The first categorization of virtual currencies is whether the virtual currency can be exchanged back and forth for fiat currency. A virtual currency that can be exchanged for fiat currency is called a “convertible” or “open” virtual currency. A virtual currency that cannot be exchanged for fiat currency is called a “non-convertible” or “closed” virtual currency.
As noted in the FATF report, even where a non-convertible currency is transferable only within a specific virtual environment, it is possible that an unofficial, secondary black market may arise to exchange the “non-convertible” virtual currency for fiat currency or another virtual currency. Because of this, the categorization of virtual currencies into convertible/non-convertible is of limited value as a primary distinguishing characteristic for law enforcement and investigative purposes. Instead, the categorization of virtual currencies based on whether they are centralized or non-centralized is more applicable. This distinction is discussed in the next section.