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Virtual Currency and Legal Tender: Conceptual and Practical Differences


Virtual Currency vs. Legal Tender

Concept of virtual currency

A virtual currency is an electronic representation of value that does not take a physical form. It is a type of digital currency that principally provides a means of payment (among other functions) for goods and services over the internet, or broadly on an online platform, while utilizing encryption technology. The currency is used by an unspecified large number of individual and businesses/ entities and can also be converted (in either direction) to legal tender, such as dollars and euros at dedicated exchanges.

Concept of legal tender

Legal tender is officially issued by a government authority in the form of banknotes or coins. It is a form of money (currency) that courts of law and the broader legal system in a country legally recognize as satisfactory means of payment for any monetary debt within its jurisdiction. In other words, it is a form of money legally valid for the payment/ settlement of debts (and coutervalues) and that must be accepted for that purpose when presented by a legal or corporate person. Legally valid money (fiat money), if tendered by a debtor in payment/ settlement of its monetary obligation, must be accepted by the creditor as a means of payment and settlement. By contrast, virtual currencies are issued by users or network participants using blockchain technology without the intervention and support of an issuing authority or administrator.

Differences

A virtual currency has the traditional features of money, and is designed to ensure security to all parties involved in an exchange, by multiple means such as public key cryptography and hash functions. Transactions that are made via virtual currency are recorded, with public accessibility, in units known as blocks, forming the broader network called a blockchain. The blockchain technology is instrumental for running different types of virtual currencies. Virtual currencies can be used the purpose of paying consideration for the purchase or leasing of goods or the receipt of such items or certain services between counterparties. The currency is transferred by means of an electronic data processing system.

Legal tender represents the legal status of fiat money (fiat currency) as an acceptable form and standard for payment of obligations. The U.S. dollar is considered to be both fiat money and legal tender, as it is accepted for settlement of private and public debts. In this sense, legal tender is any currency that a government declares to be have a legal status as a means of payment. Governments usually issue a fiat currency and then declare it legal tender by recognizing it as the standard for debt repayment.

Principally, the value of a fiat currency is derived from the trust and confidence that people have in the government or central authority that issues it. In its very essence, fiat currency is money created with a government permit, and it is accepted as a medium of exchange for goods and services. Being a source of money, it would serve other functions of money: store of value and unit of account. For a virtual currency, the value depends on general acceptance within the network community and beyond, and factors such supply and demand play a crucial role in determining its performance.



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