ARE VIRTUAL CURRENCIES MONEY?

ARE VIRTUAL CURRENCIES MONEY?

Cryptocurrencies or virtual currencies (VCs) experience high attention, because they allow their users to transfer money to other participants without a third party, without exchange rates, and even without stating their real name. Only a small processing fee has to be paid and the transaction is executed within minutes or hours (depending on several factors), even if the transaction happens between people located across the globe.

Cryptocurrencies such as Bitcoin and altcoins have rapidly gained popularity, and are often quoted as a glimpse into our future. Virtual currencies (VCs) are digital representations of value, issued by private developers and denominated in their own unit of account.

The VC ecosystem continues to transform with concepts of “currencies,” ranging from simple IOUs of issuers, VCs backed by assets such as gold, and “cryptocurrencies” such as Bitcoin.

Assets like gold are backed by the combination of existing tangible assets or national currencies and the creditworthiness of the issuer.

VCs offer many potential benefits, including greater speed and efficiency in making payments and transfers particularly across borders and ultimately promoting financial inclusion. Its popularity led to VCs emerged in the absence of effective regulation.

The BIG question therefore becomes evident. Are virtual currencies money? The following begs the question.

• Does virtual currency satisfy the legal definition of money and fulfill all the economic roles of money (store of value, medium of exchange, and unit of account)? 

• How do they compare to other privately-issued monies that existed historically? 

• If they become more widely used, could (or should) these privately-issued currencies substitute for national currencies?

It is generally accepted that VC users will have to “cash out” at some point that is, convert their VCs into fiat currency. Recognizing these features of the current market, regulators have targeted “gatekeepers.” In practice, this has been done in two ways:

• By regulating VC market participants that provide an interface with the broader economy exchanges and or 

• By restricting the ability of regulated entities (for example, banks) to interact with VCs and VC market participants.

Still given VC popularity advances, the community has to consider legal implications. Different approaches exist within countries to create legal frameworks to allow VCs accepted, such as conducting business in the network or paying taxes.

However, the regulatory and policy challenges just started, as the technology per se is complex and difficult to understand. It remains an open question how legislation will influence the technology, as it is not possible to delete any information out of the network because of the cryptographic implications.

Considering all factors, VCs remains an important development for our society and economy in the futures. We expect community, science, economy, and legislation to find trade-offs between viewpoints to enable valid usage scenarios for VCs.

Credit: IMF Staff Team

Virtual Currencies and Beyond