Virtual Currency Schemes - Essay Example

Virtual Currency Schemes . Student’s Name: Tutor’s Name Date: There have been a lot of issues that have arisen since the introduction of virtual currency and virtual currency schemes. Virtual money is a representation of money and is used where the legal tender can be used in doing transactions. Virtual currency schemes are becoming more common in the current world and they are attracting a lot of attention from all corners of the society. The system is gaining popularity because people are finding is necessary to use the schemes because they serve the same purpose met by the regulated systems. The most common virtual currency schemes are Bitcoin and Second Life Linden dollar, which have been highly used. Virtual currency schemes can be defined as is digital money that is acceptable in a certain virtual community and it is controlled by those who have developed it and it is mainly unregulated by the central bank. There are two types of virtual currency this is the use of real money in purchases and increase of stock through participating in promotions and product sales. There are three types of virtual currency schemes and they include the closed virtual currency schemes which do not have any link outside the virtual world. This means that the money cannot be used in the real economy. The second type is the scheme with unidirectional flow where its users purchase the virtual flow using the real currency and as per a fixed exchange rate. The currency cannot be exchanged back to the real currency and can be used to purchase virtual goods but at times they allow purchase of real goods. The third type is schemes with bidirectional flow where users buy and sell virtual money as per the exchange rates. It is highly used in the real world. Bitcoins and Linden dollars fall under this category. Linden dollars is a form of virtual currency issued by Second Life. The money is used in customized way where the users in the Second Life economy use the currency to purchase virtual and real commodities. The Linden dollars are purchased using the real currency and can be sold back into dollars or any other currency. Bitcoins is a scheme that has been globally used and acts as real money and as virtual currency. It is used to purchase real and virtual goods. It is highly preferred because one does not need to carry cash with them. The scheme is operated through a network. There are so many issues that may arise from the use of the virtual currency schemes such as Bitcoins and Linden dollars. These issues include that the schemes can destabilize the price in the real economy. This means that the continued production and flow of this currency will create a lot of money for people to spend. This will result to increased demand which will not be matched by the supply because the supplying firms do not have the resources to increase the supply. This will lead to increase in prices because people will continue to produce high payments for the commodities and this means the firms will continue increasing their prices until they are unbearable. This would result to collapse of the economy by increased inflation. This price instability will destabilize the economy because people will have money to spend on the little the suppliers are offering. This will result to a creeping economy due to shortage in supplies and the high demand. Another issue is that virtual currency is unregulated. This means that there is no central body that controls the use of the virtual money. This is left to those who develop the currencies. This kind of trend affects the monetary policies put in place by the central bank. The central bank does not have control over how the virtual currency is used and it cannot regulate the way it is being used. The virtual currency do not fall the monetary policies because central bank have no way of controlling the currency. The money demand is determined by the activities of the users but not by any government policies. This can result to inflation because the users are not controlled and do not need to follow central bank regulations that are put in place on the currency use. Lack of control by the central bank may also lead low monetary value because there is a lot monetary activities going and the government through the central bank does not have the power on how it should be used. This poses a risk of inflation in the economy. The virtual currency schemes such as Bitcoins might lead to users’ loss of cash. The transactions are done on line through the use of internet and one is required to keep their virtual money in their computers. Lack of Anti-virus in ones computer will lead to money being lost. This is a risky venture because systems can fail and this will result to lot losses to the scheme users. This is against the monetary policies that require money to be deposited in banks but not through any other system. The users of Bitcoins scheme have in various occasions reported that they have lost their money by attack of Trojan in the system. This has raised a lot of controversies because the system has been used as a tool of tax evasion and money laundering. Another issue that might arise from the use of virtual currency schemes is that the schemes might be used in illegal dealings. The activities of the schemes have no authority that oversees and controls their operations. This has to criminal gangs has turned to this mode of payment because it is not monitored by the central authorities. This also has led to dealings such as drug dealing taking this root which is easier for them. The government also loses revenue in terms of taxes because those carrying out activities have no legal bindings to the central government to pay taxes. It comes very hard for the government to trace these criminals because in virtual currency schemes such as Bitcoins there are no accounts required for one to send and receive payments. Another issue that arises with the use virtual currency schemes is that they are discriminative in nature. The reason behind this is that there is a lot of information asymmetry because the system is very complex in such a way that not every understands the system. The system is very simple to start using because one only needs to download the system and starting using it. This exposes new users to a lot of risks because they do not know how the system is used. This is because when one gets into the system they cannot leave because this might result into the collapse of the system because the system cannot liquefy itself. The Bitcoin transactions are not revocable and, this leads to a lot of losses in case a user makes a payment by mistakes. Another issue related with virtual currency schemes especially Linden dollars is that they operate like Ponzi schemes. The virtual currency schemes have increased their interest so as to attract a lot of people to the system and to earn increased profits. The system works in a way when there is a shortage in the flow of currency the Linden lab prints more Linden dollars so as to cater for the shortage. There is a bank that collapsed because their interests were very in such a way that they could not handle their customers’ needs because they were expensive. Another issue is that use of virtual currency schemes have led to loss of intellectual property. This has resulted in such a way that the original owner of the intellectual property have complained that the ownership have changed without their consent. This has led to users of the system to be forced to accept different terms and conditions from those they knew from the original owner. This has led to losses to the users of the system. The schemes have a digital rights system that makes those working with them to forego their intellectual property. It is hard for any government monetary policy to be put in place because there are no rules and regulations that make the virtual currency schemes to abide by the central bank policies. The virtual currency schemes do not conform to the set regulations for the financial institutions to follow. This continues to destabilize the economy even when the central bank is working to control the currency flow in the economy. There is no security about the system because the system has been hacked and the users have lost money on several occasions. The use of virtual currency scheme can lead to risk to price stability. This is because it is the system makes it hard to preserve the unit of account of money because as much as they are used in real transactions they do not possess a unit of account as that possessed by real money. Another thing that makes them pose a risk to price stability is that no monetary policy which can be effective on the schemes because the central bank does not regulate their operations. This makes it hard for the central bank to control the flow of money because people have virtual currency schemes as other sources of money. Schemes like Linden dollar print more Linden dollars to cater for their shortage and this affects the supply of money. This interferes with central bank planning on control of money supply. They also affect monetary policies where real money interact virtual currencies like in Bitcoin and Linden dollars because the central bank policies affect the real money but not the virtual currency. In conclusion, virtual currency schemes have to some extent helped improve delivery of payments for real goods and virtual products. This has made it possible for people not to walk around with cash. Though they have gained popularity in the last few years due to their flexibility in carrying out transactions virtual currency cannot like a substitute to real money. The virtual currencies represent innovation and use of advanced technology in developing payment options. The virtual currencies pose a lot of problems to real economy by posing risks to price stability because the central bank cannot control use of virtual currency. Therefore, the government should work to ensure that there is a way to control use of virtual currencies so as to protect the real economy from the effects of these activities. The virtual currency schemes should be put in place in such a way that they cooperate with the regulations of the central bank so as to ensure effects such as inflation do not attack the economy. The schemes also provide alternative ways of payment although they pose a lot of risks to the real economy. References European Central Bank. (2012). Virtual Currency Schemes. ECB. Read More