Virtual Currency Definition
The virtual currency is also known as virtual money is a category of unregulated digital currency that exists only in electronic form. It means that they do not physically exist in either notes or coins. So, the transaction of virtual currency is only through selected mobile software, or computer applications, including digital wallets.
Its developers control it and are only accepted and used by members of a given virtual community. Virtual currency is known to be a subset of digital currency. A good example of such is a crypto-currency.
A Little More on What is a Virtual Currency
Generally, virtual currency is issued, controlled, and managed by its developers. The virtual currencies are in the form of tokens, and it is possible for it to remain unregulated in the absence of a legal tender. It is different from regular money as it is not issued by a central bank, but it relies on a trusted system. Note that central banks also issue digital currency, called central bank digital currency.
The virtual currency has its base on the underlying mechanism where it derives its value. So, since there is no centralized regulatory authority with this kind of currency fluctuation in their valuation is always wide and regular. Due to the lack of regulations, the United States Commodity Futures Trading Commission warned its investors to be aware of the schemes that use virtual currencies.
Who are the Users of Virtual Currency?
Although the common public can use virtual currency, this currency has restrictions when it comes to its usage. Also, its circulation is mostly among those members who a particular online community. These are virtual groups of users who have a dedication to online transaction services across networks. Most of the virtual currency transactions happen when purchasing goods and services on an online platform.
Apart from purchasing goods and services, virtual currency community members can also use the currency to run programs and execute contracts. Note that any person can create a digital currency. What this means is that the circulation of this kind of currency can range from hundreds to thousands.
The Origin of Virtual Currency
The origin of the virtual currency term can be traced back to 2012. The European Central Bank (ECB) defined virtual currency in its move to classify categories of digital money, especially in the unregulated environment. An unregulated environment, according to the ECB, is where developers create, issue, manage, and control the digital money and allow its members to use it as a method of payment.
Note that if you are a member of a virtual currency community, you can buy or sell virtual currencies on an exchange platform via conventional money. Some of the common digital money that you can buy and sell for cash through special ATMs is Bitcoins.
How Useful is Virtual Currency?
- Alternative currency for transaction
The virtual currency has provided people with currency alternatives apart from that given by the central bank. Virtual money is easy to use, and it is more efficient when it comes to making payments. It is not bound to the country, meaning you can use the currency to transact business without border restrictions across the world.
- Financial benefit
There is a possibility of a user benefiting financially from virtual currency. A good example is using a virtual currency platform to advertise his goods and services. From the advertisements, he is able to strike good business deals that increase his sales.
The Cons of Virtual Currency
Virtual currency can result in many problems, especially to the users. Some of these problems include the following:
- Lack of User Protection
If the developers of the virtual currency happen to close down, there is no guarantee that the user will get back his or her money. The reason is that since it is not regulated, their operating terms and conditions limit their liability. The terms ensure that they are not obligated to pay back people’s money should a situation arise, necessitating its closure.
There is no user risk protection with this kind of currency. In other words, developers do not give any guarantee that they will compensate the users should their scheme collapse.
- Financial Stability
Virtual currency can lead to financial instability when it comes to the money supply. Remember that there is no monitoring of the money supply in the virtual economy space. So, some retailers, as well as people, can decide to start accepting the virtual currency in exchange for goods and services. In other words, virtual money may lead to inflation in a country’s economy, affecting interest rates.
Since the virtual currency involves anonymous transactions, most governments have been concerned with its ability to pose a danger. For instance, it is easy for people to use it as money laundering platform by the virtue that transaction on this platform is anonymous.
Also, drug sellers can use this platform to hide their drug business operations. Why is this a concern to governments? The thing is that it is difficult for governments to trace anonymous transactions, which makes catching criminals involved in money laundering activities impossible.
Difference between Virtual, Crypto-currencies, and Digital Currencies
Digital currency is the general setting in which both the virtual currency and crypto-currency falls. Unlike virtual currency, digital currency encompasses a larger group of digital monetary assets. For instance, a central bank can also issue digital currency in the form of fiat currency.
Crypto-currency uses a technology known as cryptography to keep all transactions safe and reliable. The technology also helps in controlling and managing new currency unit creation. A good example of crypto-currencies includes Bitcoins and Ethereum. The two are also part of virtual currency.
Bitcoins and Ethereum’s transactions take place over a well-designed and protected blockchain. The networks that are open for use for the general public. It means that anyone who is interested is free to join and start transacting using crypto-currencies.
The Bottom Line
In general, there should be confidence in the monetary policies established by the central bank for any country’s economy to thrive. Remember that as long as there is no legal framework in a country to regulate the use of currencies, negative effects on the economy will be felt. So, any negative effects emanating from the use of any currency, including virtual currency, will be seen as a central bank’s failure to put monetary regulations.
References for “Virtual Currency”
Academic research for “Virtual Currency”
Nuglets: a virtual currency to stimulate cooperation in self-organized mobile ad hoc networks, Buttyan, L., & Hubaux, J. P. (2001). Nuglets: a virtual currency to stimulate cooperation in self-organized mobile ad hoc networks (No. REP_WORK).
Virtual currency, tangible return: Portfolio diversification with bitcoin, Briere, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), 365-373.
Understanding purchasing behaviors in a virtual economy: Consumer behavior involving virtual currency in Web 2.0 communities, Shin, D. H. (2008). Understanding purchasing behaviors in a virtual economy: Consumer behavior involving virtual currency in Web 2.0 communities. Interacting with computers, 20(4-5), 433-446.
Self-recharging virtual currency, Irwin, D., Chase, J., Grit, L., & Yumerefendi, A. (2005, August). Self-recharging virtual currency. In Proceedings of the 2005 ACM SIGCOMM workshop on Economics of peer-to-peer systems (pp. 93-98). ACM.
Rethinking virtual currency regulation in the Bitcoin age, Tu, K. V., & Meredith, M. W. (2015). Rethinking virtual currency regulation in the Bitcoin age. Wash. L. Rev., 90, 271.
NRGcoin: Virtual currency for trading of renewable energy in smart grids, Mihaylov, M., Jurado, S., Avellana, N., Van Moffaert, K., de Abril, I. M., & Nowé, A. (2014, May). NRGcoin: Virtual currency for trading of renewable energy in smart grids. In 11th International conference on the European energy market (EEM14) (pp. 1-6). IEEE.
Human-Currency Interaction: learning from virtual currency use in China, Wang, Y., & Mainwaring, S. D. (2008, April). Human-Currency Interaction: learning from virtual currency use in China. In Proceedings of the SIGCHI Conference on Human Factors in Computing Systems (pp. 25-28). ACM.
Virtual currency and reputation-based cooperation incentives in user-centric networks, Bogliolo, A., Polidori, P., Aldini, A., Moreira, W., Mendes, P., Yildiz, M., … & Seigneur, J. M. (2012, August). Virtual currency and reputation-based cooperation incentives in user-centric networks. In 2012 8th International Wireless Communications and Mobile Computing Conference (IWCMC) (pp. 895-900). IEEE.
There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams, Vasek, M., & Moore, T. (2015, January). There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams. In International conference on financial cryptography and data security (pp. 44-61). Springer, Berlin, Heidelberg.
Bitcoin: The economic case for a global, virtual currency operating in an unexplored legal framework, Turpin, J. B. (2014). Bitcoin: The economic case for a global, virtual currency operating in an unexplored legal framework. Ind. J. Global Legal Stud., 21, 335.