12 IT in Society – Digital Currencies
Learning Objective
Understand the different types of digital currencies, their key characteristics, the technologies that underpin them, and how they are used and impact individuals and households, businesses, governments and central banks, and the global economy.
1. What Is a Digital Currency?
A digital currency exists only in electronic form and can be transferred, stored and spent using computers, smartphones or other digital devices. The Cambridge IT 9626 syllabus recognises four main categories:
- Digital / e‑electronic money – electronic representation of fiat currency (e.g., bank deposits, debit/credit cards, e‑POS).
- Virtual currency – issued by a single authority for use within a specific platform or ecosystem (e.g., in‑game tokens, loyalty points).
- Cryptocurrency – decentralised digital assets that use cryptography and a distributed ledger (blockchain) to achieve security and consensus.
- Central Bank Digital Currency (CBDC) – a digital form of a sovereign fiat currency issued and guaranteed by the central bank.
2. Comparison of Digital‑Currency Types
| Type |
Governance |
Typical Technology |
Key Examples |
Centralised / Decentralised |
| Digital / e‑electronic money |
Bank or payment‑network authority |
Centralised databases, ISO‑8583 messaging |
Debit/credit cards, online bank transfers, mobile wallets |
Centralised |
| Virtual currency |
Platform operator (single entity) |
Centralised ledger or token‑based system |
V‑Bucks (Fortnite), airline miles, Amazon Coins |
Centralised |
| Cryptocurrency |
Network of participants (no single owner) |
Distributed ledger – usually a blockchain |
Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) |
Decentralised |
| CBDC |
Central bank (state authority) |
Permissioned distributed ledger, token‑based system or conventional database |
Digital Yuan (e‑CNY), e‑Krona (pilot), Bahamas Sand Dollar |
Centralised (state‑controlled) |
3. Core Technologies
3.1 Distributed Ledger vs. Blockchain
- Distributed ledger: A database spread across multiple nodes where each participant holds a copy. Transactions are recorded in a shared, immutable log, but the structure of the log can vary (e.g., DAG, hashgraph).
- Blockchain: A specific type of distributed ledger in which data are grouped into “blocks” that are linked cryptographically. Most public cryptocurrencies use blockchains.
3.2 Consensus Mechanisms (plain‑language definitions)
- Proof‑of‑Work (PoW): Participants (miners) compete to solve a computational puzzle. The first to find a solution adds the next block and receives a reward. Security comes from the amount of work required.
- Proof‑of‑Stake (PoS): Participants (validators) lock up a portion of their holdings as a “stake”. The network randomly selects a validator, proportionally to the size of the stake, to create the next block. Misbehaviour can lead to loss of the stake.
- Delegated Proof‑of‑Stake (DPoS): Token holders elect a small set of delegates who produce blocks on their behalf, combining voting with stake‑weighting.
- Byzantine Fault Tolerance (BFT) variants: A known set of validators exchange signed messages and reach agreement through voting, tolerating a limited number of faulty or malicious nodes.
3.3 Example Cryptocurrencies
| Name |
Year Launched |
Consensus Mechanism |
Primary Use |
| Bitcoin (BTC) |
2009 |
Proof‑of‑Work |
Store of value, peer‑to‑peer payments |
| Ethereum (ETH) |
2015 |
Proof‑of‑Stake (post‑Merge) |
Smart contracts and decentralised applications (dApps) |
| Ripple (XRP) |
2012 |
BFT‑style consensus (unique node list) |
Cross‑border settlement for banks |
| Litecoin (LTC) |
2011 |
Proof‑of‑Work (Scrypt) |
Faster Bitcoin‑like payments |
4. Uses of Digital Currencies
4.1 Payments & Remittances
- Cryptocurrencies enable low‑cost, near‑instant international transfers.
- CBDCs aim to provide faster, cheaper domestic payments while retaining monetary‑policy control.
- Digital/e‑electronic money (cards, e‑POS) dominates everyday retail transactions.
4.2 Financial Inclusion
- Mobile wallets and crypto can reach unbanked populations lacking traditional accounts.
- CBDC pilots often target remote or underserved areas to provide state‑backed digital cash.
4.3 Smart Contracts & Decentralised Applications (dApps)
- Ethereum and similar platforms allow self‑executing contracts that trigger automatically when predefined conditions are met.
- Typical applications: supply‑chain tracking, insurance payouts, Decentralised Finance (DeFi), token‑gated services.
4.4 Gaming, Virtual Worlds & Loyalty Schemes
- Virtual currencies power in‑game economies (e.g., V‑Bucks, Gold) and reward programmes (airline miles, supermarket points).
- Hybrid models such as Decentraland or Axie Infinity combine blockchain tokens with game‑specific virtual currencies.
4.5 Investment & Speculation
- Cryptocurrencies are traded on exchanges, forming a new asset class.
- Virtual tokens can be purchased with fiat via in‑app purchases or gift‑card redemption.
5. Conversion Mechanisms
- Crypto ↔ Fiat: Conducted through cryptocurrency exchanges (e.g., Binance, Coinbase). Users deposit fiat, receive crypto at market rates, and can withdraw back to a bank account.
- Virtual ↔ Fiat: Rates are set by the platform issuer; conversion occurs via in‑app purchases, gift cards, or a dedicated “cash‑out” feature.
- CBDC ↔ Fiat: Direct 1:1 conversion at the central bank or authorised intermediaries; no market‑driven price fluctuations.
6. Impact & Risks (aligned with syllabus headings)
6.1 Impact on Individuals and Households
- Greater convenience for payments and access to global markets.
