Virtual currencies

In the mobile payment segment, many competitive options exist, including NFC-based Google Wallet, a copycat dongle of PayPal, and digital wallets of Visa, MasterCard, and American Express. MasterPass of MasterCard aims to integrate mobile payment for retailers as one multipool option.

Dash cryptocurrency

Virtual Currency

17.10 Conclusions

Virtual currencies such as Bitcoin represent an innovation in financial services products and technology that has the potential to support more efficient and transparent global commerce. Since Bitcoin does not rely on intermediaries, it may lower transaction costs for businesses and emerge as a major means of electronic payment processing. In the authors’ opinion, Bitcoin has a clear potential for growth in light of these attributes. Of course, virtual currencies, like traditional currencies, can also be used for money laundering and other criminal activities.

Despite the many benefits and drawbacks highlighted by supporters and detractors of Bitcoin, it is clear that presently, virtual currencies exist in a legal gray area. Though certain regulators, including FinCEN, have sought to clarify this regulatory framework, further clarification by regulators and policymakers is necessary to foster widespread acceptance of virtual currencies.

The authors appreciate the desire of Congress and the regulators to protect the public from fraudulent schemes that make use of virtual currencies. However, the fact that Bitcoin has been used by parties as part of a fraud does not mean virtual currencies are inherently fraudulent or flawed. We are encouraged by the statements by regulators, including the CFTC that they plan to issue guidance on the regulation. However, as always, the devil will be in the details.

Understanding Virtual Currencies

Virtual currencies are a form of digital currency. They are issued by private parties, such as a group of developers or organizations, and are intended only for online use—they do not have a physical incarnation like paper money. Thus, they are different from digital representations of central bank-issued currency, also known as central bank digital currency (CBDC).

The term virtual currency came into existence in 2012, when the European Central Bank (ECB) defined it to classify types of "digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community." The Internal Revenue Service (IRS) in the United States describes virtual currencies as "digital representations of value that function as a unit of account, a store of value, and a medium of exchange."

The universe of currencies that may be considered virtual has expanded considerably since 2012 to include various forms of money that do not adhere to the ECB’s definition of the term. For example, certain cryptocurrencies, which are considered a form of virtual currency, like Ripple’s XRP, are not strictly controlled or used by a virtual community.

Virtual currencies have also failed to take off as a payment method or medium of exchange in mainstream society. They have restricted usage, sometimes in gaming communities and other times as a speculative investment asset. Whether they have emerged as a store of value, like gold, also remains questionable.

There’s also the question about regulation. Though virtual currencies remain unregulated in the vast majority of financial jurisdictions, that situation is slowly beginning to change. Bitcoin, the cryptocurrency with the biggest market capitalization, is legal tender in El Salvador.

In the United States, home to the world’s most sophisticated financial markets, virtual currencies are unregulated. But regulation is seriously being considered by authorities. The trading watchdog Securities and Exchange Commission (SEC) wants to bring cryptocurrency exchanges under its supervision. Regulation for stablecoins, another form of virtual currency, is also in the cards. The IRS taxes trades that involve certain types of virtual currencies, such as cryptocurrencies.

The Federal Reserve is planning to release a paper that will assess the effect of releasing central bank digital currencies (CBDC) on the U.S. economy. Though CBDCs are not virtual currencies, the Fed’s paper may influence virtual currency regulation as currently discussed by government agencies.

Types of Virtual Currencies

Closed virtual currency

A closed virtual currency, as the name suggests, operates in a controlled and private ecosystem. It cannot be converted into another virtual currency or into a real-world fiat currency. Examples of closed virtual currencies are currencies in gaming systems. Though such currencies can be used in their respective environments (in this case games), they cannot be converted into real-world cash. Another example of closed virtual currencies is airline miles. They are issued by private parties, can only purchase additional miles, and cannot be converted into their associated monetary value.

Open virtual currency

Open virtual currencies are also known as convertible virtual currencies because they can be converted to other forms of money. They operate in open ecosystems and can be converted into another currency either within the platform or outside it. Examples of open virtual currencies are stablecoins and cryptocurrencies. Bitcoin and Ethereum, the two biggest cryptocurrencies by market capitalization, can be converted into other cryptocurrencies or certain fiat currencies. This conversion process is considered a trade transaction by the IRS and is taxed.

Though most open virtual currencies have a decentralized setup, certain cryptocurrencies like Ripple’s XRP are centralized in design, meaning a central agency is responsible for their production and distribution.

What are the most common virtual currencies?

