A virtual currency is a digital unit of currency that is primarily used for Internet-based payments. The virtual currencies are not issued by central banks; they are normally issued and controlled by their developer. This could be a company or other private organisation. Cryptocurrencies (see below), such as Bitcoin and Ethereum, are a special form of virtual currency. Issuing virtual currencies is not subject to regulation and the issuers are not under financial supervision.
Virtual currency schemes
- Closed virtual currency schemes. The currency is limited in use to, for instance, a particular on-line game and cannot be used in other contexts or converted into another currency. World of Warcraft Gold is one example of this type of scheme.
- Virtual currency schemes with unidirectional flow are schemes where the virtual currency is bought for real money but cannot be converted back. One example is Amazon Coins, which Kindle users can exchange real money for and then use to buy applications.
- Virtual currency schemes with bidirectional flow. In these schemes, one can use money to buy the virtual currency and also convert it back into money at special exchange websites and/or the issuer. Bitcoin and Ethereum are examples of bidirectional virtual currency systems.
Bitcoin – the most commonly-used virtual currency
Bitcoin was launched in 2009 and is still the most commonly-used virtual currency. It is used for payments between individuals via the Internet and in some on-line shops. However, it is likely that most owners of bitcoins do not use them as a means of payment, rather as an asset that is expected to increase in value.
Bitcoin does not have an individual issuer, but is created by its user network. Participants who pool their hardware resources to verify the payments made are rewarded with newly-created bitcoins. The size of the rewards declines over time in a way that means there cannot be more than 21 million bitcoins.
The idea is that the users can anonymously make on-line payments independent of governments, banks and other institutions.
Bitcoin is what is known as a cryptocurrency, which means that cryptographic technology is used to communicate and verify transactions and to check the creation of units of value. The issue and verification of transactions do not involve the participation of a central bank or other central body. According to coinmarketcap.com there are currently more than 1400 different cryptocurrencies, most of which are very small.
Representatives of the Riksbank, like many other central banks, have said that cryptocurrencies should not be regarded as currencies, but rather as a form of financial asset.
Why is the Riksbank monitoring the development of virtual currencies
Virtual currencies are an example of innovations that have impacted the retail payments market in recent years. This market entails relatively small payments that are made in large quantities, mainly between households, companies and public authorities. The Riksbank monitors and analyses the payment system and the retail payment market as part of our task of promoting a safe and efficient payment mechanism.
Limited use of virtual currencies
So far, all available data indicate that the use of virtual currencies is very limited, in terms of the number of users, the number of transactions and also the value mediated. During 2017, the daily number of transactions in Bitcoins around the world has been on average approximately 275,000. This can be compared with between eight and nine million card transactions per day, just in Sweden.
This limited use means that any positive effects are very minor, as are the possible negative effects on financial stability and the safety of the payment mechanism.