The European Central Bank (ECB) has just issued a report on Virtual Currency Schemes, with case studies on Second Life and Bitcoin (both previously covered in depth here).
In the report, the ECB calls Bitcoin “the most successful — and probably most controversial — virtual currency scheme to date.”
The ECB goes on to say that the concept of Bitcoin stems from the Austrian school of economics, where business cycle theory developed by Mises, Hayek and Bohm-Bawerk floated the idea that virtual currencies could be the starting point for ending central bank money monopolies.
Why does the ECB bother to write a report and an indepth analysis of Bitcoin and other virtual currencies? Because they are worried that they are unregulated value exchanges that could represent a challenge for public authorities and have a negative impact on the reputation of central banks.
Oooh! You don’t say.
On the other hand, they do make note that “these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers.”
To be honest, whether Bitcoin takes off or not, virtual currencies are going to explode thanks to in-app gaming on the mobile internet, something the ECB report misses.
Most of us already top-up or bling our gaming on our iPhones and iPads via iTunes. That is virtual currency in operation. You may disagree, but the aggregation of large amounts of small payments is effectively building a virtual currency system.
You don’t believe me?
Then read this paragraph from an article in the Next Web about Japanese mobile gaming company DeNA:
“While popular gambling-style kompu gatcha titles — in which users pay for coins to win prizes — are being eradicated from Japan, DeNA notes that its Moba-coin virtual currency was nonetheless used in a record $689 million worth of transactions in the country”, and forms half of their revenue stream today from 40 million users.
There are many examples of others developing virtual currencies for gaming: NHN Japan offers a global gaming virtual currency called Line Coins; KakaoTalk in Korea offer virtual currencies called Chocos; and Tencent’s Q-Bi in China is firmly entrenched as a virtual currency.
All of these are driven by mobile internet gaming services and the real killer will be when the major payments processors get into the virtual payments space.
Oh! They already are!
VISA recently acquired PlaySpan, a company with a payment platform that handles transactions for digital goods; whilst American Express has purchased Sometrics, a company “that helps video game makers establish virtual currencies and… plans to build a virtual currency platform in other industries, taking advantage of its merchant relationships.”
So it’s already the world of gaming developing our new world virtual economies into new world virtual payments processors.
Meantime, for more analysis of Bitcoin, it’s well worth reading this article by Doug French in Laissez Faire.
Chris, great to see more light being thrown on the likely expansion of virtual currency.
We did some work on this at HSBC a year or so back and concluded that the advent of the digital wallet will have the potential to fast-track and thereby broaden the use of virtual currency, particularly if people will be able to use virtual currency to pay for real-world purchases. In short, the digital wallet will allow virtual currencies to jump the boundary and become more a part of our day to day, real-world lives.
Watch this space, as I say!
Chris,
The inherent problem with Virtual currency is lack of regulation. With the broader acceptance, virtual currencies will attract shades of gray.
Its a matter of time when Central banks are going to step in and disrupt the virtual currency market. Only time will tell if virtual currencies can survive the regulations.
Vijay — “lack of regulation” is only an inherent problem if you view the currency world as a regulated one, only. That’s a protectionist viewpoint, which works well while your protectionist barriers are in place. Not so well when Bitcoin and friends start to bypass them by deliberately targetting the foundations of the barriers, and undermine them.
Also, it’s worth remembering that the EU in its various guises has always been disrupting the virtual money market, from before it was known as such. E.g., the 1994 report on prepaid cards sought to reserve virtual money legally to banks (see URL below for my 1996 critique).
Europe invented digital cash. I would argue that in this case the EU – or Europe – shot itself in the foot, and watched, bemused and contrary, while its invention moved elsewhere.
Regulation can and does kill the baby. On reading the ECB report, I think they have learnt that lesson. But the report doesn’t yet encourage parents of new designs as yet. Wise parents don’t hand their responsibilities over to just anyone.
It’s all quite interesting, however I feel a virtual currency’s just been concocted that will outdo anything done before: http://www.spiderflower.net
I’m the founder and we’ve just launched it. It’s free, easy and revolutionary. We’re looking for volunteers to try it and see how it works, please contact me for any queries: giosue.guglielmi@gmail.com