What Is Digital Currency? Types, Risks, and How to Protect Yourself

 

Payment methods have seen an impressive evolution over the years. We have moved from coins to cash to cards, and now to crypto and central bank digital currencies. Juniper Research projects that the value of global digital currency transactions will reach $213 billion by 2030, up from $100 million in 2023.¹

Explore key elements of digital currencies, including important distinctions between different payment methods, benefits and challenges of various methods, the most persistent fraud threats these methods face, and the strategies needed to keep them safe.

Key Takeaways

• Digital currencies are a kind of financial asset. They work like regular money but only exist online.
• Juniper Research projects that the value of global digital currency transactions will reach $213 billion by 2030.¹
• Digital currencies can either be publicly issued (e.g., central bank digital currencies) or privately issued (e.g., cryptocurrencies).
• Digital currencies are vulnerable to numerous fraud tactics, including phishing attacks, social engineering scams, account takeover, and even physical threats.

What is Digital Currency?

Digital currency, sometimes known as digital money, electronic money, or electronic currency, is a financial asset that only exists digitally. Unlike traditional cash, such as banknotes or coins, you cannot touch, store, or change them. You can only exchange them in an electronic environment.

Digital currencies can be privately or publicly issued. Privately-issued digital currencies are digital money created and managed by private companies, not a central government. Publicly issued digital currencies, known as central bank digital currencies (CBDCs), are digital versions of national currencies, issued and backed by a central authority.

 

Types of Digital Currency 

Digital currencies fall into four unique categories, based on their specific characteristics. The key types of digital currencies include: 

Central Bank Digital Currencies 

According to recent data from the Atlantic Council, 49 countries have launched CBDC pilot programs. Three countries (the Bahamas, Jamaica, and Nigeria) have launched their own national digital currency.² Meanwhile, the eurozone is planning its own digital currency between 2027 and 2029.³

Cryptocurrencies

Cryptocurrency (often called crypto) is a form of digital money. It is decentralized and secured by cryptography, which is used to protect its transactions. Cryptocurrencies operate on digital ledger technology such as blockchain. 

Unlike CBDCs, a central authority does not control or monitor cryptocurrencies. Notable names in the cryptocurrency space include Bitcoin and Ethereum. 

Stablecoins 

Stablecoins are cryptocurrencies that have their value tied to stable assets like fiat currencies or commodities such as gold. This gives them greater stability than cryptocurrencies, making them more suitable for everyday transactions. Notable stablecoin names include Tether and USD Coin.

Virtual Currencies

Virtual currencies are currencies that are often used in specific platforms like gaming ecosystems. Its developers, network, or the organization that created it frequently control it.

Digital Currency in the Real World: Pros & Cons

There are both benefits and drawbacks when using digital currencies. Here are some key points to consider: 

Digital Currency Benefits

• Stronger Central Bank Authority. Central banks often emerge as the big winners with digital currencies. CBDCs allow national central banks to strengthen their positions in digital finance by providing citizens with a secure, state-backed payment option.
• Strategic Autonomy Resilience. Using CBDCs, nations can reduce their reliance on foreign or private payment systems, strengthening their economic independence. 
• Expanding Financial Inclusion: Digital currencies open new financial opportunities to unbanked or underbanked populations, who number 1.4 billion worldwide, according to figures from the World Bank.⁴ Many unbanked people do not have bank accounts. However, they can use mobile devices to pay merchants, vendors, or utility providers. 
• Enhanced Privacy: Unlike other peer-to-peer methods, digital currencies let users transfer money without an internet connection. This makes digital transactions feel like cash swaps.
• Cross-Border Efficiency: The digital euro is expected to enhance cross-border payments by making them more seamless and efficient.

Digital Currency Risks

• Privacy Concerns: While digital currencies can be exchanged without a digital connection, they are centralized and issued by the local government or regional authority. This raises important questions over the potential of government surveillance into users’ financial activity. 
• Financial Stability Risks: CBDCs can introduce new financial risks, especially in the event of a “bank run” where people withdraw funds from banks and convert them into digital currencies.
• New Banking Competition: The availability of digital currencies creates new competition for banks by increasing competition for deposits. This may result in banks reducing funding and lending services to other customers. 
• Cyberattack Risks: Centralized digital banking currencies immediately become prime targets for cybercriminals and state-sponsored attacks, creating new and substantial national financial security threats.  

CBDCs vs. Cryptocurrencies

Central Bank Digital Currencies share some similarities with cryptocurrency. However, they are very different in several key areas.

Common Fraud Threats in Digital Currency

Digital currency offers an exciting new payment option for individuals, merchants, and person-to-person transactions. However, like all payment methods, it is unfortunately targeted by criminals using various fraud and scam tactics. 

