Is Bitcoin A Digital Currency or a Virtual Currency?

Is Bitcoin A Digital Currency or a Virtual Currency?

Bitcoin has been labeled as many things in mainstream media over the past six years. First reports called Bitcoin nothing more than “magic internet money”, which later changed to “virtual money” and eventually the term “cryptocurrency”. However, there is still a lot of confusion about whether Bitcoin is a digital currency or virtual currency.

Virtual Currency – Unregulated Digital Money Without Legal Tender

In order to explain what virtual currency truly is, we have to go back in time to 2012, during which the term was first created. The European Central Bank coined the term virtual currency to classify types of “digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community”.

When we translate this into Bitcoin terms, virtual currency seems to sum it up quite nicely. Bitcoin started out as digital money – even though that moniker has changed – and is, according to many people, unregulated. Additionally, Bitcoin has a limited number of use cases, most of which are transactions between community members.

But this is where the first misconceptions started to pop up. Bitcoin is not regulated, but it is certainly not unregulated either. Everyone involved in the Bitcoin ecosystem has to adhere to a certain set of rules, ranging from taxation purposes to record keeping and accounting. From a specific legal perspective, Bitcoin remains without oversight in most countries in the world, a status that most likely will never change due to to its decentralized nature and community members all over the world, living in different jurisdictions.

Furthermore, Bitcoin used to be a payment method accepted only by community members in its early stages of development. But In recent years, both online and brick-and-mortar stores have started accepting Bitcoin payments, allowing the cryptocurrency to operate outside of its “community borders”. In a sense, Bitcoin has become money, as it can be used to pay for goods and services.

The term virtual currency has undergone quite some changes in 2013 and 2014. Financial Crimes Enforcement Network classified virtual currency as “a medium of exchange operating like a currency in some environments but without having all of the true attributes of a currency.” Bitcoin fits this description as well, because it lacks fungibility, one of the main aspects of a true currency.

One year later, the European Banking Authority defined virtual currency as a “digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency.” Once again, Bitcoin fits the bill, as it can be used as payment form in its natural state, rather than being tied to fiat currency values. However, this is hardly ever the case, as most merchants take the fiat currency price and charge the corresponding amount in BTC.

A List of Recent Virtual Currencies

In recent years, there have been quite a few types of virtual currency trying to create an ecosystem of

their own. Closed virtual currencies, which have no ties to the real economy, are most commonly found in video games. World of Warcraft gold is one such an example, despite there being a [quite large] black market for buying and selling in-game gold in exchange for fiat currency.

Frequent flyer programs by major airlines, Facebook Credits and Nintendo Points are virtual currencies in their own right. This type is known as “virtual currencies with currency flow in one direction”, as you can buy these types of currency with fiat currency. However, a consumer is – officially speaking – not allowed to resell these codes in a physical or digital format in exchange fiat currency.

Last but not last, there are the convertible virtual currencies, of which Bitcoin and Linden Dollars are two perfect examples. Both of these virtual currencies can be bought and sold in exchange for legal tender, such as EUR, USD or CNY. However, there is also the option of converting convertible virtual currencies intermittently, such as the exchange from Bitcoin to Linden Dollars.

Digital Currency – An internet-based Instantaneous Medium of Exchange

To make matters slightly more confusing, cryptocurrencies – such as Bitcoin – and virtual currencies – such as Linden Dollars – are both digital currencies. The reason for that is simple: both types of currency allow for the purchase of goods and services, yet they can also be used in closed-down environments such as online gaming or a social network.

At its core, a digital currency is an Internet-based form of currency or medium of exchange that allows for instantaneous transactions and borderless transfer-of-ownership. Additionally, a digital currency exhibits various properties similar to a physical currency.

The main reason why bitcoin is both a digital and virtual currency is because it does not exist in the “real physical world”, yet it also facilitates the payment of goods and services in the real world. Especially this latter part is interesting, because virtual currencies are not intended to be used in “real life transactions”. Bitcoin has transcended that border, and managed to gain a foothold in the real world as an alternative payment method.

If someone wants to label Bitcoin in its truest form, they would have to call it a “digital cryptocurrency”. Because of Bitcoin’s hybrid nature between digital and virtual currency, a new type of currency term had to be created. Despite lacking the fungibility of a traditional currency, Bitcoin is maturing into a global payment method.

What type of terminology do you use to refer to Bitcoin? Let us know in the comments below!

Sources: Wikipedia 12

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