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Virtual Currencies fall short of the legal concept of money and the economic roles associated with money.
The International Monetary Fund (IMF) has published a paper on virtual currencies in January 2016. The paper provides an exhaustive analysis of virtual currencies, covering everything from the basics, to legal and economic perspectives, and regulatory and policy changes among other topics.
The paper distinguishes virtual currencies from other digital currencies by describing that “they differ from other digital currencies, such as e-money, which is a digital payment mechanism for (and denominated in) fiat currency. VCs, on the other hand, are not denominated in fiat currency and have their own unit of account.”
The paper reads that virtual currencies fall short of the legal concept of currency or money since the legal concept of currency is associated with the power of the sovereign to establish a legal framework providing for central issuance of banknotes and coins and regulate the monetary system.
The paper also states that virtual currencies do not fulfill the three economic roles associated with the money because of their high price volatility, limited acceptance due to lack of legal tender status, and lack of evidence that they are an independent unit of account.
Further, the paper also distinguishes between a distributed ledger system, and a centralized payment system, before exploring regulatory and policy challenges.
The publication of this paper highlights a rising interest in virtual currencies, and more research such as this into the challenges faced by virtual currencies and the various advantages and disadvantages of using a cryptocurrency over a sovereign authority backed currency is expected.
Recently, People’s Bank of China had also announced a plan to launch their own digital currency.
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