Why virtual money is used for money laundering?

○ What is virtual money?

Virtual money has grown to be the talk of the town as Bitcoin, virtual money, which is transferred person to person without a basis system like a central bank, is said to have been used for large-scale money laundering.

In addition, virtual money has been pushed into the limelight as a safe asset that can replace real assets amid currency depreciation, which could be possible due to quantitative easing by large economies since the global financial crisis.

Virtual money is a kind of electronic money. Electronic money is divided into a plastic card type, in which an integrated circuit is embedded, and a network type that exists as a form of information in gadgets such as a computer. Virtual money is network-type electronic money. Aside from Bitcoin, Amazon’s coin and Facebook’s credit are major examples, while Cyworld’s dotori and Kakao Talk’s choco are Korean examples. This story now will deal with virtual money that is readily exchangeable with real money just like Bitcoin.

○ Pros and cons of virtual money

According to economics, money is used as a means of exchange, a measure of value and storage of value. From this perspective, virtual money is superior to real money.

First, as a means of exchange, virtual money saves cost thanks to no production cost and much lowered transaction fees. As a means of measuring value, virtual money is easier to use because everything is computed. As it can be saved on such gadgets such as computer`s hard drive, virtual money doesn`t charge any storage cost and is free from being stolen or lost. It can also be facilitated for e-commerce and privacy protection.

Despite these advantages, disadvantages also exist. One of the biggest problems is that virtual money can be used for money laundering and then used for drug transfer, gambling or creating a slush fund. Anonymity of virtual money makes it difficult to taxation, which can spur tax evasion. Virtual money can make foreign exchange rates unstable because no official mechanism exists to determine exchange rates between virtual money and real money of each country.

To tackle this problem, the U.S. is considering designation of companies using virtual money as payment settlement companies and having them submit financial transaction information and measures to the financial authorities in order to prevent money laundering. The European Central Bank warned in a report titled “Virtual Money Overview” late last year that virtual money can damage people’s trust in the central bank. In the report, ECB gave five reasons including financial instability in the future and threats to payment settlement systems.

○ Virtual money vs. real money

How much effect does virtual money have on real money? Based on Irving Fisher’s quantity equation, a famous currency circulation theory in classical economics, the fall of demand in real money seems inevitable as the use of virtual money increases. According to this equation, money supply and the pace of its circulation have an inverse relationship.

On the other hand, a complete replacement of real money with private electronic money, including virtual money, is highly unlikely. In a 2004 report titled “Six Puzzles about Electronic Money and Finance,” the International Monetary Fund pointed out that a complete exchangeability with legal real money should be secured for private electronic money to succeed. In addition, demand for real money will exist continuously because private electronic money issuers are not allowed to do loan services. The report concluded that electronic money would only partly replace real money.

○ The future of virtual money

It is true, however, that virtual money is spreading into people’s lives. Looking back on currency changes in human history, virtual money may grow to be major currencies. In the primitive times, products, such as salt, seashells and fur, were used as money. After civilized, people started using gold and silver as money. In the mean time, credit money, a currency without physical value but guaranteed by law such as checks or bills, was developed as a type of money.

An internationally transferred virtual money may be able to entirely replace or enjoy the same status of real currency, given the fall of the Bretton Woods regime, which used gold as standard for money, made the U.S. dollar the international key currency. This is why more attention needs to be paid on the fact that global giants, such as Facebook, Amazon and Google, are introducing virtual money one after another.