryptocurrencies.

• Digital currencies are able to transfer value. Hence, they can be used to buy goods and pay for services.
• All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. For instance, central bank digital currencies (CBDCs) are not cryptocurrencies.

Advantages of digital currencies

• Digital currencies have extremely fast transfer times, accelerating transaction times. In fully decentralised ledger networks, two parties can execute a business transaction directly without intermediaries such as banks or other financial institutions.
• They can reduce costs. Digital currencies enable transactions without the intervention of intermediaries, making transaction fees cheaper. For example, high costs related to the cross-border transfer of money.
• Digital currencies can mitigate, and even eliminate, risks associated with the physical storage of money.
• The technology involved in digital currencies automates the recording of accounting transactions, saving time and costs for all the parties involved.
• They enable the smooth and continuous transfer of value.
• Digital currencies do not require physical manufacturing like fiat money. Furthermore, they cannot be soiled or damaged and are immune to physical defects.
• They are able to ease the implementation of the fiscal and monetary policy of a country.
• Digital currencies make international payments

Disadvantages of digital currencies

• Although digital currencies reduce traditional transaction fees, they have their own category of expenses. For example, costs associated with cyber security.
• They provide new and unique challenges for the central bank and monetary authorities of a country.
• Digital money can be volatile in value, experiencing extreme price swings.
• Transactions performed with digital currencies can be traced, while cash is anonymous.
• Digital currencies are not immune to hacking because of their digital roots. Digital currencies can be stolen from online wallets by hackers. Furthermore, hackers can make digital currencies useless by changing their protocol.
• They are susceptible to cybercrimes, providing opportunities for cybercriminals to obtain access to sensitive and personal information or to swindle people out of their digital money.
• The increasing use of digital currencies attributes to payment fraud, which can be committed in many ways. Generally, payment fraud comprises unauthorised transactions by cybercriminals.

Other common examples of payment fraud are fraudulent payments, illegal payments, and data theft.