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Closed Virtual Currency

Closed Virtual Currency

What Is a Closed Virtual Currency?

A closed virtual currency is an unregulated digital currency utilized as payment just inside certain virtual networks. It has no association with the real economy and can't be switched over completely to legal tender. Closed virtual currencies are otherwise called non-convertible virtual currencies, closed-circle currencies, closed-stream virtual currencies, or in-world money. These are as opposed to open or convertible virtual currencies that are straightforwardly exchangeable.

How Closed Virtual Currencies Work

Technology progressions all around the globe are driving disturbing changes in the traditional approach to getting things done, including how goods and services are acquired and paid for. The rise of [e-commerce](/online business) and virtual community platforms has prompted a demand for alternative means of managing transactions.

One quickly developing payment technology that is causing disturbances in the digital world is virtual currencies, for example, on account of bitcoin, a type of digital money used to purchase real-world goods or services online yet isn't recognized as legal tender in numerous nations — note that El Salvador (in June 2021) turned into the main country to perceive bitcoin as legal tender.

Types of closed virtual currencies incorporate preferred customer credits, loyalty points, and video arcade tokens.

Closed versus Open Virtual Currencies

Virtual currency can be either open or closed with respect to its compass. An open virtual currency can be fill in for real money utilizing online exchange systems or ATMs that are designed for virtual to real currency exchanges.

An illustration of an open virtual currency is bitcoin, the most well known decentralized cryptocurrency online. Since open currencies have a definable value in real money and can be exchanged for real money, they are treated as properties or capital assets for tax purposes in the U.S.

Closed virtual currencies were established to operate in closed-circle environments and are limited to transactions in virtual goods inside the closed environment. A closed platform considers real currency to be exchanged for its virtual currency. Conversely, open virtual currencies can be reclaimed for real goods and real currency.

Closed virtual currencies are centralized by design, compared with decentralized peer-to-peer currencies like bitcoin that are ungoverned by any central authority. With a closed virtual currency, there is a central system that issues the currency, lays out rules for its utilization, records transactions made by its users, and reserves the right to pull out the currency from circulation.

Closed Virtual Currency Criticisms

There are a few pervasive mishaps with closed currencies. The currency is generally illiquid and digitally scant with no real way to make a greater amount of it, dissimilar to bitcoin mining, which makes more bitcoins for its users. A client can lose each of their earned coins in no time through cyber robberies, software bugs, or account termination initiated by the virtual administrator or the client themself.

Real-World Example of a Closed Virtual Currency

Consider closed virtual currencies closed-circle payment cards like the Nordstrom store credit card that must be utilized in Nordstrom. Further, the currencies utilized in numerous online games are closed. Virtual assets acquired in-game can be traded for other in-game tools or currency and in this way, don't create any taxable income.

Instances of closed-circle virtual gaming platforms and their specialty currencies include:

  • World of Warcraft's Gold
  • Entropia Universe's Project Entropia Dollar
  • Ultima Online's Gold Coins


  • Since open currencies have a definite value in real money and can be exchanged for real money, they are frequently treated as properties or capital assets for tax purposes in the U.S.
  • Closed virtual currencies along these lines can't be straightforwardly exchanged for different currencies, virtual or fiat.
  • A closed virtual currency is utilized as payment just inside certain virtual networks, for example, inside the world of an online video game.