- Potential for financial inclusion where traditional banking is unavailable.
6.2 Impact on Businesses
- Reduced transaction costs and faster settlement times.
- New revenue streams through token sales, smart‑contract services, and blockchain‑based supply‑chain solutions.
6.3 Impact on Governments and Central Banks
- CBDCs provide a new tool for monetary‑policy transmission and can improve tax‑collection traceability.
- Digital‑currency analytics support anti‑money‑laundering (AML) and counter‑terrorist‑financing (CTF) efforts.
6.4 Impact on the Global Economy
- Potential for more efficient cross‑border trade and capital flows.
- Risk of market instability if large volumes of crypto assets are used for speculative purposes.
6.5 Key Risks & Challenges
- Volatility – Prices of many cryptocurrencies can swing dramatically.
- Security – Loss of private keys, phishing attacks, and exchange hacks.
- Regulatory uncertainty – Varies by jurisdiction; legal status may be property, currency or commodity.
- Energy consumption – PoW blockchains require significant electricity; many networks are migrating to PoS.
- Privacy vs. transparency – Public ledgers are auditable but can expose transaction patterns.
- Monetary‑policy & financial‑stability concerns – Widespread crypto use could affect central‑bank control of money supply.
7. Additional Syllabus Topics
7.1 Data Mining (12.2)
Data mining is the process of extracting useful patterns, trends or knowledge from large data sets. In the context of digital currencies it is used for:
- Detecting fraudulent or illicit transactions.
- Analysing market sentiment and price trends.
- Profiling user behaviour for targeted services or compliance reporting.
The typical stages are: data collection → data cleaning → pattern discovery (e.g., clustering, classification) → evaluation → deployment.
7.2 Social‑Networking Services & Platforms (12.3)
Many digital‑currency ecosystems are embedded in social platforms:
- In‑app purchases of virtual tokens within social games (e.g., Roblox).
- Token‑gated communities on Discord or Telegram where holding a specific crypto grants access to exclusive channels.
- Integration of “Buy‑with‑Crypto” buttons on e‑commerce sites linked to social media advertising.
7.3 The Broader Impact of IT on Society (12.4)
- Employment shifts – new roles such as blockchain developers, crypto‑compliance officers.
- Privacy concerns – digital‑currency transactions generate data that can be monitored by governments or corporations.
- Digital divide – access to reliable internet and devices influences who can benefit from digital currencies.
- Environmental impact – especially from PoW mining, prompting policy debates.
7.4 Technology‑Enhanced Learning (12.5)
Digital‑currency concepts are taught through MOOCs, interactive simulations (e.g., blockchain sandboxes), and credential‑issuing platforms that use token‑based certificates to verify completion.
8. Advantages & Disadvantages by Currency Type
8.1 Digital / e‑Electronic Money (Cards, e‑POS)
| Advantages | Disadvantages |
|---|
- Widely accepted, mature infrastructure.
- Consumer protection (charge‑backs, fraud liability limits).
- Instant settlement for most retail transactions.
|
- Reliance on banking intermediaries.
- Higher fees for cross‑border or high‑value transfers.
- Excludes people without a bank account.
|
8.2 Virtual Currency
| Advantages | Disadvantages |
|---|
- Easy integration into specific platforms.
- Effective for incentivising user behaviour (loyalty, engagement).
- Often convertible directly to in‑app purchases.
|
- Usually non‑convertible to fiat or limited to the issuing platform.
- Value depends entirely on the platform’s policies.
- Risk of platform shutdown or sudden policy change.
|
8.3 Cryptocurrency
| Advantages | Disadvantages |
|---|
- Decentralised – no single controlling entity.
- Transparent, immutable public ledger.
- Programmable (smart contracts) enables new business models.
- Potential for low‑cost international transfers.
|
- High price volatility.
- Regulatory uncertainty and varying legal status.
- Security risks (hacking, loss of private keys).
- Energy consumption (PoW) and scalability challenges.
|
8.4 Central Bank Digital Currency (CBDC)
| Advantages | Disadvantages |
|---|
- Full legal‑tender status; backed by sovereign reserves.
- Reduces cash‑handling costs for governments.
- Can improve monetary‑policy transmission and financial inclusion.
|
- Privacy concerns – central authority can monitor all transactions.
- Implementation complexity; requires robust digital infrastructure.
- Potential to disintermediate commercial banks.
|
9. Suggested Diagram (for revision)
Flow of a cryptocurrency transaction: Sender’s wallet → creation of a signed transaction → broadcast to the peer‑to‑peer network → inclusion in a pending block → validators/miners verify (PoW/PoS) → block added to the blockchain → recipient’s wallet updates balance.
10. Key Take‑aways
- Digital currencies comprise digital/e‑electronic money, virtual tokens, cryptocurrencies and CBDCs, each with distinct governance and technology.
- Centralised systems (cards, e‑POS, virtual tokens, CBDCs) are controlled by a single authority; decentralised systems (cryptocurrencies) rely on a distributed ledger and consensus mechanisms such as PoW or PoS.
- A distributed ledger is any shared database across nodes; a blockchain is a specific type of distributed ledger that groups data into linked blocks.
- Conversion pathways differ: crypto uses market‑driven exchanges; virtual tokens use issuer‑set rates; CBDCs convert at a fixed 1:1 rate with fiat.
- All forms bring benefits—speed, lower fees, new services—but also pose risks: volatility, regulatory uncertainty, security challenges, energy use, and broader societal impacts on privacy, monetary policy and financial stability.