The definition of terms is essential to prevent duplication of effort and unintended confusion. This is particularly relevant in virtual currencies, where numerous related definitions exist for commonly used terms such as electronic money, virtual currency, and cryptocurrency. These definitions, sometimes overlapping or inconsistent, vary in both substance and focus. Indeed, whether virtual and electronic currencies meet the definition of a currency or should be considered a commodity is also currently under debate.
For this document, the definitions of terms and classification of virtual currencies proposed by The Financial Action Task Force (FATF) will be used.
These definitions are provided in the following sections:
“A virtual currency is a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; (2) a unit of account; or (3) a store of value, but does not have legal tender status in any jurisdiction.”
For this definition, a “digital representation” represents something in the form of digital data. A physical object, such as a flash drive or a bitcoin, may contain a digital representation of virtual currency. Still, ultimately, the currency only functions as such if linked digitally via the Internet to the virtual currency system.
The critical point of note in using the term “digital representation” is that it is the digital data itself that is the virtual currency, not the medium on which the digital data is stored. Digital representations of virtual currency can be moved, copied, or transferred to another storage medium, but the value of the virtual currency remains inherent in the digital representation.
Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates, and is customarily used and accepted as a medium of exchange in the issuing country.
“It [virtual currency] is distinct from e-money, which is a digital representation of fiat currency used to transfer value denominated in fiat currency electronically. E-money is a digital transfer mechanism for fiat currency – i.e., it electronically transfers value that has legal tender status.”
Virtual currencies are defined as not having legal tender status in any jurisdiction. It is possible, both hypothetically and practically, to create a digital representation of fiat currency. This is, by definition, not virtual currency, so a different term, electronic money, is used to refer to digital representations of fiat currency.
“Digital currency can mean a digital representation of either virtual currency (non-fiat) or e-money (fiat)…”
Unique challenges arise when a digital representation of value is used. Some are specific to virtual currencies, and some are specific to electronic money. For example, in virtual currencies, topics relating to the conversion of fiat currency to virtual currency arise. These are less of an issue for electronic money, which is already a direct representation of fiat currency.
However, it can sometimes be useful to refer to digital representations of value, irrespective of whether the value represents legal tender in a particular jurisdiction or not. For example, in either case, the problem of “double spending” needs to be addressed. Double spending is a situation where a digital representation of value is spent more than once. This is a serious problem in any value transfer system and is not dependent on whether the digital data represents fiat or non-fiat currency.
The term digital currency encompasses both of the above definitions. It provides a term by which it is possible to refer to digital representations of fiat and non-fiat currencies.
A comprehensive list of cryptocurrency definitions can be found at Decryptionary – Cryptocurrency Definitions Dictionary