What is Virtual Currency?

“Virtual Currency” is any medium of exchange, other than real currency, that facilitates online or other electronic transactions.

How did it evolve?

Virtual communities, which have proliferated in recent years – a phenomenon triggered by technological developments and by the increased use of the internet – created and circulated their own currency for exchanging the goods and services they offer, and thereby, providing a medium of exchange and a unit of account within the community.

Virtual currencies which have been in existence since the last 15 years have evolved to gain traction with the masses. It has become much more prevalent with the quick growth of online multiplayer video games and social networking platforms. With the advancements and evolution of the digital space, we are witnessing a slow and steady convergence of our physical and virtual economies. And so have our monetary systems over the years. Whether the virtual currencies are exchanged via virtual worlds, social games, eCommerce deals’ sites or mobile apps, they essentially hold implications for our global economy, fundamentally altering how we can conduct transactions.

European Central Bank (ECB) defines three schemes for virtual currencies, focusing on their interactions with real money and real economy.

Why is Virtual Currency important?

Virtual currency is gaining importance owing to the growing distrust in the traditional financial systems, rising value with acceptance. The fact that they act as the closest substitute to the real currency allowing people to buy, sell, and trade items without having to use real world money and cutting down the involvement of the players such as the banks and payment processors, has also made virtual currency relevant today.

As an indication of the growing popularity and progress that will raise much more attention in the future, statistics shows a steady increase in the money supply for various virtual currencies. Juniper Research predicted that the amount of money being spent on virtual currency in mobile apps will double from US$2.1 billion in 2011 to US$4.8 billion by 2016. The value of Bitcoins in circulation breached the US$1 billion mark this year, and the total Linden Dollars (L$) supply in Second Life ecosystem has increased to more than 8 billion with more than over L$30 billion already exchanged. Also currently, there are over 31 trillion miles on frequent flyer accounts which is now worth more than US$1.5 trillion, overtaking the total Euro currency in circulation (US$1.035 trillion).

What are the implications of Virtual Currency?

As coupons, gift cards, and loyalty points become digital – and more importantly mobile, they can become more effective mediums of exchange as Branded Currency. Mobiles will enable all of this purchasing power to converge in one place, and potentially be used interchangeably and collectively, always within the easy reach of consumers.

Prima facie, many virtual currencies and eCommerce platform have risen and fallen faster than consumers have had time to adopt them. Presently, there are numerous ways of doing financial transactions, each of them holding its own payment mechanism. Diversity in virtual currencies will be seen bringing in unique advantages and disadvantages. However, the big question is whether these virtual currencies can remain in mainstream or stay limited in scope with just a few usages to bank on.

By Vijay Kumar SL/ Kiran Nandavarapu

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