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 largely unregulated and 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 communi ...
.
In 2014, the
European Banking Authority
The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in Paris. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying ...
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 (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
, but is accepted by
natural
Nature, in the broadest sense, is the physical world or universe. "Nature" can refer to the phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. Although humans are p ...
or
legal persons
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
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, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
is referred to as a
central bank digital currency.
Definitions
In 2012, the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary 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)#Intern ...
(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 virtual community".
In 2013, US
Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terr ...
(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, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing 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 courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...
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 legal tender status in any jurisdiction.
In 2014, the
European Banking Authority
The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in Paris. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying ...
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 (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
, but is accepted by
natural
Nature, in the broadest sense, is the physical world or universe. "Nature" can refer to the phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. Although humans are p ...
or
legal persons
In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...
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 Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
said they "have been viewed as a form of 'electronic money' 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
Flooz.com was a dot-com venture, now defunct, based in New York City that went online in February 1999. It was promoted by comic actress Whoopi Goldberg in a series of television advertisements. Started by iVillage co-founder Robert Levitan, the ...
was created in 1999. The term "virtual currency" appears to have been coined around 2009, paralleling the development of digital currencies
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 ...
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 its principal Federal law enforcement in the United States, federal law enforcement age ...
in 2012, the General Accounting Office
The U.S. Government Accountability Office (GAO) is a legislative branch government agency that provides auditing, evaluative, and investigative services for the United States Congress. It is the supreme audit institution of the federal gover ...
in 2013, as well as the government agencies testifying at the November 2013 US Senate hearing on bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
, 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 or home ministries of other countries. Its stated missions involve anti-terr ...
, the US Securities and Exchange Commission
The U.S. 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. The primary purpose of the SEC is to enforce the law against market ...
, 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 regulations promulgated by the executive departments and agencies of the federal government of the United States. ...
, such as real paper money and real coins are simply that they act as legal tender
Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...
and circulate "customarily".
The IRS
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...
decided in March 2014, to treat bitcoin and other virtual currencies as property for tax purposes, not as currency. Some have suggested that this makes bitcoins not fungible
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for exam ...
—that is one bitcoin is not identical to another bitcoin, unlike one gallon of crude oil being identical to another gallon of crude oil—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 massively multiplayer online role-playing game (MMORPG) released in 2004 by Blizzard Entertainment. Set in the ''Warcraft'' fantasy universe, ''World of Warcraft'' takes place within the world of Azeroth ...
. While there may be a grey market
A grey market or dark market (sometimes confused with the similar term " parallel market") is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market pr ...
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 program
An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees ...
s or loyalty program
A loyalty program is a marketing strategy designed to encourage customers to continue to shop at or use the services of a business associated with the program. Today, such programs cover most types of commerce, each having varying features and ...
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 r ...
loses its face value 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 program (American English) or frequent-flyer programme (British English) is a loyalty program offered by an airline.
Many airlines have frequent-flyer programs designed to encourage airline customers enrolled in the program ...
s by various airlines, Microsoft Points
Microsoft Points, introduced in November 2005 as Xbox Live Points, were a digital currency issued by Microsoft for use on its Xbox and Zune product lines. Points could be used to purchase video games and downloadable content from Xbox Live Mark ...
, Nintendo Points
The Wii Shop Channel is a former digital distribution service for the Wii video game console. The service allowed users to purchase and play additional software for the Wii (called Channels), including exclusive games (branded WiiWare), and gam ...
, Facebook Credits
Facebook Credits was a virtual currency that enabled people to purchase items in games and non-gaming applications on the Facebook Platform. One U.S. dollar was the equivalent of 10 Facebook Credits. Facebook Credits were available in 15 currencies ...
and Amazon Coin
Amazon Coin is a digital payment method created by Amazon.com. Currently, the coins can only be used to purchase software and for microtransactions on apps downloaded from the Amazon Appstore on Kindle, Kindle Fire, and Android devices.
History
...
.
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 mus ...
. A virtual currency can be decentralized, as for example bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
, a cryptocurrency
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...
. 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.
The 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 cryptocurrency
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...
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 ( ; ; Quechua: ''Ikwayur''; Shuar: ''Ecuador'' or ''Ekuatur''), officially the Republic of Ecuador ( es, República del Ecuador, which literally translates as "Republic of the Equator"; Quechua: ''Ikwadur Ripuwlika''; Shuar: ''Eku ...
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 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
Economic statistics is a topic in applied statistics and applied economics that concerns the collection, processing, compilation, dissemination, and analysis of economic data. It is closely related to business statistics and econometrics. It is ...
*Monetary and exchange rate policy
An exchange rate regime is a way a monetary authority of a country or currency union manages the currency about other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many ...
*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, instruments, people, rules, procedures, standards, and technologies that make its exchange possible.Biago ...
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
Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdicti ...
*Impact of financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
on financial service providers
United States of America
US Commodity Futures Trading Commission guidance
The US Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
(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, in order to sell the cheaply purchased stock at a higher price. Once the operat ...
schemes that use virtual currencies.
US Internal Revenue Service guidance
The US Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) ruling Notice 2014-21 defines any virtual currency, cryptocurrency and digital currency as property; gains and losses are taxable within standard property policies.
US Treasury guidance
On 20 March 2013, the Financial Crimes Enforcement Network issued a guidance to clarify how the US Bank Secrecy Act
The Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laund ...
applied to persons creating, exchanging and transmitting virtual currencies.[
]
US Securities and Exchange Commission guidance
In May 2014 the US Securities and Exchange Commission
The U.S. 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. The primary purpose of the SEC is to enforce the law against market ...
(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
The New York State Department of Financial Services (DFS or NYSDFS) is the department of the Government of New York (state), New York state government responsible for regulating financial services and products, including those subject to the Consol ...
proposed the most comprehensive regulation of virtual currencies to date commonly referred to as a BitLicense A BitLicense is the common term used for a business license for virtual currency activities, issued by the New York State Department of Financial Services (NYSDFS) under regulations designed for companies. The regulations are limited to activities i ...
. 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 EU
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 th
EU E-Money Directive
nor a payment service or payment instrument as defined b
EU Payment Services Directive II
nor any other means of payment as defined b
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.
In a CNN interview, the financial crime expert Veit Buetterlin explained that the raise of the cryptocurrency market opened creative channels for terror groups to finance themselves.
See also
*Complementary currency
A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and thei ...
*Virtual goods
Virtual goods are non-physical objects and money purchased for use in online communities or online games. Digital goods, on the other hand, may be a broader category including digital books, music, and movies. Virtual goods are intangible by defini ...
* List of digital currencies
References
External links
Virtual Currency: Investigative Challenges and Opportunities (FBI)
Regulatory Approach to Digital Assets in Hong Kong and Singapore
{{Authority control
Alternative currencies