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Virtual currency

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Definitions[]

General[]

Virtual currency is

“ a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.[1] ”
“ a digital representation of value that can be digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency.[2] ”
“ 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 legal tender status in any jurisdiction.[3] ”
“ [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 virtual community.[4] ”
“ a digital unit of exchange that is not backed by a government-issued legal tender. Virtual currencies can be used entirely within a virtual economy, or can be used in lieu of a government-issued currency to purchase goods and services in the real economy.[5] ”
“ a form of unregulated digital money, not issued or guaranteed by a central bank, which can act as means of payment.[6] ”
“ any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. Virtual Currency shall not be construed to include any of the following:
(1) digital units that (i) are used solely within online gaming platforms, (ii) have no market or application outside of those gaming platforms, (iii) cannot be converted into, or redeemed for, Fiat Currency or Virtual Currency, and (iv) may or may not be redeemable for real-world goods, services, discounts, or purchases.
(2) digital units that can be redeemed for goods, services, discounts, or purchases as part of a customer affinity or rewards program with the issuer and/or other designated merchants or can be redeemed for digital units in another customer affinity or rewards program, but cannot be converted into, or redeemed for, Fiat Currency or Virtual Currency; or
(3) digital units used as part of Prepaid Cards.[7]
 ”

Virtual currency is a "digital representation[] of value that are not government-issued."[8]

Virtual worlds[]

Virtual currency refers to the unit of exchange used in virtual worlds. Originally provided to users of virtual worlds by game creators for use in-game, a robust market has developed for these currencies offline.

Overview (General)[]

Virtual currencies have come in many forms, beginning as currencies within online computer gaming environments and social networks, and developing into means of payment accepted "offline" or in "real life." It is now increasingly possible to use virtual currencies as a means to pay for goods and services with retailers, restaurants and entertainment venues. These transactions often do not incur any fees or charges, and do not involve a bank.

While virtual currencies can function as a unit of account, store of value, and medium of exchange, they are not widely used or accepted. Some virtual currencies can only be used within virtual economies (for example, within online role-playing games) and may not be readily exchanged for government-issued currencies such as U.S. dollars, euro, or yen. Other virtual currencies may be used to purchase goods and services in the real economy and can be converted into government-issued currencies through virtual currency exchanges.

They offer potential benefits over traditional currencies, including lower transaction costs and faster funds transfers. Because some virtual currency transactions provide greater anonymity than transactions using traditional payment systems, law enforcement and financial regulators have raised concerns about the use of virtual currencies for illegal activities. Additionally, recent cases involving the loss of funds from virtual currency exchanges have highlighted potential consumer protection issues.

Virtual currency does not have legal tender status in any jurisdiction.

Recently, the virtual currency "Bitcoin" has set the scene for a new generation of decentralised, peer-to-peer virtual currencies — often also referred to as crypto-currencies.

Virtual currencies can be bought at an exchange platform using conventional currency. They are then transferred to a personalized account known as a "digital wallet." Using this wallet, consumers can send virtual currencies online to anyone else willing to accept them, or convert them back into a conventional fiat currency (such as the Euro, Pound or Dollar).

“ Virtual currency can best be described as digital cash. It is generated by computers, lives on the Internet, and can be used to purchase real and digital goods across the world.

Some proponents believe that digital currencies can prove valuable to those in developing countries without access to stable financial systems. Others believe it could prove to be a next generation payment system for retailers both online and in the real world. At the same time, however, virtual currencies can be an effective tool for those looking to launder money, for those looking to traffic illegal drugs, for those looking to exploit children around the world, and the list goes on.

While virtual currencies have seen increased attention from regulators, law enforcement, investors, and entrepreneurs in recent months, there are still many unanswered questions and unresolved issues.[9]

”

Overview (Virtual worlds)[]

Linden Lab, the creator of Second Life, has been credited with creating the first currency system in a virtual world.[10] The basis for Second Life's virtual economy is the "Linden Dollar," or "L$." Users may buy and sell Linden Dollars on the "Lindex" or "Linden Exchange," which Linden Lab operates. As of September 2009, the exchange rate on the Lindex is approximately 270 Linden Dollars for each U.S. Dollar. Users may sell Linden Dollars on the Lindex and cash out the sale proceeds in U.S. Dollars into their PayPal accounts. Linden Lab monitors and manages the Lindex to keep it stable, and has implemented anti-fraud and anti-money laundering measures.

Given this framework for conducting business, "Second Life has been a starting ground for many real-life companies to explore the opportunities for virtual business and marketing."[11] Many users have even used Second Life to earn money by creating, advertising, and selling virtual goods such as clothing and accessories as well as by operating entertainment venues and offering scripting and creative services to major businesses and universities.</ref> This model has been replicated in many other virtual worlds to varying degrees.[12]

Risks[]

Virtual currencies aren't regular money. To begin with, virtual currencies are not issued or backed by the United States or any other government or central bank. No one is required to accept them as payment or to exchange them for traditional currencies. To work, they depend on the processing power of vast networks of unidentified, private computers around the world, which maintain and update a public ledger called the "blockchain." (Think of it as a public spreadsheet.)

Further, virtual currencies are not kept in banks or credit unions. In order to use virtual currencies, you need to store them in a "digital wallet," which are identified by the owner's "public keys." To access the virtual currency in a digital wallet, the owner uses its "private keys." (Private keys are random sequences of 64 letters and numbers that should be kept secret; public keys are corresponding letter/number sequences that everyone can see on the blockchain.) If the owner want to send someone its virtual currency, for example as payment, the owner uses the private keys to unlock the digital wallet.

In many ways, the private keys are the virtual currency so keeping the private keys secret is critical to owning and using virtual currency. An owner can store and protect its private keys itself or entrust them to a company called a wallet provider to protect them for the owner.

References[]

  1. ↑ IRS Notice 2014-21 (full-text).
  2. ↑ Virtual Currencies: Key Definitions and Potential AML/CFT Risks, at 4.
  3. ↑ Guidance: Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, at 1.
  4. ↑ Virtual Currency Schemes, at 5.
  5. ↑ Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks, at 3.
  6. ↑ European Banking Authority, "EBA warns consumers on virtual currencies" (Dec. 13, 2013) (full-text).
  7. ↑ Virtual Currencies, at 5-6.
  8. ↑ Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges, at Highlights.
  9. ↑ Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies, at 29.
  10. ↑ See Yesha Sivan, "3D3C Real Virtual Worlds Defined: The Immense Potential of Merging 3D, Community, Creation, and Commerce," J. of Virtual Worlds Res., Vol. 1, No. 1, at 8 (July 2008) (full-text).
  11. ↑ Lyle R. Wetsch, "The 'New' Virtual Consumer," J. of Virtual Worlds Res., Vol. 1, No. 2, at 2 (Nov. 2008).
  12. ↑ Other online virtual worlds that have in-world monetary systems include: Gaia, in which users may use "Gaia Cash" purchased with U.S. dollars online and at certain brick-and-mortar stores, or earned in-world by doing surveys and completing sponsored deals; Neopets, in which users may buy items for their virtual pets with "Neopoints," earned through playing games, investing in the game’s stock market, and winning contests; and There.com, in which users engage in monetary transactions using Therebucks purchased directly from There.com, from other members, or from third-party online banks.”

Sources[]

See also[]

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