What Is Digital Currency: Definition, Types & Role In Modern Finance

Key Takeaways
 

1. The Digital Rupee in circulation rose to ₹10.16 billion by March 2025. This was a 334% increase from 2024.
    
2. With Digital currency, you make faster and cheaper payments to anyone in the world. 
    
3. Due to high price changes, security reasons and no fixed regulations, depending entirely on digital currency is risky.
    

Digital currency is money that exists only online. It does not have physical notes or coins, and people use it through phones or computers for payments.

For example, Rohit invested ₹2,00,000 in Bitcoin in 2020 when the price was $18,383 (₹13,66,040) per coin. By August 2020 2025, Bitcoin’s price reached $112,778.34 (₹97,24,007) per coin. This sudden increase in the Bitcoin price led to a huge gain for Rohit’s small investment, as shown in the table given below.
 

This example shows how digital currencies can grow wealth, but also carry high risks because prices can rise or fall sharply. However, Bitcoin is not the only digital currency present. It’s just one of many. Let’s know more about digital currency from its characteristics, types and role in this blog.

What is Digital Currency?

Digital currency is supposed to exist in your mobile, laptops and the internet. Did you know the Digital rupee in circulation rose to ₹10.16 billion ($122 million) by March 2025? It was a 334% increase from ₹2.34 billion ($28 million) in 2024. It is changing how people send, spend, and store money. Let’s learn about its characteristics, advantages and risks in this section.

Core Characteristics

Digital currencies have special features that make them different from cash. These features are:

• Purely digital: You cannot hold it in your hand like coins or notes.
   
• Intangible nature: It only exists as numbers in a digital system.
   
• Transfer method: Money moves through apps or networks, not by handing over cash.

These features make digital currency simple to use, but it fully depends on technology.

For example, if you send ₹5,000 from your phone to a friend, no cash is exchanged. Instead, the digital wallet updates instantly to show the new balance.

Do you know that as of March 2025, the Indian Reserve Bank’s digital rupee circulation increased to ₹1,016 crores, which was ₹234 crores a year earlier. 

Advantages

Digital currency makes payments quicker and cheaper. As stated above, it has helped people around the globe. Let’s see what made it so popular:
 

• Faster transactions: Money can reach another person in minutes, even in another country.
  For example, sending ₹10,000 to the U.S. with digital currency takes only 5 minutes. A regular bank transfer may take 2–3 days for the same payment.
   
• Cheaper transfers: Sending money costs less than using a bank or money agent.
  For example, sending ₹50,000 abroad through a bank can cost around ₹1,200 in fees. The same transfer through digital currency may cost just ₹200.
   
• Financial inclusion: People without a bank account can still use digital wallets.
  For example, a farmer in Bihar without a bank account can receive ₹2,000 in subsidy on his phone. He can then spend it digitally at local shops without needing a bank branch.

These benefits make digital currency useful for both everyday payments and global money transfers.

Challenges and Risks

Since you can’t touch or see digital currency, you may face security issues and other challenges. 

• Security vulnerabilities: Hackers can steal money from weak wallets or exchanges.
  For example, Neha forgets to set a strong password for her wallet. One day, she notices ₹3,000 missing after someone hacked her account.
   
• Volatility: The value of some digital currencies can rise or fall very fast.
  For example, Vikram buys a coin worth ₹1,000 today. A week later, its value falls to just ₹600.
   
• Regulatory ambiguity: Different countries have different rules, which creates confusion.
  For example, Suresh travels abroad and tries to pay with his digital currency. The shopkeeper refuses because that country doesn’t allow it.
   
• Infrastructure dependency: It needs internet and smartphones, which are not available everywhere.
  For example, Sunita lives in a village with poor internet. She cannot use her wallet to pay when the network is down.

These risks need solutions before digital currency can become safe and trusted by all.

What are the Types of Digital Currency?

Depending on who issues it, how it’s structured, and what it’s used for, digital currency is divided into multiple types. They range from government-backed CBDCs to private stablecoins and gaming tokens. The table briefly describes each in the table given below: 

As you have seen, digital currencies are diverse despite their shared digital nature, trust, utility, and risks. You would be shocked to know that the stablecoin market alone has surged to around $252 billion in capitalisation. This shows the growth rate and its importance.

Role in Modern Finance

From the barter system to the gold coin exchange, there was a change in the transaction. However, this change led to a global and historical impact. The same is happening with digital money. It impacts payments, access to banking, policy control, and even investments.

1. Payments & Remittances

One of the biggest uses of digital currency is in sending money across borders. It makes the process faster and cheaper than traditional banking. With digital currency, cross-border payments can be completed in minutes instead of days. Fees are much lower compared to banks and money transfer agents.

Example: Riya sent ₹50,000 to her brother in Canada using digital currency. The money reached him within 10 minutes at a fee of only ₹200, instead of ₹2,000 through a bank.

2. Financial Inclusion

Many people still don’t have access to banks. Digital currency can help bring financial services to them. Central Bank Digital Currencies (CBDCs) allow even people in remote areas to store and transfer money using a mobile phone.

Example: In a rural village, Meera opened a CBDC wallet on her basic smartphone. She received ₹1,500 from the government directly, without needing a bank account.

3. Programmability

Digital currencies can also be programmed with conditions. This helps create automatic payments through smart contracts. Smart contracts make transactions happen only when certain rules are met, reducing the need for middlemen.

Example: Raj rented a co-working space using a smart contract. His ₹5,000 rent was paid automatically each month only when he accessed the office.

4. Monetary Policy & Financial Stability

Digital currency also helps governments and central banks manage money in the economy. CBDCs give central banks real-time data on transactions, allowing better control over monetary policy.

Example: During a slowdown, the RBI could directly transfer ₹2,000 CBDC to citizens’ wallets to boost spending. This is faster than traditional welfare schemes.

On the other hand, stablecoins can weaken central banks’ control and cause instability.

Example: If millions of Indians switched savings from ₹ to a stablecoin, the RBI might struggle to manage inflation.

5. DeFi and Investment

Digital currencies are also powering new ways of investing through decentralised finance (DeFi). People can trade, lend, or borrow without banks, using only crypto wallets and tokens.

Example: Ankit invested ₹10,000 in a DeFi platform and earned 8% annual returns. If he used a bank FD, he would have earned only 6%.

Conclusion

Digital currency is the new way to look at money and transactions. It is not a regional change. It is global. People are growing their wealth by investing in them. However, it comes with challenges like security, volatility, and regulatory gaps. You just need to be careful, set clear rules, and have access to digital technology whenever dealing with digital currency. 

Frequently Asked Questions

How are digital currencies taxed?
They’re usually taxed as capital gains or income, depending on local country regulations.

How is user privacy protected?
Privacy depends on blockchain design; some offer anonymity, others track identities with regulation.

Can CBDCs work without the internet?
Some CBDCs allow offline use with smart cards or devices, while others need connectivity.

Will different digital currencies interoperate?
Interoperability needs common technical standards and regulations; currently, seamless exchange is still limited.

Do digital currencies harm the environment?
Proof-of-work uses high energy; proof-of-stake methods reduce energy impact significantly worldwide.

 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?