Challenges of Digital Currency

1.Technological
Data is the fuel that puts this new digital economy into function. Needless to say,
preserving it is one of the primary concerns of any digital service. Raw cash is
printed by the central bank of the nation, and leaves no scope of compromising the
sensitive information of the user. However, it is not the case with digital currency.
Being a computer program, the system is ever vulnerable to malicious cyberattacks
which can potentially cause a lot of damage to the users.
A digital currency should have a high degree of technical sophistication while
maintaining a simple user interface. It should protect the overall integrity against
cyber threats and ensure a proper exchange of value between buyers and sellers.
Achieving technological sophistication of such level at a large scale would be one
of the major barriers for the state to deploy a digital currency. The key features that
would be required are: 1) The currency including the architecture design 2) Means
of acquiring, storing, and transferring that currency as a part of the financial
transaction 3) Robust backend infrastructure like servers to support large volumes
of payments at once with or without an access to the internet.
There would be two aspects of creating a digital currency technology. 1) Regulatory
aspect: Like Bitcoin, the currency should require minimal human interference in
order to function smoothly 2) Deployment aspect: It should be readily available for
everyday usage by the means of applications.
A significant challenge in executing a digital currency would be of identifying or
rather, enabling a medium where users can transact with the regular brick and mortar
stores. Software facilitating this should be compatible with portable devices like
smartphones and even smartwatches. However, one hurdle to this solution is the
assumption that every citizen must possess a smartphone, which is not a pragmatic
assumption to make even in a developed economy. Use of such portable devices also
make the system extremely vulnerable to currency thefts in case the device is
stolen/lost. In case of an ATM card, banks put a withdrawal limit to reduce the
impact of such losses. However, in case of an e-wallet running on a smartphone
implementing a transaction limit wouldn’t exactly be possible.
An application of such kind must be equipped with multi-layered verification
including biometric identification before executing any transaction. In case where
any discrepancies arise, the system should be supported by a responsive 24/7
helpline.
Smartphones shouldn’t be the only means of transacting digital currency. The
application should extend its compatibility to feature phones as well, which is more
prevalent in the countryside.
Other potential means of transacting extend beyond phones and require additional
hardware like USB sticks or cards. However, this would require a large-scale
distribution campaign and hence, incurring further costs to the system.
The cost of printing paper currency is a tiny fraction of its original value. For
example, the government of India spends Rs 4.18 on each Rs 2,000 note. The cost
of printing of each Rs 500 note is Rs 2.57 and for Rs 100 note it is Rs 1.51. While
for each Rs 10 note the cost incurred by the government is Rs 1.01.
Maintaining a digital currency should be cheaper or at least equivalent to similar
fractions in order to be feasible.

2. Adoption and Valuation

For a currency to be able to deliver an economic value, it is necessary that it has a
widespread adoption. Both the buyer and the seller should be accepting the digital
currency without any problems. This is one of the major challenges that a new digital
currency is likely to face. Physical currency, owing to the ease of access to the ATMs
and banks still holds a major share of transactions in our day to day life compared to
any other means. Making people switch would require a similar ease of access to the
required software both in usability and monetary terms.
Digital currency would need to provide a strong incentive to make people make a
complete or even a partial shift from the paper currency. One such incentive could
be the ease of carrying money in the digital form and its insusceptibility to physical
wear and tear. Given the right conditions, a digital transaction is almost instant and
fool proof.
Valuation of a digital currency depends on the type of digital currency it is. In case
of a decentralised digital currency (or a cryptocurrency) like Bitcoin, the value will
continue to remain volatile unless it reaches a very widespread adaption. However,
in case of a centrally backed digital currency, it can be backed by either the trust of
the government (similar to fiat currencies), a financial instrument (by bonds for
example), or by an actual physical asset (like real estate or gold). A digital currency
can also be set to a fixed exchange rate with an accepted benchmark fiat currency
like INR or USD.