Digital Currency

Digital currency is money that exists ONLY as digital records. There are no physical notes or coins; transactions are recorded electronically.

It's not the same as electronic payments. When you tap your debit card, you're moving TRADITIONAL currency (£/$/€) electronically — there are still notes and coins backing it in the banking system. Digital currency has NO physical form anywhere.

Two big families.

1. Central bank digital currency (CBDC). Issued and controlled by a central bank — like a digital £ or $. Some countries have piloted these (e.g. China's e-CNY).

2. Cryptocurrency. Decentralised — no central authority. Run on a peer-to-peer network using a blockchain ledger. Examples: Bitcoin, Ethereum, Solana.

Cambridge tip. Mark scheme expects 'exists only digitally' AS WELL AS 'electronically transacted'. Both halves are needed for full marks.

A blockchain is a digital ledger that stores transactions in a tamper-evident way.

The structure. A chain of BLOCKS. Each block contains:

• A list of transactions.
• A timestamp.
• The HASH of the previous block (this is what links them).
• Its own hash (computed from all of the above).

Why this is hard to tamper with. A hash function produces a fixed-length fingerprint that completely changes if any input bit changes. So if an attacker edits a transaction in block 50:

• Block 50's hash changes.
• That changes block 51's stored 'previous hash' field.
• Block 51's own hash changes.
• ... and so on for every block after.

To make the tampering invisible, the attacker would need to recompute every block from 50 onward AND get the network to accept the rewritten chain. With proof-of-work, that means out-mining the legitimate network — practically impossible at scale.

Distributed copies. A copy of the blockchain is stored on every full node in the network. Any tampering on one copy is rejected by the others. Consensus rules keep the legitimate chain dominant.

Cambridge tip. Mark scheme rewards the chain explicitly: 'each block contains a hash of the previous block, so changing one block changes every block after'. Add 'distributed across many nodes' for full credit.

Cryptocurrencies make a clear set of trade-offs.

Advantages.

• Decentralised — no bank or government can freeze accounts or inflate the supply unilaterally.
• Global — sending coins to anyone, anywhere, takes minutes; no foreign-exchange fees or bank-hours delays.
• Tamper-resistant ledger — anyone can verify the full transaction history.
• Lower transaction fees for cross-border payments versus traditional banking.
• Programmable money — smart contracts let payments execute automatically when conditions are met.

Disadvantages.

• Highly volatile — value can swing 20%+ in a day. Hard to use as a stable store of value.
• Used for illicit activity — ransomware payments, dark-web markets, money-laundering. The pseudonymous nature helps attackers.
• Energy-intensive (proof-of-work coins) — Bitcoin uses national-scale electricity.
• Irreversible mistakes — send to the wrong address and it's gone.
• Regulatory uncertainty — legal status varies by country and changes fast.
• Loss of access — lose your private key and your coins are unrecoverable.

Cambridge tip. Top-band evaluation answers offer BOTH SIDES and acknowledge the energy / regulation tension. Pure 'crypto is the future' or 'crypto is a scam' answers lose marks for one-sidedness.