1. Bitcoin [BTC]

what are bitcoin and what is inflation in the market

Bitcoin appeared in 2008 but until 2009 it did not start working. Its creator is known as Satoshi Nakamoto but nobody really knows who he is, if he is a person or a group of individuals, there has been much speculation about it. Even several people have wanted make believe they were Nakamoto although none have been able to prove it.

Satoshi Nakamoto the bitcoin creator

The Bitcoin is a digital currency, such as the Euro or Dollar, with which you can make all kinds of purchases in businesses which accept this currency. The operations can be performed either from mobile devices such as Smartphones, a Tablet or from a desktop computer.

In the following hours after its peak, Bitcoin plunged 15% in Asian markets after the South Korean cryptocurrency platform (Youbit) announced its bankruptcy after suffering a virtual theft of approximately 17% of its digital currencies.

How does Bitcoin work?

To start using Bitcoin or any other cryptocurrency the first thing we need is a Wallet, which will do the same function as a physical wallet (save our money). This Wallet is an alphanumeric code and has access codes to access it and make payments. If we lose these keys we lose EVERYTHING in the wallet, which is why it is always convenient to create backup copies of our keys in different places to avoid problems.

Once we have our wallet, the keys and Bitcoin in them, the use is simple: we only have to decide what wallet address and what virtual currencies amount we want to send, once this is done we just have to wait for the confirmation of the shipment and we have made our transaction.

2. Ethereum [ETH]

Ether Vitalik virtual currency

Just as Bitcoin, Ethereum is based on a network of monetary value exchanges with the characteristic of having no central authority to manage control, leaving everything in the hands of users. At the same time, it is an OpenSource platform for the creation of smart contracts or tokens.

How does Ether work?

For example, companies or users can sign Smart Contracts from anywhere in the world, without commissions or control by any state, since they are only controlled by decentralized computer systems with a high degree of security. The biggest advantage of these contracts is that you do not need to trust the counterparty, as this will be resolved automatically if the conditions are agreed.

An example would be one in which two parties agree on a contract by which someone offers their products or services in exchange for Ethers and at the time it materializes, the contract will give the product and money to the corresponding parties.

3. Ripple [XRP]

Ripple digital currency

It is a virtual system of payments in real time, used by financial institutions as a faster and cheaper way than other methods, lowering the internal costs of operations since it allows sending and receiving money or liquidating transactions in less than 5 – 10 seconds. Much faster than Bitcoin.

How does the Ripple work?

4. Litecoin [LTC]

what is litecoins the virtual currency

How does Litecoin work?

5. Monero [XMR]

decentralized virtual currency

How does Monero work?

  • Security: This is one of the fundamental requirements of virtual currency transactions because, just as we want security by having our money in a bank, we want security by having our cryptocurrencies in a wallet. This is something that is being worked on every day and where the creators and developers of cryptocurrencies put all their effort to improve, but in reality nothing is 100% safe. As criminals can steal a bank, they can attack or hack a virtual wallet – it is the user who must do everything possible to keep their private keys safe, use cold wallets and increase their security levels.
  • Privacy: Privacy is fundamental for the community and for developers. Unlike what happens with Bitcoin or Ethereum, transactions are completely private, both in the parties involved and in the amounts, so they are untraceable transactions.
  • Decentralization: with Monero there is no need to depend on anyone else in the network. The digital currency works through the Proof of Work algorithm and does not allow its development in ASIC devices. It does not support the centralization of mining in large mining groups as is the case, for example, with Bitcoin.

Resources:

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/virtual-currency
https://www.investopedia.com/terms/v/virtual-currency.asp
https://crypto-economy.com/virtual-currencies/
Virtual currencies

If you do not know what the exact purchase date is, report the virtual currency’s acquisition year on your tax return, as it affects the amount of the deemed acquisition cost. Enter the first date of the year in the Acquisition date field in the calculation of capital gain tax, e.g. 1 January 2013, and leave all other fields blank.

Virtual currencies

Income received from the use and mining of virtual currencies is subject to tax. File the income you have received from virtual currencies or cryptocurrencies on your tax return. You can file the expenses on your tax return as deductions.

Estimate your gains and losses from virtual currencies using the Tax Administration’s FIFO calculator. The calculator is available in Finnish and Swedish. The calculator utilises the FIFO principle (First In – First Out) according to which virtual currencies are considered to have been spent in the order that they were acquired.

Enter all your purchases and sales in the calculator. Calculate the gains and losses separately for each sales transaction during the tax year, i.e. every time you have exchanged virtual currency for some other currency or spent it on purchases.

