Ecb-Virtual Currency Schemes

v i r t ua l c u r r e n c y s c h e m e s
O c t O B e r 2012

VIRTUAL CURRENCY SCHEMES
O C T O b E R 2012

In 2012 all ECB publications feature a motif taken from the €50 banknote.

© European Central Bank, 2012 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Website http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. ISBN: 978-92-899-0862-7 (online)

CONTENTS
ExECUTIVE SUMMARY 1 INTROdUCTION 1.1 Preliminary remarks and motivation 1.2 A short historical review of money 1.3 Money in the virtual world 2 VIRTUAL CURRENCY SCHEMES 2.1 Definition and categorisation 2.2 Virtual currency schemes and electronic money 2.3 Payment arrangements in virtual currency schemes 2.4 Reasons for implementing virtual currency schemes 3 CASE STUdIES 3.1 The Bitcoin scheme 3.1.1 Basic features 3.1.2 Technical description of a Bitcoin transaction 3.1.3 Monetary aspects 3.1.4 Security incidents and negative press 3.2 The Second Life scheme 3.2.1 Basic features 3.2.2 Second Life economy 3.2.3 Monetary aspects 3.2.4 Issues with Second Life 4 THE RELEVANCE Of VIRTUAL CURRENCY SCHEMES fOR CENTRAL bANkS 4.1 Risks to price stability 4.2 Risks to financial stability 4.3 Risks to payment system stability 4.4 Lack of regulation 4.5 Reputational risk 5 CONCLUSION ANNEx: REfERENCES ANd fURTHER INfORMATION ON VIRTUAL CURRENCY SCHEMES 5 9 9 9 10 13 13 16 17 18 21 21 21 23 24 25 28 28 28 29 30 33 33 37 40 42 45 47 49

ECB Virtual currency schemes October 2012

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ExECUTIVE SUMMARY
Virtual communities have proliferated in recent years – a phenomenon triggered by technological developments and by the increased use of the internet. In some cases, these communities have created and circulated their own currency for exchanging the goods and...