Virtual Currencies

By Jason Poggioli

Most purchases today are made using electronic transfers of money that are fast, convenient, and easily tracked transactions.  Imagine a scenario instead where people all over the world could buy and sell goods or services electronically in a completely anonymous and untraceable way.  It would resemble the simplicity of a cash transaction, but with the convenience of an electronic transmission.  A completely anonymous transaction means no taxes, no record of the sale, and perhaps most importantly, no way for any government body to regulate it in any way.  The enormity of the possibilities takes a while to sink in.

This possibility has been evolving as the Internet gained in popularity and is somewhat a marriage of two seemingly unrelated phenomena on the Internet: The first being peer-to-peer file sharing and the second being massive multi-player online games.

You’ve probably heard of peer-to-peer file sharing since it’s in the news a lot as recording studios, movie producers, and all other manner of entertainment companies struggle to prevent the public from wholesale copying and distributing what previously could only be purchased in a store like Tower Records.  That chain of stores and many others like it have gone belly up owing their demise in some part to P2P file sharing.  Laws already exist making copyright violations illegal, but those laws have been proven to be extremely difficult to enforce especially when they are disregarded by so many people.

Essentially, peer-to-peer file sharing allows people to share files anonymously with millions of others simultaneously.  The ease of copying and downloading is so simple that you could have a copy of virtually any song you want before you finish reading this article.  Legalities and ethics aside, the fact is that intellectual property of any kind is in the midst of the largest transformation since the invention of the printing press.

The second, and lesser known, phenomenon is the rise of virtual currencies in online games.  Things only have value if there are people willing to buy them and purchasing power is dictated by an abstract concept called currency.  Money isn’t often thought of this way, but the value of the dollar is only what it is because everyone on the planet agrees to its value.  Throughout history currency has always been an abstract value that people could use to represent some tangible production.  I make you a pair of shoes and you pay me in some form that I can use to buy a shirt.  As long as we all agree on a common currency the economy works.

In a virtual gaming world, known as massive multi-player online role playing games, millions of people place real value on goods that can be obtained within the game. Often these virtual goods (like armor, swords, potions, and other items you’d typically find in an online fantasy game) are so coveted, people are willing to spend real-world currency to purchase them from other players.  As soon as you have a regular exchange of real-world dollars with a virtual currency in an online game you have created an exchange rate between the two currencies and an entire economy is born.

As fantastical as it may seem, economists have studied these virtual economies and even ranked them against real countries’ economies.  While it may seem bizarre it’s no joke.  In some countries it’s even led to the creation of sweatshops where workers are paid very low real-world wages to “create” wealth within the online games.  The sweatshop owners then go on to profit from this virtual wealth by selling it to online gamers willing to pay.

Which leads us to the new Internet phenomenon this article is about – the creation of a virtual currency that is specifically designed for use in the real world and is used via untraceable peer-to-peer sharing technology.

Currency is an abstract concept that assigns value to a given object for the purpose of driving an economy.  The U.S. dollar is already essentially virtual, but the supply is regulated and taxed by the government.  In addition, nearly all transactions are tracked by institutions such as banks or credit card companies.  That all could change, though, as more and more people start using new virtual currencies that are issued by no government, controlled by no banks, and can be used in completely anonymous and untraceable ways.

One such currency is called Bitcoin, and was created in 2009.  It’s still very new and this may not be the currency that catches on, but the genie is out of the bottle now and it will be near impossible to put it back.  All it requires is a certain critical mass of acceptance – enough merchants and customers need to be willing to pay and accept the currency in question.  And once that happens – once a growing portion of the world economy is occurring outside the control of existing governments and institutions – what then?

One Response to “Virtual Currencies”

  1. Jill Says:

    I wonder if we can draw inferences from the historical advent of currencies in different cultures. Was it purely a tipping point, political motivation, or perhaps a social contract of sorts such as “In God We Trust.”

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