What Are Cryptocurrencies?

Before we take a closer look at some of these alternatives to Bitcoin (BTC), let’s step back and briefly examine what we mean by terms like cryptocurrency and altcoin. A cryptocurrency, broadly defined, is virtual or digital money that takes the form of tokens or “coins.” Though some cryptocurrencies have ventured into the physical world with credit cards or other projects, the large majority remain entirely intangible.

The “crypto” in cryptocurrencies refers to complicated cryptography that allows for the creation and processing of digital currencies and their transactions across decentralized systems. Alongside this important “crypto” feature is a common commitment to decentralization; cryptocurrencies are typically developed as code by teams who build in mechanisms for issuance (often, although not always, through a process called mining) and other controls.

Cryptocurrencies are almost always designed to be free from government manipulation and control—although, as they have grown more popular, this foundational aspect of the industry has come under fire. The cryptocurrencies modeled after Bitcoin are collectively called altcoins, and in some cases, shitcoins, and have often tried to present themselves as modified or improved versions of Bitcoin. Though some of these currencies may have some impressive features that Bitcoin does not, matching the level of security that Bitcoin’s networks achieve largely has yet to be seen by an altcoin.

Click Play to Learn All About Altcoins

Below, we’ll examine some of the most important digital currencies other than Bitcoin. First, though, a caveat: It is impossible for a list like this to be entirely comprehensive. One reason for this is the fact that there are over 18,000 cryptocurrencies in existence as of March 2022. Though many of these cryptos have little to no following or trading volume, some enjoy immense popularity among dedicated communities of backers and investors.

Beyond that, the field of cryptocurrencies is always expanding, and the next great digital token may be released tomorrow. Though Bitcoin is widely seen as a pioneer in the world of cryptocurrencies, analysts adopt many approaches for evaluating tokens other than BTC. It’s common, for instance, for analysts to attribute a great deal of importance to ranking coins relative to one another in terms of market capitalization. We’ve factored this into our consideration, but there are other reasons why a digital token may be included in the list.

Types of Altcoins

Cryptocurrencies

Cryptocurrencies are intended for payments, transmitting value (akin to digital money) across a decentralized network of users. Many altcoins (i.e., those that are not Bitcoin or sometimes Ethereum) are classified in this way and may sometimes be called value tokens.

Tokens

There are also blockchain-based tokens that are meant to serve a different purpose from that of money. One example could be a token issued as part of an initial coin offering (ICO) that represents a stake in a blockchain or decentralized finance (DeFi) project. If the tokens are linked to the value of the company or project, they can be called security tokens (as in securities like stocks, not safety).

Other tokens have a particular use case or function. Examples include Storj tokens, which allow people to share files across a decentralized network, or Namecoin, which provides decentralized Domain Name System (DNS) service for Internet addresses. These are known as utility tokens.

Regulation [ edit ]

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:

US Treasury guidance [ edit ]

New York state regulation [ edit ]

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".

Resources:

https://www.vero.fi/en/individuals/property/investments/virtual-currencies/
https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/
https://en.bitcoinwiki.org/wiki/Virtual_currency
Virtual currencies

Virtual currency developers vary in how much interaction they allow their system to have with “real” currencies. At the extreme end of the spectrum, World of Warcraft is very strict; Blizzard does this primarily to avoid legal headaches, as their currency would incur taxes if the government recognized it as having actual value. In order to maintain the perception that their virtual gold is fake, violating this rule is punishable by a permanent ban, and they actively search for accounts involved with real-money trading. Many items bind to an account upon acquisition; since this restricts the free flow of goods, the net effect of such restrictions is to reduce the scope of the game’s economy.

Ms. Pelker

Virtual currency

Virtual currency, also known as virtual money, is 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. The Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury, defined virtual currency in its guidance published in 2013. 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, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically". By contrast, a digital currency that is issued by a central bank is defined as "central bank digital currency".

In 2012, the European Central Bank 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, Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury, in contrast to its regulations defining currency as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is 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 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, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically".

History of the term [ edit ]

In his written testimony to the 2013 congressional hearing on virtual currencies Ben Bernanke stated, "virtual currencies have been viewed as a form of ‘electronic money’ or area of payment system technology that has been evolving over the past 20 years", in reference to a congressional hearing on the Future of Money before the Committee on Banking and Financial Services on 11 October 1995. 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", US government institutions have preferred and uniformly adopted the term "virtual currency", first the US Treasury’s FinCEN, then the FBI in 2012 and in the General Accounting Office in its 2013 report and other government agencies testifying at the November 2013 U.S. Senate hearing about bitcoin like the Department of Homeland Security, the U.S. Securities and Exchange Commission, the Office of the Attorney General.

