European finance organisation points to lack of legal framework
The European Central Bank has expressed concern about online virtual currencies.
In a report titled Virtual Currency Schemes, the ECB stated that unlike real currencies, virtual currency systems lacked a proper legal framework. All currencies are subject to a set of rules, laws, regulations and agreements, as well an understanding that defines the rights and obligations by which parties can use them. However, it says that virtual currency systems have not defined this clearly.
The report says, “In essence, virtual currencies act as a medium of exchange and as a unit of account within a particular virtual community. The question then arises as to whether they also fulfil the ‘store of value’ function in terms of being reliable and safe, or whether they pose a risk not only for their users but also the wider economy.”
The bank defined three kinds of virtual currencies; closed virtual currency schemes, virtual currency schemes with undirectional flow and virtual currency schemes with bidirectional flow.
An example of a closed virtual currency scheme is gold in World of Warcraft. Gold is needed to purchase new gear by players in order to reach higher levels, and that buying and selling gold is strictly prohibited by Blizzard.
Nintendo Points and Facebook Credits are virtual currency schemes with undirectional flow, as they can be purchased with real money, and then be used to purchase a virtual good, but cannot be converted back.
A virtual currency with a bidirectional flow thus allows users to buy and sell the virtual money with the exchange rate of their own currency. Second Life is an example of this, as its users can purchase Linden Dollars with their own money to buy virtual goods, but they can also sell Linden Dollars for real cash as well.
Because of the fact that virtual currencies are worldwide, the ECB said that it would also be difficult to control or ban because there would be no central jurisdiction by which they could be identified, and thus they would not be governed by a set of rules.
The ECB also stated that it was unclear what impact a virtual currency could have on the real economy, as they are not given any value by national income and product accounts when considering the production of wealth per capita.
The report concludes that it should be considered to make companies that use virtual currency systems into financial institutions.
“Registering these companies as financial institutions would at least reduce the incentive for terrorists, criminals and money launderers to make use of these virtual currency schemes for illegal purposes.”
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