Friday, November 29, 2013

De-jargoned: Virtual currency

De-jargoned: Virtual currency
Getty Images/AFP

These coins are mined through a computer program

Live Mint Vivina Vishwanathan   THU, NOV 28 2013. 06 26 PM I
There are reports that a bitcoin automated teller machine (ATM) has been launched in Canada. Bitcoin is an example of virtual currency.
What is virtual currency?
According to the Reserve Bank of India (RBI), virtual currency can be defined as a type of unregulated digital money which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. It also provides flexibility in terms of business model and business strategy for the virtual community. Virtual currency schemes are different from electronic money schemes as the virtual currency, used as the unit of account, has no physical counterpart with legal tender status, states RBI on its website.
Different kinds of virtual currency
For some kinds of virtual currencies there is no interaction or exchangeability with the real currency, while for others the relationship with real money, goods and services is more active and direct. Closed virtual currency schemes have no connection with real money. For instance, currency mostly used in online games. Some virtual currency schemes offer the facility of a mostly unidirectional conversion rate for its purchase. These can be used to buy virtual goods and services. Under another category of virtual currency scheme which provide for bidirectional flows, the virtual currency acts like any other convertible currency, with two exchange rates. In such schemes, the virtual currency can be used to buy not only virtual goods and services, but also to purchase real goods and services. Bitcoin, peercoin, litecoin, anoncoin and ripple, are examples of virtual currencies. There’re exchanges available for virtual coins that determine the value of a currency. For instance, for bitcoins the exchanges are BTC China and Mt Gox. On www.cryptsy.com, 60 different virtual coins can be traded.
How does it work?
Bitcoin is one of the most popular virtual currencies that is used to purchase both real and virtual goods and services. These coins are mined through a computer program. The more coins you mine, the more difficult the program will get. Litecoin is also created through similar mining process on a computer. It is said that there are online websites where you can buy goods and also exchange the credits of the digital currency for cash.
What regulators say
According to RBI, the absence of a distinct legal framework implies that the traditional rules under financial sector regulation and supervision, including the institution of central banks, are not involved in the case of virtual currency. RBI further says that the unregulated link between virtual currency (if permitted), and traditional currency with a legal tender status poses challenges as the complete control over the differently denominated virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.

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