Virtual Currency

Stock image of three computer screens with computer digits and a world map in the background.

In June 2014 the U.S. Marshals Service held a first-of-its-kind auction to sell an unusual asset: 29,656 “bitcoin,” units of “virtual currency,” which function much like traditional currency on the Internet but are not controlled or backed by any national government. 1 The bitcoin, valued at $18 million at the time of auction, were a portion of more than 179,000 units seized by the FBI in 2013 during the takedown of Silk Road, an extensive black market website. For over two years, Silk Road facilitated the sale of hundreds of millions of dollars worth of narcotics, stolen identities, and numerous other illegal goods and services. 2 All transactions were conducted exclusively in bitcoin.

Use of virtual currency has evolved over nearly two decades alongside the expansion of the Internet. Every day, people across the globe use the Web to move money. Most transactions are denominated in U.S. dollars or another national currency. However, a small but increasing fraction of those transactions use virtual currency as an alternative form of payment. Until recently, all virtual currency existed within centralized systems. In the centralized model a private company controls the virtual currency, issues units to its users, determines the virtual currency’s value, records transactions, and keeps track of customers’ balances. The company is the controlling force that drives everything in the system.

Centralized virtual currency systems encompass a wide range of business models. The technical operation of online payment systems, such as WebMoney and the now-defunct Liberty Reserve, is nearly identical to that of traditional online systems, apart from denominating users’ accounts in virtual currency, rather than a national currency. Some systems, such as Pecunix and the now-defunct e-Gold, allow users to exchange digital units of gold bullion or other precious metals, earning the systems the name “digital precious metals.” Other systems operate within popular virtual worlds and online games where entire microeconomies develop among players relying on in-game currency.

Over the past six years, decentralized virtual currencies also have grown to prominence in the virtual currency landscape. Decentralized virtual currency systems afford users many of the same benefits as their centralized counterparts—users can hold funds and transfer value to other users within the system. However, unlike centralized systems, decentralized systems are not run by a company. Rather, transactions are sent across a peer-to-peer network without involving a third party. Users anywhere in the world can download the free, open-source software specific to a particular decentralized virtual currency. Once they have done so, users can send funds securely and almost instantly across vast distances with just the click of a button. Bitcoin is by far the most popular and well-known decentralized virtual currency, with a total market value of approximately $3.4 billion as of May 2015. However, there are hundreds of other decentralized virtual currencies—often called “altcoins”—also in circulation.

Most virtual currency in centralized systems has a fixed value whereby the controlling company sets an exchange rate. Often, this value is linked to some quantity of national currency. For example, one Liberty Reserve Dollar was equal to one U.S. dollar, and one unit of WMZ, a currency controlled by WebMoney, also is equal to one U.S. dollar. The value also may be fixed to some other real-world value. Companies running digital precious metals systems fix their virtual currency’s value to some quantity of a precious metal, commonly gold bullion. Alternately, a virtual currency’s value may fluctuate based on the supply of and demand for units of that currency. This model is seen frequently in decentralized virtual currencies, which have no company to enforce a pegged exchange rate.

While users can transact entirely in virtual currency within a system, most individuals also want to cash in and out of the system, converting their dollars to virtual currency and, ultimately, back again. This exchange function is central to the virtual currency ecosystem. In centralized models the user may deal directly with the administrating company to cash in or out. However, not all companies offer this service, and decentralized systems lack the capability altogether. As a result, third-party companies have established themselves as “exchangers,” providing a venue for customers to cash in and out of virtual currency or to convert from one virtual currency to another. Exchangers are one component of a network of sites and services that have developed to support and enhance the virtual currency landscape.

Under U.S. money services business regulations, any business that transfers virtual currency from one person or location to another is obligated to register with the Financial Crimes Enforcement Network (FinCEN) and comply with Bank Secrecy Act (BSA) requirements, including implementing anti-money-laundering programs and filing suspicious activity reports (SARs). 3 Additionally, many states require money transmitters to obtain state licenses. The U.S. Department of Justice has identified these regulations as “crucial tools in preventing malicious actors from exploiting virtual currency systems in furtherance of illicit activity.” 4

Resources:

https://en.bitcoinwiki.org/wiki/Virtual_currency
https://leb.fbi.gov/articles/featured-articles/virtual-currency-investigative-challenges-and-opportunities
https://bitcoinmagazine.com/business/digital-vs-virtual-currencies-1408735507

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