What is Closed Virtual Currency?
Closed virtual currency broadly refers to a currency that is in digital form which provides a medium for payment within specific virtual communities. It is normally viewed as electronic money.
This form of currency is unregulated and cannot be converted or used as a legal tender. Closed Virtual currencies do not have any connection whatsoever to the real economy of a country. Another key emphasis is that they are neither real nor a full form of money.
They do not ascribe to the characteristics of real money such as being in the form of real paper money or real coins. They are issued and controlled by their developers and are accepted as payment by members of the specific virtual community it was intended for.
A key characteristic of this form of currency is that it is usually traded, stored and transferred through electronic means.
How Did Virtual Currencies Come to Be?
Virtual Currencies, in general, arose as a result of modern day advancements in technology around the world. Conventional ways of conducting business and commerce were quickly being disregarded and overtaken by advancements in systems of commerce.
With the increasing need for interlinking and real-time communication, people have devised mediums and technology that would enhance these processes. Nowadays, people talk of e-commerce and online video-conferencing whereby, you can trade and conduct business virtually in different places globally, and all you need is an internet-connected device. The internet brought a myriad of opportunities for online transactions.
Since various economies use various currencies, there arose for a need for an alternative medium which could be used, transferred and stored electronically. Social gaming also provided an impetus for the development of digital currencies. Virtual currencies hence surfaced as an alternative medium for such transactions.
Virtual Currencies: Opened or Closed?
Virtual currencies can be classified as either open or closed. Open virtual currencies are so called because they can be exchanged for real money. This is because their value in terms of real money can be determined.
You can actually exchange open virtual currencies for real money or real goods. An example of such a currency is the Bitcoin which has gained global popularity. Bitcoin itself is regarded as property which is taxable.
On the other hand, closed virtual currencies have a closed connotation, in that they are used in closed and limited transactions in exchange for certain virtual goods that are available only in certain closed environments. A good example is currency used in online games. For example, in World of Warcraft, they use a closed currency called Gold.
The tokens acquired in video arcade games are a perfect example of closed virtual currency. Also loyalty points in online games can be regarded as closed virtual currency. With closed virtual currencies, you can substitute real currency for its corresponding virtual currency.
In the development and distribution of closed virtual currencies, there is always a centralized structure in which it is done. The issuance and the rules that govern the use of any closed virtual currency is normally done and determined by a central authority. The one who exercises this authority is many at times the developer of the closed virtual currency.
The exercise of this authority goes as further as recording all transactions that are carried out with the closed virtual currency by the members using it. He/she also holds all prerogative as far as determining the extent of circulation of the closed virtual currency. This further means that the developer can withdraw the use of the currency if need be.
The Downside to Closed Virtual Currencies
The downside of closed virtual currencies is that they are not easily converted into cash. They are also scarce and cannot be reproduced. This is unlike open currencies like Bitcoin where you have the opportunity to create more of it.
Users of Bitcoin can create or generate more Bitcoins for themselves through Bitcoin mining. Closed Virtual currencies are also more prone to cyber theft and software bugs hence posing a risk to users. Users also stand to lose all their coins if the developer decides to terminate their accounts.
The disadvantage of this is that the user cannot do anything to remedy the situation as the developer has full control over the interface that is used with the currency.