They may not be classed as legal tender, but there are now more virtual currencies in the world than there are traditional ones.
There are officially 180 recognised currencies in the physical world, but there are now 193 virtual currencies that are being traded on the internet. Unlike their physical counterparts, however, none of these are authenticated by governments or banking regulators and they are not classed as legal tender.
The most well-known of these is the bitcoin digital currency that is used for peer-to-peer payments, but there others, including Ripple, Aliencoin, Teacoin, Litecoin, Auroracoin, Dogcoin, Peercoin, and Heisenberg. These currencies began arriving around four years ago, but their numbers are thought to have doubled over a two-month period at the start of 2014. Others are preparing to enter the market, such as India’s Laxmicoin, but promoters have put this on hold while they carry out more research.
Whilst the number of currencies grows, there are still concerns about their use amongst traditional authorities and banking professionals. The Reserve Bank of India, for example, has issued public advice warning people that these currencies may be risky and are not part of a regular banking system. Many experts are particularly concerned about the potential for hacking into a virtual currency exchange and the serious consequences that can follow for users.
Although the number of currencies has increased significantly – there were just 67 in December 2013 – the value of them all when combined has actually dropped. This was around $13 billion at the start of 2014, but had fallen to less than $10 billion by March.
Bitcoin currently accounts for more than two-thirds of the virtual currency market but this traded below £100 a piece for most of 2013, hitting a high of $1,200 at the end of the year and falling again to $600 by March 2014.
Virtual currencies such as bitcoin have been the subject of much scrutiny amidst concerns about the potential for illegal activity and a lack of consumer protection. The FBI in America seized 144,000 bitcoins with a value of $28.5 million and shut down the Silk Road market in October 2013. A bitcoin security breach in 2011 led to around $500,000 being stolen after hundreds of accounts were compromised, and China has introduced rules governing currency exchanges from bitcoin to the local currency.
Interest in virtual currencies continues to be high, however, particularly amongst speculators. Some businesses are also drawn to bitcoin because transaction fees are lower than those usually imposed for processing credit card payments.
Other individuals and businesses are drawn to peer-to-peer currencies such as bitcoin because they can remain stable even when traditional markets are not, and claim to be solely policed by users rather than a single organisation.
One of the biggest transactions bitcoin has been used for was the purchase of a Bali villa that had a value of more than $500,000.