What are digital currencies?
Digital currencies are virtual money that act as an alternative or replacement to traditional, bank-regulated, national currencies
Spurned on by the banking crisis of 2008 alternative forms of currencies received huge investments from VCs. These currencies have no central body, no contract computer system and no standard currency. They are not endorsed by any government or central bank.
Consumers can trade virtual coins online and use them to pay for good just as with any other currency. People can easily transfer their digital currencies into other major currencies without the currency exchange fees normally associated with this kind of transaction.
Digital currencies will directly compete with banks and major credit card brands such as Visa, MasterCard, American Express.
Being able to trade globally without considerations of borders or transfer costs will prove one of the greatest advantages of these new currencies.
Do not confuse digital currencies with digital wallets. Just as a physical wallet or purse can hold a few US dollars and a some GB pound notes, digital wallets can hold multiple different currencies, including regular bank currencies and various digital currencies. 2012 and the first half of 2013 saw many digital wallet brands explode onto the scene, some betting on a single digital currency and some attempting to stay currency agnostic.
In 2013 the currencies became practical and went online.
What else do we call it?
Digital wallet, digital money, electronic money, alternative currency
How does it work?
This video from one of the most popular currencies explains how digital currencies work. Various currencies differ slightly in their technology approach, but the concepts remain similar.
What is necessary to make it commonplace?
From a technology standpoint, elements of ubiquitous computing need be commonplace to make this happen. The success of smartphones in particular have heralded in this technology. The adoption of digital currencies also depends on the common usage and security of the cloud computing infrastructure, which 2012 saw come into its own.
Much like merchants, banks and consumers adopting Visa or American Express, shops have to integrate systems to accept digital currencies. Developers for common online shopping carts such as Magento, Zencart and Shopify have begun creating integration plugins for digital currencies and different flavours of digital wallets.
Standardisation and consumer adoption will decide which form of electronic money wins out. In all likelihood we will end up mimicking traditional currencies where multiple currencies exist, with varying values and usage.