Take On Payments

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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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September 2, 2014


Not All Digital Currencies Are Virtual

Besides a few classic novels, my summer reading list has largely consisted of various papers and reports on virtual and digital currencies. Not all digital currencies are virtual currencies, though these two terms are often incorrectly used interchangeably. For example, the Consumer Financial Protection Bureau recently issued a warning about the risks associated with Bitcoin and other virtual currencies, yet some media outlets reported that the agency issued a warning about digital currencies. And while the media statements are technically correct since virtual currency is one form of digital currency, they fail to recognize that digital currencies are broader than just virtual currencies. In an effort to clear up confusion and create a better understanding of digital currencies, Portals and Rails offers the following simple framework and definitions.

Framework-image

Digital currency is a digital representation of value and consists of both electronic and virtual currency. Digital currency can be used to purchase physical, digital, and virtual goods. Some, but not all, digital currencies use cryptography as their primary method of security.

Electronic currency, also referred to as e-money, is pegged to a fiat currency. It is a digital representation of value that is government-issued legal tender. The link between electronic currency and fiat currency is preserved and has a legal foundation. The funds of an electronic currency are expressed in the same unit of account as the fiat currency. Examples of electronic currency transactions include payments via credit, debit, and prepaid cards; ACH; and PayPal.

Virtual currency is not pegged to a fiat currency. It is a digital representation of value that is not government-issued legal tender. The funds of a virtual currency are not expressed in a fiat currency. There are currently more than 300 tracked virtual currencies, and as we noted in a Portals and Rails post last year, these currencies can take on multiple characteristics. Examples of virtual currencies include Bitcoin, Ripple, Ven, and Dogecoin.

Photo of Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

September 2, 2014 in currency | Permalink

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