Virtual Currencies

A currency is known as the common mode of payment mode of payment that is used in a certain jurisdiction and facilitates that exchange of goods and services. The currency must be customarily accepted for use, be circulating and be legal. This is what many people will refer to as the legal tender or a real currency. The use of a currency has led to the creation of virtual currency. It has been gaining popularity over the past few years. The European Central Bank has defined the virtual currency as a form of digital money that is not regulated and used to transact online by its developers and other people that accept it as a currency. The use of virtual currency is not restricted to any locational boundary. This is because its users are a virtual community that is not confined to any region but only need to acknowledge the currency and accept it as a means of payment or remuneration. It is just a simple digital representation of value that is not affiliated to any currency but can be used for trade.

Categorization by currency flow

  • Closed virtual currencies: this is a form virtual currency that is not linked to the economy in any manner. This form of currency is used in online video games. You can use the currency that you win in the games to purchase things in the game. The currency can only circulate in the game but has no value elsewhere and it adds nothing to the economy.
  • Virtual currencies with the flow in one direction: this is the kind of incentive or promotion system for loyalty to a product or company. It is given informs of coupons that can be redeemed for a product or service. In most of the times, it is used as a means of promotion.
  • Convertible virtual currencies: this is a form of virtual currency that has money value. It can be bought and sold after an agreement on the exchange of the real currency.

Issues associated with virtual currencies

In the recent past, the use of convertible virtual currency has grown at an alarming rate. This poses a high risk because as discussed above, the mode of payment is not controlled by the central bank. This means that a lot of fraud activities can be involved in the use of these currencies. Money laundering is a major problem and virtual currency can be used to fund terrorists and other illegal businesses.