Virtual currency, or virtual money, is a

digital currency Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...

that is typically unregulated, issued and usually controlled by its developers, and used and accepted electronically among the members of a specific

virtual community A virtual community is a social network of individuals who connect through specific social media, potentially crossing geographical and political boundaries in order to pursue mutual interests or goals. Some of the most pervasive virtual commu ...

as part of a

virtual economy A virtual economy (or sometimes synthetic economy) is an emergence, emergent economy existing in a virtual world, usually exchanging virtual goods in the context of an online game, particularly in massively multiplayer online games (MMOs). Peop ...

. In 2014, the European Banking Authority defined virtual currency as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a

fiat currency Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, ...

but is accepted by

natural Nature is an inherent character or constitution, particularly of the ecosphere or the universe as a whole. In this general sense nature refers to the laws, elements and phenomena of the physical world, including life. Although humans are part ...

or legal persons as a means of payment and can be transferred, stored or traded electronically." A digital currency issued by a

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

is referred to as a central bank digital currency.

Definitions

In 2012, the

European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...

(ECB) defined virtual currency as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific

". In 2013, the

Financial Crimes Enforcement Network The Financial Crimes Enforcement Network (FinCEN) is a bureau within the United States Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrori ...

(FinCEN), a bureau of the

US Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States. It is one of 15 current U.S. government departments. The department oversees the Bureau of Engraving and ...

, in contrast to its regulations defining currency as "the coin and paper money of the United States or of any other country that is designated as

legal tender Legal tender is a form of money that Standard of deferred payment, courts of law are required to recognize as satisfactory payment in court for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything ...

and that icirculates and iiis customarily used and accepted as a medium of exchange in the country of issuance", also called "real currency" by FinCEN, defined virtual currency as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency". In particular, virtual currency does not have

status in any jurisdiction. In 2014, the European Banking Authority defined virtual currency as "a digital representation of value that is neither issued by a

or a public authority, nor necessarily attached to a

, but is accepted by

or legal persons as a means of payment and can be transferred, stored or traded electronically."- In 2018, Directive (EU) 2018/843 of the European Parliament and of the Council entered into force. The Directive defines the term "virtual currencies" to mean "a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically."

History of the term

In a 2013 congressional hearing on virtual currencies,

Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Federal Reserve, he was appointed a distinguished fellow at the Brookings Insti ...

said they "have been viewed as a form of '

electronic money Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...

' or area of payment system technology that has been evolving over the past 20 years," referencing a 1995 congressional hearing on the Future of Money before the Committee on Banking and Financial Services. The Internet currency Flooz was created in 1999. The term "virtual currency" appears to have been coined around 2009, paralleling the development of digital currencies and social gaming. Although the correct classification is "digital currency", the US government prefers and has uniformly adopted the term "virtual currency". The FinCEN was first, followed by the

FBI The Federal Bureau of Investigation (FBI) is the domestic Intelligence agency, intelligence and Security agency, security service of the United States and Federal law enforcement in the United States, its principal federal law enforcement ag ...

in 2012, the General Accounting Office in 2013, as well as the government agencies testifying at the November 2013 US Senate hearing on

bitcoin Bitcoin (abbreviation: BTC; Currency symbol, sign: ₿) is the first Decentralized application, decentralized cryptocurrency. Based on a free-market ideology, bitcoin was invented in 2008 when an unknown entity published a white paper under ...

, including the

Department of Homeland Security The United States Department of Homeland Security (DHS) is the U.S. federal executive department responsible for public security, roughly comparable to the interior, home, or public security ministries in other countries. Its missions invol ...

, the US

Securities and Exchange Commission The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...

, and the Office of the Attorney General.

Limits on being currency

Attributes of a real currency, as defined in 2011 in the

Code of Federal Regulations In the law of the United States, the ''Code of Federal Regulations'' (''CFR'') is the codification of the general and permanent regulatory law, regulations promulgated by the executive departments and agencies of the federal government of the ...

, such as real paper money and real coins are simply that they act as

and circulate "customarily". In March 2014, the

IRS The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...

decided to treat

and other virtual currencies as property for tax purposes, not as currency. Adam Levitin, a law professor at

Georgetown University Georgetown University is a private university, private Jesuit research university in Washington, D.C., United States. Founded by Bishop John Carroll (archbishop of Baltimore), John Carroll in 1789, it is the oldest Catholic higher education, Ca ...

, suggested that this made bitcoins not

fungible In economics and law, fungibility is the property of something whose individual units are considered fundamentally interchangeable with each other. For example, the fungibility of money means that a $100 bill (note) is considered entirely equ ...

