Closed Virtual Currency - Explained
What is a Closed Virtual Currency?
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Table of ContentsWhat is a Closed Virtual Currency?How Does a Closed Virtual Currency Work?Closed Virtual Currencies Versus Open Virtual CurrenciesClosed Virtual Currency SetbacksReal World Example Closed Virtual Currency
What is a Closed Virtual Currency?
A closed virtual currency is a currency in the digital form used in the specific virtual community or market it was created for. A closed virtual currency is not regulated in a real economy, this currency cannot be used as a legal tender in business transactions. As its name implies, a closed currency can only be used as a medium of payment within a closed circle which is the virtual community is was created for. Closed virtual currencies are not real money or cash acceptable in an economy, they are electronic money limited to a particular community.
How Does a Closed Virtual Currency Work?
Closed virtual currencies do not possess the characteristics of real money such as coins or paper money, they are digital money circulated within a specific digital space. Other names for closed virtual currency are closed-loop currency, closed-flow virtual currency, and non-convertible virtual currency. This type of currency cannot be converted into cash or be used for payment in a physical business transaction. Advancement in technology gave rise to the creation of closed virtual currency. The use of this type of currency is restricted to virtual communities and eCommerce. Open Virtual currency is another type of currency that can be used for business transactions in the real world, despite that it cannot be used as a legal tender in some countries. Here are some quick points to know about closed virtual currency;
- A closed virtual currency is a currency in a digital form that can only be used as a medium of exchange in the virtual community it was created for.
- Closed Virtual Currency is unregulated and not acceptable as a legal tender in real-world transactions.
- This currency is not real money or full money and has no connection with the currency of a country.
- Technological advancement which gave rise to e-commerce and the creation of virtual communities led to the development of the closed virtual currency.
Closed Virtual Currencies Versus Open Virtual Currencies
There are two types of virtual currency, open and closed virtual currency. These two types of currency can be used in e-commerce and virtual community platforms. Open virtual currencies are the opposite of closed virtual currencies. These currencies can be exchanged for real cash because it has a determinable value. Many countries of the world accept open virtual currency as a legitimate means of exchange although they do not have the status of legal tender. Bitcoin is the most popular example of open virtual currency. While open virtual currency is allowed to be used as a medium of exchange in real-life transactions and in the open markets, closed virtual currency is restricted to closed environments. An open virtual currency has a determinable value which makes it easy to be exchanged for real money, closed virtual currency does not. Virtual Currencies are generally not regulated by any central authority, rules guiding its use are made by service providers who developed it.
Closed Virtual Currency Setbacks
The major drawbacks of closed virtual currency are listed below;
- Additional closed virtual currency cannot be created, unlike open virtual currency that can be continually created through mining. A good example is Bitcoin.
- Closed virtual currency is generally illiquid.
- Owners of this type of currency stand the risk of losing all their coins at once to cyber fraud, bugs, and thefts.
Real World Example Closed Virtual Currency
Generally, closed virtual currency is used in a closed-loop virtual environment. This currency can be used in the gaming industry. Video tokens, loyalty points, gold coins, Warcrafts's gold, flyer miles are some examples of closed virtual currency. A popular instance of closed virtual currency is the Nordstrom which is only accepted at the Nordstrom store.