The recent popularity of virtual currencies has detracted from their intended use. Instead of acting as a decentralized currency, tokens such as Bitcoin and Ethereum have been utilized as investment opportunities. However, as the crypto-mania dies down, the potential application of virtual currency must be reexamined and reconciled with our current financial system. This paper aims to explain the transition from currency as we knew it to this virtual currency, and the political implications of such a transition. This paper will first outline currency, both traditional and virtual, before turning to discuss the difficulties in implementing virtual currency. Then, it will consider three different government approaches to the new currencies. Finally, the paper will end with a discussion of the patentability of virtual currency technology.
Currency, unlike money, does not have any intrinsic value. The U.S. Dollar does not have a value beyond a determination set by the government and markets, whereas money, such as gold, has a value beyond its market price. For centuries, global currencies relied on the gold standard for this very reason. For example, the U.S. Dollar had a set value in gold, and until 1971 the Dollar could be exchanged for its gold value. With the elimination of the gold standard, current economies have transitioned to fiat currencies. A fiat currency is backed only by the full faith and credit of the issuing state. Thus, a currency is only valuable to the extent that the market trusts the currency. Despite these varying states, currency continues to three critical purposes. The first is as a store of value, where one pound of iron, for example, can be exchanged into currency and then re-exchanged at a later date. Following, the second purpose is as a medium of exchange, through which people can buy and sell from one another. Lastly, currency serves as a unit of account, where goods and services are based on a set value and not relative to other goods and services.
In general, digital currency also seeks to satisfy these criteria. Virtual currency, a form of digital currency, is the virtual representation of economic value. This differs from traditional currency in that virtual currency is not available in tangible ‘note’ form. While current banking maintains account balances and credit card transactions without any paper exchanging hands, account balances and credit card transactions are also convertible into paper form. In addition, virtual currencies, unlike traditional currencies, do not require a third party (such as a bank) to mediate transactions. Instead, some utilize blockchain technology. The blockchain serves as a public ledger, where transactions are grouped into ‘blocks’ and verified by the network of users. While the intricacies of virtual currencies are interesting and expansive, the larger integration of them into the economy may pose a greater obstacle.
The difficulty with virtual currency lies in its rogue nature, where the three main purposes of currency face obstacles. First, virtual currency as a medium of exchange faces issues due to its lack of legal tender status. Since the currencies are not validated by any state, their use is at the discretion of transacting parties. A bookseller in Boston can just as well refuse or accept Bitcoins for a purchase. Thus widespread adoption is limited until such currencies are guaranteed across the economy.
Also, currencies such as Bitcoin are unreliable as a unit of account. A party wishing to sell a good is unlikely to rely on a currency with such a volatile nature. One Bitcoin, for example, reached a price high just above $19,000 in early December; and, four months later, it was sitting around $8,300. Despite the extreme price fluctuations, virtual currencies can participate in market exchange pricing, which tracks the relative exchange rates between a virtual currency and a more traditional one, such as the Dollar. The benefit of market exchange pricing for a unit of account allows a virtual currency to be understood relative to a more well-known tool. However, until price volatility is maintained, the institutional adoption of virtual currencies seems unlikely.
Lastly, some virtual currencies maintain a unique advantage due to their finite supply. As a store of value, a finite supply of a currency ensures that a single token or bill is not reduced in value over time by inflation. Yet, the finite supply also makes market inequalities possible, where the possibility of future scarcity may motivate some to treat the currency more as an investment than a store of value. Additionally, a common concern surrounding the currencies is their potential for fraud and abuse. Before the recent spike in popularity, virtual currencies were commonly used in questionable transactions, such as on Silk Road, which was an online marketplace for drugs and other illegal goods and services. A virtual currency called Monero markets itself by claiming it is “private” and “untraceable.” The lack of transparency lends itself to possibilities for criminal activity, such as money laundering and purchase of illegal goods and services. Also, since virtual currencies must be stored online in a virtual wallet, there is the risk of cyber theft. Given these risks amid widespread popularity of virtual currencies, governments have sought to regulate, and in some cases ban, this new currency.
The government has limited ability to ban virtual currency. A state may criminalize the use, sale and/or possession of the currency; however, a government faces difficulty in enforcing such laws. China has made Bitcoin illegal, citing concerns over its decentralized nature, the limited quantity of Bitcoins, that the currency’s major functions are not geographically restricted and are anonymous, and that the currency does not have legal tender status. The concerns raised by China reinforce the rogue nature of the currency, where there is no central authority accountable or regulations in place to verify the users. The lack of accountability undermines the role of the government in protecting the rights of citizens. Russia, in a mix of restriction and freedom, has allowed the possession of virtual currencies, but previously outlawed their use for transactions, insisting that transactions are only valid using the Ruble. There is, however, current legislation pending in the Duma which aims to legalize virtual currencies in the coming months. In the U.S., virtual currency is legal. However, the Internal Revenue Service (IRS) categorizes virtual currency as property. Given the varying treatment of virtual currency by countries, it is difficult to come to any global understanding or determination. However, companies and individuals are surging ahead, attempting to patent the myriad opportunities in this new financial realm.
The opportunity to patent virtual currencies seems like a modern-day gold rush; however, the new intellectual realm has its limitations. The patentability of an idea was tested in the 2014 Supreme Court decision in Alice Corp. v. CLS Bank. The case set two important limitations on new intellectual property patents: a party cannot patent an abstract idea, and a patent cannot simply take a practice and apply it to computers. Additionally, the idea must be “non-obvious,” which is determined by a legal test. Given these limitations, corporations and individuals are attempting to patent new utilizations of virtual currency and the underlying mechanisms.
Virtual currency and related patents have skyrocketed in recent years, where the blockchain and related technologies seem promising for businesses. Facebook has an approved patent concerning virtual credits. The patent covers creating virtual tokens, their relative redemption value to real world currencies, and a method to keep track of it all. Bank of America is also looking to the virtual realm, where it is seeking to patent a virtual currency exchange system that streamlines currency conversion. Additionally, Paypal, in a race for future virtual currency stake, has submitted a patent to expedite the transaction of virtual currency. Bitcoin, for example, is plagued by slow transaction times given the high volume and verification system. If PayPal is able to patent and realize the faster transaction system, they may gain an advantage in the future marketplace.
The focus on virtual currencies follows the discussion of an economic transition from traditional currencies to virtual currencies. While other applications of blockchain and related technology are promising innovation in a variety of sections, such as healthcare and voting, the implementation of virtual currency seems to be the fundamental system on which our society operates. While the coming years in digital currency remain uncertain, the possibility and seemingly eventual transition to an internet-driven economy raise these concerns which must be addressed before virtual currencies are truly viable.
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