Virtual Currency – An Overview

Virtual Money is defined as a digital representation of value that is issued and controlled by its creators. It is used and recognized by members of a specific virtual community. Virtual money relies on an organization that completely works on trust and unlike regular money, it is not issued by central bank or any other banking authorities. A virtual currency permits to transfer money without having to use any sort of intermediary like banks. It uses a cryptographic technology called blockchain that forms a collective and publicly demonstrable file of transactions to stop fraud. This builds trust between sellers and buyers, thus eradicating the want banks to get involved to authenticate the procedure.

Virtual Currency

Globalization, virtualization, active customer participation, cost of reduction and networking are indications of altering reality, persuading also the financial amenities. Operating payments services currently regulated by entities of economic trust, which is based on money that is local, made to make profits, do not have a chance to stay on top of the users’ outlooks. Virtual currencies on the other hand, are the people’s demonstration of the need for changes in the world of finance. They are made to become universal. The lack of a middle man makes their use very cheap and the idea of cash lets people create it just the way they like it. They are seen as the money for a world made of trust. Their acquiescence with the market trends help them jump over their opponents who are still working with the old rules and hence make new ideologies for the system as a whole.

Virtual money can be put into three classes and they are “closed virtual currency schemes, virtual currency schemes with unidirectional flow and virtual currency schemes with bidirectional flow”. Virtual currency schemes have almost no connection to the actual economy.  A good example of virtual currency schemes is World of Warcraft gold where the gamers are able to pay their monthly subscription using the gold earned in the game. The second class of virtual money is virtual currency schemes with unidirectional flow. This is where points can be bought using real currency at an explicit exchange rate but cannot be exchanged back. Good examples of virtual currency scheme are Amazon coins and frequent flyer points. Amazon coins is a method of purchase where customers are able to buy products like Kindle fire or Android devices using digital coins from the app or from the Amazon Appstore. The last class of virtual money is virtual currency schemes with bidirectional flow. This class includes Second Life Linden Dollars and Bitcoins. Second Life has its very own economy and its own currency known as Linden Dollars where the users are able to buy and sell using a platform called Linden. Similarly, Bitcoin is a form of digital currency where encryption methods are used to control the initiation of units of currency and confirmation of transfer of funds and it operates separately of a country’s central bank.

Just like a coin that has two sides, any topic that we deal with in today’s world has its advantages and disadvantages. Similarly, virtual currency has its own advantages and disadvantages but definitely the pros outweigh the cons. But here is one side of the coin which are the advantages of virtual currency. Virtual currency is considered global because if it is correctly implemented, cybernetic money can provide its users an international platform for trading. It can also be considered a stage for interoperability for pricing plans and member accounts. This will be effective for a person if the merchandise base is steadily valued on an international base. Secondly, virtual money can be considered efficient. This is because if a consumer makes plenty of small transactions, a virtual currency can be added efficiency by allowing micropayments or minor scale outflows very easily and without any incremental cost.  This releases up a lot of options for payments and business prototypes, specifically if the currency can be communal or compensated. Also brand plays an important role as prodigious virtual currency can assist improve and expand a brand relationship. This is every common when it comes to airline points, membership rewards or any other virtual points and systems.

The flip side of the coin are the disadvantages of virtual currency and they are basically exchange limitation, security and regulations. When we talk about virtual currency being able to exchange it is very limited, this is because not a lot of people use virtual currency. Exchanging regular money is easy, sure their value is different but we can still trade regular money for something else. On the other hand exchanging virtual currency is much harder, because a bare minimum amount of people use virtual currency. Another downside about using virtual currency is the security, many times people hacking and trying to mess with the system is being a regular worry for many companies. This is because there is not a big amount of security for this system yet like federal cash. So security measures is definitely a big concern for using virtual currency. Last but not least the regulations are a worrisome factor. There is not a high amount of regulations for the virtual currency. The policies are in the shallow grey area and it might become a concern when dealing with taxes and other issues when dealing with currency refunds.

One of the key virtual currencies is bitcoins. Bitcoin is a virtual currency, or cryptocurrency, which is measured by a non-regionalized system of customers and is not openly questionable by the notions of the central bank and its officials. “At its peak in March of 2014, the daily volume of Bitcoin transactions in United States dollars exceeded $575,000,000.” To think of the fact that bitcoins was well known and used three years ago is marvelous as it reflects the knowledge of the consumers and the state of the economy. Also the fact that consumers were able to meet their requirements and needs through virtual money is an important thing to be noted. Bitcoin is definitely the prevalent and extensively made use of virtual currency, even though at present there are a few millions of cryptocurrencies in the market.

Iddo de Jong, senior expert in the market integration division of the European Central Bank (ECB), states that bitcoins “do not pose a risk to price stability nor can they jeopardize financial stability.” As bitcoins are an unfettered source of transacting, they carry a factor of danger for the people that use them as they do include in the territory of central banks’ power. Because Bitcoins have a common platform with other transaction schemes, higher specialist that carefully view the virtual currency get to keep a watch on the trends of the market, develop security necessities for payments that take place within the system and any legal matters with regards to the particular issues are kept rationalized.

The article written by Griffin “Virtual currencies in the crosshairs”  states “The government has been able to target both the individuals involved with Liberty Reserve as well as the institution itself to prosecute AML violations precisely because of its centralized nature: Liberty Reserve had administrators, employees, and even a place of business. So what happens when you remove all of the centralized structure around a virtual currency? Bitcoin and other similar decentralized virtual currencies happen. Bitcoin is an open-source “peer-to-peer” digital currency that has no administrator. Rather, it uses an algorithm that constantly checks itself against other Bitcoin users to verify its amounts and locations.” This article clearly explains that bitcoins does not need to be administered by Federal Reserve or any other government agencies unlike real money that floats around. It is kept account for by the system that repeatedly verifies itself with further users of bitcoins to check on the totals and the places where it has been used.

Similar to any customary currencies, like the US dollars or the Euros, Bitcoins also have value comparatively. Bitcoins can also be split up into fractions that showcase units of less value than a whole number. At present the smallest Bitcoin unit is satoshi which is 1.0E-7/10 Bitcoin. This cannot be further fragmented down into lesser units. The structure of Bitcoins is in a way that it can be broken down further but that is only going to happen if the value of virtual money were to rise.

Bitcoin is the utmost flexible cryptocurrency as it can be made use to buy goods from an increasing cluster of dealers that take Bitcoins as a source of payment after a related transaction is complete. Bitcoins can also be swapped with other people that use virtual money for the service rendered or for paying off debts. It is also used to be traded as other forms of currencies which are both the common ones that we use or the other kinds of virtual money. The dark side to this is that it can be made use for buying illegal items online like drugs or firearms with any record being put to what is purchased.

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