Phishing Scams

Digital currencies effectively convert cash to electronic currency. Fraudsters will use phishing attacks to steal or obtain legitimate credentials by posing as trustworthy parties, such as bank staff, law enforcement officials, or even family members.

Investment Scams

Criminals pressure their targets to give them money for a once-in-a-lifetime investment opportunity that promises high returns with little risk. However, in reality, the investment doesn’t really exist or is a Ponzi scheme that eventually collapses when new investors dry up. 

Rug Pulls

A “rug pull” is a type of crypto fraud where developers build hype and community over a new digital currency asset they are developing. Next, they abruptly abandon the project, selling off assets and causing the currency’s value to plummet. The fraudsters disappear with the money, leaving investors with worthless assets and no recourse.

Fake Wallets and Exchanges

Fraudsters use social engineering tactics to create fake digital wallets or crypto exchanges that resemble legitimate platforms. This may involve using similar or stolen logos, web designs, and branding. When users attempt to connect their digital wallets to these fake platforms, they unknowingly reveal their login information and passwords, allowing criminals to steal their assets. 

Social Engineering Fraud

Social engineering fraud is central to many scams that exploit victims’ trust. Criminals tailor carefully crafted messages, designed to psychologically manipulate targets into sharing sensitive data or transferring money. Common tactics include phishing, smishing, vishing, romance scams, and business email compromise (BEC). Using GenAI, criminals can make their social engineering scams even more convincing with deepfakes or voice cloning.

Account Takeover (ATO) Fraud

Criminals use stolen credentials, malware, and malicious bots to log into other people’s digital wallets. From there, they can make purchases or transfer assets to different accounts they control.

Synthetic Identity Fraud

Criminals use a combination of real and fabricated information to create fake identities and commit new account fraud. If successful, these profiles can bypass KYC checks and allow criminals to launder money from criminal activities.

Physical Threats

While digital currency may only exist electronically, criminals may resort to physical threats and force to steal them. These types of attacks are also known as “wrench attacks” or “$5 wrench attacks” and may involve brutal methods like kidnapping, home invasion, or even torture to coerce owners to transfer assets.⁵

How Feedzai Prevents Digital Currency Fraud

Digital currencies may be the newest payment type available. But they still require strong protections against fraud and scams. Here’s how Feedzai’s AI-powered platform provides robust, multi-layered protection against digital currency fraud, reviewing multiple datasets in real time to quickly detect anomalies.

AI-powered Fraud Scoring

Feedzai’s advanced AI-powered solution delivers a real-time risk scoring engine that rapidly reviews millions of digital transactions. This includes both person-to-person (P2P) exchanges and person-to-merchant (P2M) transactions. The score indicates the perceived level of fraud risk behind a transaction, ultimately allowing the bank to make the final approval decision.

Payment Rail & Infrastructure-ready

Feedzai’s solution is payment-rail agnostic, working seamlessly across multiple payment rails. The technology protects multiple payment channels to deliver consistent fraud prevention for digital currency transactions. This means we’re ready to quickly take on new digital currency payment options when they emerge. 

AI-native and Explainable Solutions

Feedzai’s platform uses advanced, explainable AI to provide immediate, accurate, and understandable risk scores. This significantly reduces false positives, enhances operational efficiency, and promotes greater trust and transparency in analytical processes. By providing clear insights into model decision-making, our system not only improves efficiency but also strengthens user confidence.

Behavioral Analytics & Biometrics Solutions

It’s not enough to protect infrastructure. As digital currencies expand, banks need to have confidence in the person behind the transaction. Feedzai solutions use behavioral analysis to understand how customers normally behave and use AI and machine learning to flag anomalies. 

Our behavioral biometrics solutions can detect how customers typically interact with their devices or computers (e.g., typing speed, smartphone angle, touchscreen pressure), giving banks and businesses confidence that their customer is indeed behind a digital transaction.

Building a Safer Digital Currency Future

Digital currencies are a vast leap from traditional payment methods like coins, cash, and cards. While these may be newer payment options, they are still vulnerable to the same fraud tactics that target both organizations and customers. 

As currency becomes digital, it’s more important than ever to understand who is behind a transaction and quickly assess their risk level. Feedzai’s AI-powered risk-scoring engine, combined with our behavioral analysis and biometrics capabilities, is an essential tool for keeping digital currency transactions secure.

Digital currencies hold significant promise to help unbanked populations, bolster a nation or region’s local economy, and promote economic independence. However, transactions must remain secure across all possible channels for customers and citizens to realize the full benefits of these currencies. As these currencies expand, it’s never been more essential to ensure real-time risk scoring protections.

• Blog: From a Family Photo to the Digital Euro Protector
• Report: 2025 AI Trends in Fraud and Financial Crime Prevention
• Report: Extracting Business Value from External Data
• Solution Sheet: Secure Digital Currency Transactions
• Solution: RiskOps. Unify All Risk Signals to Stop FinCrime.