One recurring point made by almost everyone we spoke to for our mobile money special, was that cash is of no value to anybody in this ecosystem. The cash value chain features the smallest number of participants – the buyer and the seller – with no opportunity for anyone else to skim a wafer thin transaction charge off the top. Moreover, cash is seen as inconvenient and insecure, and some might argue it’s on the way to getting a bad rep as a payment mechanism. So will digital triumph by virtue alone?
Coins and notes have plenty of enemies – as many of the articles in our mobile money special reveal. And one of the commentators, Dominic Keen, CEO of Mobank and ex-Egg executive, made a salient point when he said that the more you move into a digital money culture, the more cash has a negative effect on society. The only things that are done with cash are increasingly in the grey economy – things like money laundering, buying drugs, and tax avoidance.
This degeneration of the reputation of cash gives governments the impetus to push forward digital money initiatives, and convenience, security and feature rich applications offer plenty of temptation for consumers, merchants and banks alike. The initiatives are starting small – catering to micro transactions – as an alternative to small change. In fact, Canada recently started phasing the penny out of circulation at the same time as the Royal Canadian Mint introduced a digital currency called MintChip.
Now some clarification is needed here, to explain the subtle difference between digital currency and virtual currency. Most of our feature length coverage focuses on virtual currency, or the moving of state issued money from the realm of the physical – coins and notes – to more portable and secure bits and bytes. The stakeholders here want a part of the value chain, so they can take a slice out of any transaction as it travels from the consumer to the merchant’s bank via a series of networks. But the value of virtual currency is limited in terms on anonymity, given that – in the words of the EFF – it is increasingly laden with tracking, control and regulatory overhead, as our features on m-commerce show.
Digital currency on the other hand is effectively a non-political monetary unit that shares something in common with cash – it has to be completely anonymous. If you ‘lose’ your digital currency, it’s gone, just like dropping a banknote in the street.
MintChip, although it is digital, is backed by the Canadian dollar and centrally distributed by the Mint, which in some eyes, puts it at a disadvantage. Since most of the world abandoned the gold standard in the 1970s and currency instead became fiat money – that is to say, currency with a value controlled by the government — there is no limit to the amount of money that can be issued. Fiat money is also susceptible to the effects on inflation from a single entity, such as a government.
Conversely, Bitcoin– a somewhat controversial but truly digital currency – claims to have solved the issue of state interference and anonymity, using a decentralised distribution system and an absolute limit of 21 million Bitcoins. Bitcoin is not backed by anything, but its value comes from its scarcity, like gold. Each coin is divisible by eight decimal places, and the currency’s supporters expect that as some coins are irretrievably lost, the value of the remaining coins will be pushed up slightly. While the decentralised nature means that no one entity can have an impact on inflation of the currency.
The currency has its detractors, which believe that Bitcoin’s lack of an underlying power base puts the currency on thin ice. But for many investors, this is exactly what attracts them. Anecdotal claims suggest that a large percentage of professional investors have bought into Bitcoin and are seeking to invest in related start-ups.
At the end of April a Seattle-based Bitcoin startup, called CoinLab secured a $500,000 investment from investors such as Silicon Valley firm Draper Associates and angel investor Geoff Entress. CoinLab’s business plan taps into the processor power made available by of free-to-play gamers, and uses that resource to ‘mine’ a Bitcoin block. When this number crunching mining is completed, the block yields up a bounty of (at present) 50 Bitcoins to the block’s owner, until the absolute limit of 21 million Bitcoins is reached.
What’s interesting in this model, which is by no means unique, is the legitimate use of gaming resources to generate real money. At present, there is a somewhat problematic grey market, whereby similar resources are used to generate digital currency in online games such as World of Warcraft and turn that into real world cash.
Gold farming is huge. In a report by the World Bank’s InfoDev unit in 2011 (Knowledge Map of the Virtual Economy), researchers estimate 75 per cent of all virtual goods sales globally are from gold farmers and the industry brought in something like $3bn in 2009. The vast majority of gold farms are based in developing countries like China, and the phenomenon has attracted the same kind of publicity as sweat shops, with imagery of banks of computers staffed by ill-paid workers who repeat the same in-game tasks in World of Warcraft for hours at a time to earn in game currency. These funds are then traded on illicit exchanges for real world money. The value comes from games players who support the system as an easy way to boost their in-game funds.
The developers of World of Warcraft have no stake in this ecosystem, but Facebook has been more canny. With the popularity of games like FarmVille spawning their own digital currencies, Facebook has jumped on the bandwagon with Facebook Credits and facilitated a number of exchanges on its platform for virtual goods and money, and takes a nice 30 per cent slice of any transactions.
The social network is cosying up to the operators, to act as a facilitator for carrier billing, and conceivably, in the future, to put Facebook Credits in place as a form of currency that can be used off-platform. But this idea follows the gift card model, and while virtual and digital money is still in the nascent stages, it seems the tracking features and lack of anonymity will be tolerated.
But it’s an evolutionary process. And as virtual currency gives way to digital currency, which may not even happen with our generation, all this tracking and user association with wallets will become less bearable and anonymity will undoubtedly be called for. There are already signs that Bitcoin and its peers (no pun intended) are finding a niche among ordinary people for everyday transactions and there’s no question that it’s more secure than cash. Whether it’s more convenient depends on mass adoption, and the old arguments about grey markets will always stand. But it’s hard to argue against the attraction of something that’s not controlled by any central authority, yet whether this comes to fruition is a journey we’ve only just started on.
Will regulators ever be able to catch up with the rate of change in the telco/tech industry?
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