, that is one bitcoin is not identical to another bitcoin, unlike one gallon of crude oil being identical to another gallon of crude oil and making bitcoin unworkable as a currency. Others have stated that a measure like accounting on average cost basis would restore fungibility to the currency.

Categorization by currency flow

Closed virtual currencies

Virtual currencies have been called "closed" or "fictional currency" when they have no official connection to the real economy, for example, currencies in

massively multiplayer online role-playing game A massively multiplayer online role-playing game (MMORPG) is a video game that combines aspects of a role-playing video game and a massively multiplayer online game. As in role-playing games (RPGs), the player assumes the role of a Player charac ...

s such as

World of Warcraft ''World of Warcraft'' (''WoW'') is a 2004 massively multiplayer online role-playing (MMORPG) video game developed and published by Blizzard Entertainment for Windows and Mac OS X. Set in the '' Warcraft'' fantasy universe, ''World of War ...

. While there may be a

grey market A grey market or dark market (sometimes confused with the similar term "parallel import, parallel market") is the trade of a commodity through distribution channels that are not authorised by the original manufacturer or trademark proprietor. ...

for exchanging such currencies or other virtual assets for real-world assets, this is usually forbidden by the games' terms of service.

Virtual currencies with currency flow into one direction

This type of currency, units of which may also be circulated as (printed) coupons, stamps or reward points, has been known for a long time in the form of customer incentive programs or

loyalty program A loyalty program or rewards program is a marketing strategy designed to encourage customers to continue to shop at or use the services of one or more businesses associated with the program. Single-company vs. coalition programs Loyalty progr ...

s. A

coupon In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in ...

loses its

face value The face value, sometimes called nominal value, is the value of a coin, bond, stamp or paper money as printed on the coin, stamp or bill itself by the issuing authority. The face value of coins, stamps, or bill is usually its legal value. Ho ...

when redeemed for an eligible asset or service (hence: flow in one direction), may be valid for only a limited time and subject to other restrictions set by the issuer. The business issuing the coupon functions as a central authority. Coupons remained unchanged for 100 years until new technology enabling credit cards became more common in the 1980s, and credit card rewards were invented. The latest incarnation drives the increase of internet commerce, online services, development of online communities and games. Here virtual or game currency can be bought, but not exchanged back into real money. The virtual currency is akin to a coupon. Examples are

frequent flyer program A frequent-flyer programme (FFP) is a loyalty program offered by an airline. Many airlines have frequent-flyer programmes designed to encourage airline customers enrolled in the programme to accumulate points (also called miles, kilometres, ...

s by various airlines, Microsoft Points, Nintendo Points, Facebook Credits and Amazon Coin.

Convertible virtual currencies

A virtual currency that can be bought with and sold back is called a

convertible currency Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies mu ...

. A virtual currency can be decentralized, for example

, a

cryptocurrency A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership record ...

. Transacting or even holding convertible virtual currency may be illegal in particular jurisdictions and to particular national citizens at particular times and the transactor/recipient/facilitator liable for prosecution by the State.

Centralized versus decentralized

FinCEN defined centralized virtual currencies in 2013 as virtual currencies that have a "centralized repository", similar to a central bank, and a "central administrator". A decentralized currency was defined by the US Department of Treasury as a "currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort". Rather than relying on confidence in a central authority, it depends instead on a distributed system of trust.

Money matrix

Digital currency Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...

is a particular form of currency which is electronically transferred and stored, i.e., distinct from physical currency, such as coins or banknotes. According to the European Central Bank, virtual currencies are "generally digital", although their enduring precursor, the coupon, for example, is physical. A

is a digital currency using cryptography to secure transactions and to control the creation of new currency units. Since not all virtual currencies use cryptography, not all virtual currencies are cryptocurrencies. Cryptocurrencies are not always legal tender, but some countries have moved to regulate cryptocurrency-related services as they would financial institutions.

Ecuador Ecuador, officially the Republic of Ecuador, is a country in northwestern South America, bordered by Colombia on the north, Peru on the east and south, and the Pacific Ocean on the west. It also includes the Galápagos Province which contain ...

is the first country attempting a government run a cryptography-free digital currency; during the introductory phase from Christmas Eve 2014 until mid February 2015 people can open accounts and change passwords. At the end of February 2015 transactions of electronic money will be possible. Estonia has been exploring various possibilities for blockchain technology, such as Estcoin and the use of crypto tokens within its e-residency program, which gives both Estonians and foreigners a digital form of identification.

