Virtual Currency

Virtual currency is a digital representation of value that can be traded on the Internet and functions as:

• a medium of exchange;
• a unit of account; and/or
• a store of value, but does not have legal tender status in any jurisdiction.

Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency” ), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country. Virtual currency is also distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency.

E-money is a digital transfer mechanism for fiat currency, i.e., it electronically transfers value that has legal tender status.

Bitcoin and other decentralized virtual currencies

As decentralised, math-based virtual currencies-particularly Bitcoin-have garnered increasing
attention, two popular narratives have emerged:

• virtual currencies are the wave of the future for payment systems; and
• virtual currencies provide a powerful new tool for criminals, terrorist financiers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities.

While the 2013 New Payment Products and Services (NPPS) Guidance (FATF, 2013) broadly addressed internet-based payment services, it did not define “digital currency,” “virtual currency,” or “electronic money.” Nor did it focus on virtual currencies, as distinct from internet-based payment systems that facilitate transactions denominated in real money (fiat or national currency) (e.g., Pay-Pal, Alipay, or Google Checkout). It also did not address decentralised convertible virtual currencies, such as Bitcoin. The 2013 NPPS Guidance also notes that, “[g]iven the developing nature of alternate online currencies, the FATF may consider further work in this area in the future” (2013 NPPS Guidance, p. 11, para. 29).

Virtual Currency treatment in the United States

By Michael Bobelian. He is an author, lawyer, and freelance writer who teaches journalism at City University of New York.

In 2013, government officials dismissed virtual currency as either a libertarian fantasy or a means to criminal enterprise. But the Treasury Department established guidelines in 2014, and then Bitcoin was attracting venture capitalists.

Benjamin M. Lawsky, superintendent of New York’s Department of Financial Services, in a Manhattan hearing room January 2014, said that “It’s generally a difficult proposition for financial regulators to forecast technological trends,” Lawsky began. “That said, serious people in the technological and investment community are taking virtual currencies seriously. They are putting significant amounts of time, attention, and capital behind them. We, as a regulator, cannot turn a blind eye to something like that. We don’t really have a choice.”

Christened the hottest technology since the Internet, Bitcoin – the best known of some 80 virtual currencies – had become a darling of the national media. Its potential led Netscape founder and venture capitalist Marc Andreessen to publicly endorse the technology in a New York Times essay published the week before. “Bitcoin offers a sweeping vista of opportunity to re-imagine how the financial system can and should work in the Internet era,” Andreessen wrote.

Yet outside of techie circles, Bitcoin remains a target of suspicion and ridicule. Its mysterious origins, arcane protocol, anonymous users, and libertarian advocates have spooked governments around the world. And its ability to facilitate essentially untraceable transactions in illicit goods means law enforcement views it as little more than a tool for criminals.

On the second day of hearings, Manhattan District Attorney Cyrus R. Vance Jr. turned the conversation to Bitcoin’s darker side. “The anonymity offered by these payment systems attracts … criminals who now can easily move, conceal, and launder illicit profits,” Vance said. “Without stronger government oversight in this area, we are going to be permitting cybercriminals, identity thieves, even traffickers of child pornography … to operate in what will be a digital Wild West.”

Mainstream economists also remain skeptical. Alan Greenspan, former chairman of the Federal Reserve Bank, told Bloomberg TV last year, “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. … If you ask me: ‘Is this a bubble in Bitcoin?’ Yeah, it’s a bubble.”

In the face of such widespread suspicion, Bitcoin’s backers have struggled to gain the government’s trust. Without that sanction, transactions using virtual currency may be relegated to technology enthusiasts operating at the margins of the economy. See more about Bitcoins in this Legal Encyclopedia.

Law Enforcement Actions

Law enforcement is already seeing cases that involve the abuse of virtual currency for money
laundering purposes. Examples include:

• Liberty Reserve (see more here)
• Silk Road (see more here)
• Western Express International (see more here)

Centralized Virtual Currencies in the E-Commerce Law

Centralized Virtual Currencies have a single administrating authority (administrator), i.e., a third party that controls the system. An administrator issues the currency; establishes the rules for its use; maintains a central payment ledger; and has authority to redeem the currency (withdraw it from circulation).

