What is a virtual currency?

Virtual currencies are big news right now. If you’ve heard of them and are looking for a virtual currency definition, you’re in the right place. We’ll run through some virtual currency examples, and cover the key questions, including: what is virtual money?

While virtual currencies have some neat features, they’re not usually accepted for day to day spending. So, as a bonus we’ll also touch on how you can hold 50+ currencies in a Wise account, to send, receive, and spend fiat currencies all over the world. Get a free Wise account online or in the Wise app today.

What is a virtual currency?

A virtual currency is a digital representation of value. There’s no physical form to virtual currencies, and they’re not issued by a central bank.

Instead, virtual currencies are issued by private individuals, companies or developers, and are not usually covered by standard financial regulation.

Virtual currency transactions are made electronically or online only - you won’t be able to withdraw a virtual currency from an ATM, for example, and you won’t be issued a bill, coin or other token to represent the value you hold.

Virtual currencies are not usually considered to be a hard currency, as they can be volatile in terms of value.

Nor are they a fiat currency - like dollars - which is normally issued and backed by a national government.

In broad terms, virtual currencies can be split into 2 types: closed virtual currencies and open virtual currencies.

Closed virtual currencies

Closed virtual currencies can’t be traded or used outside the environment they’ve been created for. A common example is air miles - air miles are issued by private companies, and are only useful in selected transactions - they can’t be used directly to buy groceries in a store, for example. Closed currencies are also commonly used in gaming, allowing players to buy and trade within a game environment, but not cash out or convert any of the virtual currencies involved.

Open virtual currencies

Open virtual currencies are tradable and can be converted. You can buy these currencies online and hold them in specialist digital wallets, before converting to other virtual currencies or even some fiat currencies.

How do virtual currencies work?

Virtual currencies are used as a medium of exchange, either in an open or closed environment. Some can only be used in very specific ways - like reward points issued by your credit card issuer, for example - others can be traded or used for virtual currency transactions on the open market. In this case, units of virtual currencies can be exchanged to fiat currencies - like US dollars - through specialist brokers.

It’s important to note that some virtual currencies are treated as a capital asset by the IRS, and certain virtual currency trades are taxable, meaning you must recognize any gain or loss when you complete your tax return.

Virtual currencies: Pros & cons

Hold more than 50 currencies on your Wise account

Open a free Wise account online or in the Wise app, to hold 50+ fiat currencies, get local bank details for 10 currencies, and send payments to 80 countries all over the world. You’ll also be able to get a linked international debit card to spend and make cash withdrawals in 2.3 million ATMs globally.

Top up your Wise account in the currency of your choice, and switch to the currencies you need instantly, using the real exchange rate. You can manage your money on the go through the handy Wise app, and you’ll only ever pay low, transparent fees for the services you need. No monthly charges, no minimum balance and no hidden costs. Make your money as flexible as you are, with Wise.

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Examples of virtual currencies

Fiat currencies and hard currencies are backed by governments and come with physical assets like bills and coins. These are considered real currency, and are used in day to day physical transactions, while all transactions involving virtual currencies happen online.

Virtual currencies are often issued by developers and private companies: some examples include air miles, merchant rewards, and gaming currencies.

Frequently asked questions

Is virtual currency real money?

The phrase real money usually refers to fiat currencies issued by governments - like dollars, pounds or euros.

Virtual currencies include a broad range of currency types. Currencies which are not convertible - like gaming currencies - are not usually considered to be real money. However, whether or not virtual currencies which are convertible could be considered real money is a bit trickier, as it’s possible to put a dollar value on them. If you convert a virtual currency to real money, you’ll need to report any capital gain or loss to the IRS.

Is virtual currency legal in the US?

Legislation of virtual currencies is lagging behind the market in many ways. However, virtual currencies are legal in the US and in most developed countries, and even legal tender in a couple of places.

How many virtual currencies are there?

There are thousands of virtual currencies in circulation across different countries and markets.