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What is digital cash?

What digital cash means for your business

Cash is hard to replicate in a digital form. While crypto has become a major focus as an alternative to traditional currencies, it works very differently from cold, hard cash. Digital cash, on the other hand, acts like real cash except that it's not on paper. And while many might think that digital cash is just another word for cryptocurrency, that's not actually the case.

Crypto relies on a decentralized system, while digital cash is part of the centralized banking system. Although digital cash is still in its infancy, there are some who are hoping to develop the technology further and create a truly digital U.S. dollar.1

What is digital cash?

Digital cash is a form of cash that is used electronically. It acts like cash but instead of being on paper, it's in a digital format. The money in a bank account, for example, is managed using electronic codes. It can be transferred and exchanged using credit cards and payment processing apps.2

Digital currencies are similar in that they are a form of currency that is electronic. However, crypto, such as bitcoin, operates differently than fiat or digital cash that banks use. Crypto is decentralized, meaning there is no one organization that controls the flow of money like a central bank. The other key difference is that digital cash can be converted back to physical cash.3

Due to the increasing popularity of crypto, central banks like the Federal Reserve are discussing the possibility of a central bank digital currency (CBDC) to help businesses navigate the digital world. In fact, President Joe Biden issued an executive order to place a high priority on researching and developing a CBDC.4

How can businesses use digital cash?

The possibility of a central bank digital currency is promising news for businesses, especially small ones. One of the biggest issues small businesses face is payment delays that can span 30 to 120 days.5 Businesses also must pay merchant fees to process credit card transactions, which can range from 1.15% to 3.15% and are likely to rise.6

Using digital cash is one way for businesses to overcome barriers that hard cash presents. Digital cash payment solutions can be used to quickly pay suppliers and is easy to store. 

Furthermore, there are several unique advantages to using digital cash. For one, it can help facilitate real-time and lower-cost payments for both domestic and international transfers.7 It also eliminates the need to transfer large amounts of physical cash. Digital cash also makes it easier to conduct business overseas, as digital money can be transferred more quickly, and at times with less processing fees. 

The future of digital cash

Digital cash can help merchants mitigate the issues that stem from dealing with cash systems and slow payments. The future of money looks promising when you think about digital cash and the uses of cryptocurrencies. Faster payments mean businesses can keep employees, like gig workers, happy by offering them faster payouts or even allowing workers to get paid in crypto.

This is part of the reason some in Congress are pushing for an exploration of digital cash as a centralized currency. Known as the ECASH Act, it would direct the U.S. government to issue digital dollars that are stored on hardware and can be used without access to the internet.8

Whether digital cash comes in the form of centralized tokens issued by the Fed, or another digital system, having a centralized system to quickly and easily pay merchants and suppliers is likely to be a great benefit for businesses across the world. 

This does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment, including any of the product(s) mentioned herein, or an invitation, offer or solicitation to engage in any investment activity. This information is provided solely on the basis that you will make your own investment decisions, and Bakkt does not take account of any investor's investment objectives, particular needs, or financial situation. It is strongly recommended that you seek professional investment advice before making any investment decision.

 

1 Bloomberg. "What a U.S. Digital Dollar Means for the Future of Your Wallet." Published March, 2022. 

2 Corporate Finance Institute. “Digital Money." Accessed August, 2022. 

3 The Motley Fool. “What Is a Digital Currency?" Published June, 2022. 

4 The White House. “Executive Order on Ensuring Responsive Development of Digital Assets." Published March, 2022. 

5 Pymnts.com “The Trade Credit Dilemma." Accessed August, 2022. 

6 the ascent. “Average Credit Card Processing Fees and Costs in 2022." Published August, 2022. 

7 Harvard Business Review. “How Digital Currencies Can Help Small Businesses." Published May, 2022. 

8 Wired. “The Future of Digital Cash is Not on the Blockchain." Published March, 2022.