Virtual Currencies
A virtual currency is an electronic-only digital representation of value. It is kept and handled using specialized computer, mobile, or software applications. Virtual currency exchanges take place over the Internet or through secure, dedicated networks. They are often unlicensed and are distributed by private individuals or groups of developers.
Digital currencies, such as cryptocurrencies and tokens produced by private companies, are included in the category of virtual currencies. Faster transaction times and ease of use are benefits of virtual currency. Virtual currencies' drawbacks include their vulnerability to hacking and the limited legal protection they offer investors due to their lack of regulation.
Understanding Virtual Currencies
A type of digital currency is virtual currency. They don't have a physical manifestation like paper money; instead, they are issued by private parties, such as a group of developers or organizations, and are only meant for use online. As a result, they differ from central bank digital currency, also known as digital representations of cash issued by central banks (CBDC).
In 2012, the European Central Bank (ECB) first used the phrase "virtual currency" to categorize various forms of "digital money in an uncontrolled environment, issued and managed by its developers and used as a payment method among members of a specific virtual community."
Virtual currencies are "digital representations of value that serve as a unit of account, a store of value, and a medium of exchange," according to the Internal Revenue Service (IRS) of the United States.
Types of Virtual Currencies
Depending on their operating network, virtual currencies are classified as follows:
Closed virtual currency
As the name implies, a closed virtual currency functions in a regulated and private ecosystem. It cannot be changed into a fiat currency from the real world or into another virtual currency. Gaming system currencies are an example of closed virtual currency. Such currencies cannot be turned into real money, even though they can be spent in their particular contexts (in this example, video games). Airline miles are another illustration of restricted virtual currency. They are issued by private parties, can only be used to buy further miles, and cannot be exchanged for money.
Open virtual currency
Because they can be exchanged for other types of money, open virtual currencies are also known as convertible virtual currencies. They function in open ecosystems and can be exchanged for different currencies both inside and outside of the platform. Stablecoins and cryptocurrencies are two types of open virtual currencies. The two biggest cryptocurrencies by market capitalization, Bitcoin and Ethereum, can be exchanged for other cryptocurrencies or specific fiat currencies. The IRS classifies and taxes this conversion procedure as a commerce transaction.
