Lending Against Digital Currency

Digital currencies are also known as virtual currencies.

Digital currencies have different significance for some of us: there are those who are confused while others are excited at its potential. Digital currency was actually a by-product of an invention that sought to facilitate peer-topeer cash transfer. In the process of transacting with the first crypto currency, it emerged as an alternative currency that can be used globally.

How does it qualify as a currency?

One of the considerations that make digital currency to qualify as a “currency” is the general acceptance for use. Crypto currency or digital currency qualify on the basis that there is a consensus in use based on the data entries that are entered on a virtual ledger. The security is enhanced by cryptography that cannot be easily copied. Thus, for all intents and purposes, digital currency can claim validity and compete with other forms of currency.

Digital currency also qualifies as a currency due to its controlled supply. Most digital currencies are controlled and limited in supply. This control mechanism is in the form of a written code in the database. An example is bitcoin that has a reducing supply code that will reach its final number in the year 2140. This makes it possible to roughly estimate the supply at any moment in time.

It also qualifies as a currency since it is issued as bearer and not as a debt. The conventional banking system works on debt. The money that reflects on your account is actually debt or IOU. It is an acknowledgment that the bank owes you that amount. The difference with digital currency is that it represents real value similar to holding gold coins. Thus when compared with conventional currencies, it is more solid.

How does the lending against digital currency work

The typical bank loan will take several days to a week as the processing time for approving a loan. Lending against digital currency takes significantly less time. It may be a few hours to a maximum of seven days. The lender can provide a loan against the digital currency that is flexible- from 15 days to one year. The digital currency attracts interest rates on the loan that are slightly lower than for conventional loans.

The borrower starts first by registering on a platform or exchange that lends against digital currency. Digital currencies within this context include Bitcoin (the most widely traded) and Ethereum amongst others. The registration is then followed by verification and ends with approval of the loan. The funds which are approved may be transferred to the borrower`s bank account or through wallets such as PayPal.

The future paints the picture in which most of our transactions will be cashless. The global economy is converging around a cashless system that will use digital currency as the media of exchange. Future loans will almost entirely be based on digital currency. Learning early enough about lending against digital currency is important in order to be better prepared for that eventuality.