The exchange rate for a convertible virtual currency may be either floating, i.e., determined by market supply and
demand for the virtual currency – or pegged, i.e., fixed by the administrator at a set value measured in fiat currency or another real-world store of value, such as gold or a basket of currencies. Currently, the vast majority of virtual currency payments transactions involve centralized virtual currencies. Examples: e-Gold (defunct); Linden Dollars PerfectMoney; (Second Life); WebMoney; and World of Warcraft Gold.

U.S. Law Enforcement Presecutions

By Michael Bobelian.

In October 2013, FBI agents arrested Ross Ulbricht – Silk Road’s alleged proprietor, known as Dread Pirate Roberts – at a San Francisco library. The agents seized $3.6 million in virtual currency, and later unsealed papers charging the 29-year-old Ulbricht with narcotics trafficking, money laundering, and an attempted murder-for-hire. (U.S. v. Ulbricht, 14-CR-068 (S.D.N.Y. filed Feb. 4, 2014).) Ulbricht has pleaded not guilty.

Months earlier, federal prosecutors had charged Liberty Reserve, a Costa Rica-based virtual currency exchange, with laundering billions of dollars in transactions that involved some 200,000 customers in the United States and more than a million worldwide. For the first time, the Treasury Department invoked against a virtual currency provider section 311 of the USA Patriot Act (31 U.S.C. § 5318A), which permits authorities to designate a foreign financial institution as of “primary money laundering concern.” (United States v. Liberty Reserve, SA, No. 13-CR-368 (S.D.N.Y. sealed indictment filed May 28, 2013.) Liberty Reserve’s co-founder later pleaded guilty to money laundering, unlicensed money transmitting, marriage fraud, and receiving child pornography.

In both cases, the Bitcoin community excused the lapses as the work of either bad apples or unstable companies – and, in the case of Liberty Reserve, an alternative digital system that should be replaced by more trustworthy currencies. Each infraction, however, made it a little tougher for conventional thinkers to accept the potential foibles of virtual currency.

These prosecutions exposed a chasm between Bitcoin entrepreneurs and federal agencies. “A start-up has nothing to lose and everything to gain,” Murck observes. “When you’re a government official, it’s almost the opposite. Why champion something that might get you into trouble?”

Users of the Virtual Currencies

A user is a person/entity who obtains virtual currency and uses it to purchase real or virtual goods or services or send remittances in a personal capacity to another person (for personal use), or who or holds the virtual currency as a (personal) investment. Users can obtain virtual currency in one of three ways. They can:

• purchase virtual currency (from an exchanger or, for certain centralized virtual currencies, directly from the administrator/issuer), using real money (national currency)
• engage in specific activities that earn virtual currency payments (e.g., respond to a promotion, complete an online survey, provide a real or virtual good or service); and
• with some decentralized virtual currencies (e.g., Bitcoin), self-generate units of the currency by “mining” them, which involves running special software to solve complex
  algorithms in a “distributed proof-of-work system” used to validate transactions in the virtual currency system.

Resources

See Also

• Reserve Currency
• Artificial Currency Unit
• Bitcoin
• International Currency
• Currency Convertible In Fact
• Functional Currency
• Key Currency
• Hard Currency
• Exotic Currency
• Soft Currency
• Fiduciary Currency

Biography

Hierarchical Display of Virtual currency

Finance > Monetary economics > Money market > Money

Virtual currency

Concept of Virtual currency

See the dictionary definition of Virtual currency.

Characteristics of Virtual currency

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Resources

Translation of Virtual currency

• Spanish: Moneda virtual
• French: Monnaie virtuelle
• German: Virtuelle Währung
• Italian: Valuta virtuale
• Portuguese: Moeda virtual
• Polish: Waluta wirtualna

Thesaurus of Virtual currency

Finance > Monetary economics > Money market > Money > Virtual currency

See also

• European patent

• UPC

• Cryptocurrency
• Cyber currency
• Virtual currency scheme
• VCS
• VC
• Bitcoin