Virtual currency is type of digital currency that is unregulated and accepted among a specific digital ecosystem or community. It has similar characteristics as traditional fiat money, except that it is not legal tender and not issued by a central bank. Virtual currencies may not be universally accepted, but it is accepted within a specific community. For example, in the gaming community like World of Warcraft or an ecosystem of commercial ecosystem, e.g. QQ coins in Tencent’s ecosystem.
Characteristics of Virtual Currency
Not Legal Tender
Virtual currencies are not legal tender. That means that:
- there is no obligation for someone to accept it
- it does not have to be accepted at full face value and
- the currency has no power to remove the repayment obligations.
Virtual currencies are governed by its developers and/or institution that created it. The 4 developers define the amount of supply in circulation of the specific community.
Virtual currency exists within a specific community or economy. It is used to transact and trade within the community and not on secondary markets to trade and speculate. While there are cases of virtual currencies like World of Warcraft’s currency being traded on a secondary market, that is usually not allowed or discouraged.
Convertible Virtual Currency
However, some virtual currencies are convertible (convertible currency). They can be bought and sold back for legal tender. For example, Twitch is introducing a new virtual currency in its ecosystem called Stream+. Players can buy the virtual currency to use it within the ecosystem. Another example is QQ coin by Tencent’s QQ. Each QQ coin is worth 1 RMB and can be 6 bought or earned in QQ’s ecosystem. Instead of converting to legal tender, it is used to purchase commodities in the physical world.
|Unit of account||Invented currency or
virtual form of
|Acceptance||Within a specific digital
community or ecosystem
|By undertaking of the issuer|
|Issuer||Non-financial or financial
|Legal established institutions
like the central bank
|Types of risk||Legal, credit,
- Authority, E. B. (2014). EBA opinion on virtual currencies. Available on https://eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf
- Adapted from Authority, E. B. (2014). EBA opinion on virtual currencies.
- European Central Bank (ECB), Virtual Currency Schemes *5 (Oct 2012), online at https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
- Twitch to start offering a virtual currency. (2016, September 30). Retrieved from https://www.bbc.com/news/technology-37518679
- Fowler, G. A., & Qin, J. (2007, March 30). QQ: China's New Coin of the Realm? Retrieved from https://www.wsj.com/articles/SB117519670114653518
- Here's how the transactions work: A small-time retailer offers QQ coins for sale at her online shop at a discount price -- currently about .8 yuan. Customers then pay the seller yuan through a debit card, money-order transfer or special online payment systems such as Paypal. The retailer then transfers the QQ coins to the buyer's account, like one might do with air miles, or even just gives the buyer access to her own QQ account (including username and password) where QQ coins are stored.
- More risks can be found in the report of EBA’s opinion on virtual currencies. Details about risks of payment systems can be found on page 270 of the 2014 Q3 report by Bank of England https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q3.pdf