Regulation

Virtual currencies pose challenges for central banks, financial regulators, departments or ministries of finance, as well as fiscal authorities and statistical authorities. Gareth Murphy, Central Bank of Ireland, described the regulatory challenges posed by virtual currencies as relating to: * Economic statistics *Monetary and exchange rate policy *Tax leakage *

Payment system A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, payment instruments such as payment cards, people, rules, procedures, standards, and technologies that ...

s and settlement infrastructure *

Consumer protection Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...

* Anti-money laundering *Impact of

financial regulation Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest consi ...

on financial service providers

United States

Commodity Futures Trading Commission guidance

The US

Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an Independent agencies of the United States government, independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures contract, fut ...

(CFTC) has determined virtual currencies are properly defined as commodities in 2015. The CFTC warned investors against

pump and dump Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements (pump), in order to sell the cheaply purchased stock at a higher price (dump). O ...

schemes that use virtual currencies.

Internal Revenue Service guidance

The US Internal Revenue Service (IRS) ruling Notice 2014-21 defines any virtual currency, cryptocurrency and digital currency as property; gains and losses are taxable within standard property policies.

Treasury guidance

On 20 March 2013, the Financial Crimes Enforcement Network issued a guidance to clarify how the US Bank Secrecy Act applied to persons creating, exchanging and transmitting virtual currencies.

Securities and Exchange Commission guidance

In May 2014 the US

(SEC) "warned about the hazards of bitcoin and other virtual currencies".

State regulations

=New York state regulation

= In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date commonly referred to as a BitLicense. Unlike the US federal regulators it has gathered input from bitcoin supporters and the financial industry through public hearings and a comment period until October 21, 2014, to customize the rules. The proposal, per NY DFS press release "sought to strike an appropriate balance that helps protect consumers and root out illegal activity". It has been criticized by smaller companies to favor established institutions, and Chinese bitcoin exchanges have complained that the rules are "overly broad in its application outside the United States".

European Union

European Central Bank guidance

In February 2015 the ECB concluded "Virtual currency schemes, such as Bitcoin, are not full forms of money as usually defined in economic literature, nor are virtual currencies money or currency from a legal perspective. Nevertheless, Virtual currency may substitute orbanknotes and coins, scriptural money and e-money in certain payment situations". In a May 2019 report ECB expressed concerns that "crypto assets provide opportunity for anonymous participation in illegal activities of all sorts".

Legal classification

In the European Union, a legal definition of cryptocurrency was introduced to be broadly be regarded as "a digital representation of value that can be digitally transferred, stored or traded and is accepted… as a medium of exchange" in the 5th Anti Money Laundering Directive. This also means that within the European Union cryptocurrencies and cryptocurrency exchanges are considered "obliged entities" subject to the European Union's Anti-Money Laundering Directives, and face the same CFT/AML regulations. As of July 20, 2021, the European Commission has proposed replacing the previous Directive 2015/849/EU with provisions from the 6th Anti-Money Laundering Directive. Virtual currencies are defined as "a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically". The fact that European Union lawmakers regard Bitcoin as the archetypal example of virtual currencies and that Bitcoin therefore fulfills all elements of the legal definition can serve as an anchor point for interpretation. Basically, the definition consists of six elements: # Virtual currencies are digital representations of value. Thus, digital assets must have a certain value in business transactions in order to be considered virtual currencies under EU law. # Virtual currencies are not issued or guaranteed by a central bank or public authority. Issuing is the first placement of a digital asset in the market. Guaranteeing is the assumption of third-party or own liabilities. If digital assets are issued or guaranteed by a central bank or public body, they are not virtual currencies. # Virtual currencies can be attached to a legal currency. Attachment is a legal or economic mechanism that links the value of the digital asset to a legal currency. # Virtual currencies do not have the legal status of a currency or money. This depends on the status of a digital asset in the EU or a Member State. # Virtual currencies are accepted by natural or legal persons as a means of exchange. This is the core element of the legal definition: The term "medium of exchange" is best understood in negative terms and requires that a digital asset is neither e-money as defined by the EU E-Money Directive, nor a payment service or payment instrument as defined by the EU Payment Services Directive II, nor any other means of payment as defined by the EU Capital Requirements Directive IV. The concept of acceptance requires a certain minimum of actual demand for the digital asset on the market to be considered a virtual currency. # Virtual currencies can be transferred, stored and traded electronically. Only digital assets that can be transferred electronically to a person (transfer), whereby the owner also has the option of preventing transfers without his intervention (storage), fulfill this concept. The authors of the legal definition under EU law primarily had blockchain technology in mind – and Bitcoin as an archetypal form. Against this background, it is remarkable that the definition does not contain any elements tailored to the use of a particular technology. On the contrary, the legal definition is strikingly technology neutral.

References

External links

Virtual Currency: Investigative Challenges and Opportunities (FBI)
{{Authority control Alternative currencies