Virtual Currencies, Online Transactions, and the Future of Cash

Is a cashless revolution at hand? Might we find ourselves using virtual currencies for everyday transactions in the near future?

A recent article from Fox Business written by Peter Andrew asked the question, "Is cash really going to disappear?" In light of the advantages of having cash, Andrew noted that "there's something visceral about banknotes." According to Andrew, "our relationship with dollar bills is pretty much entirely emotional and irrational." In contrast to paper money, many of us use checks, debit cards, and credit cards "that can buy us what we want without the risks of carrying quantities of cash around." And whereas "high-value bills are well worth counterfeiting, posing risks to our economy", Andrew suggested that perhaps central banks should reconsider the use of high-value paper money.

With alternative forms of everyday currency in mind, Andrew discussed that "both MasterCard MA and Visa V already have significant installed bases of payment terminals that allow you to wave your enabled card or smartphone near the device to complete a transaction." Andrew continued, "For small-value purchases, these may not need PINs or signatures, thus actually reducing checkout lines in stores as clerks don't have to make change." Aside from retail stores, public transit networks are also making use of this new technology.

In terms of interpersonal transactions, Andrew discussed how Barclays BCS has recently "introduced Pingit for its UK customers and their friends". Andrew: "For now, only Barclays customers can send money...but anyone with any bank account can receive it. You just download an app onto your smartphone, register on the website, and send or receive cash." Andrew suggested that US banks will probably be offering similar services in the near future.

Andrew went on to discuss virtual currencies that "many Americans have already grown used to" over the past several years. Examples of such virtual currencies include Bitcoin, Facebook Credits, Second Life Linden Dollars, and World of Warcraft Gold. For Andrew, the phenomenon of virtual currencies raises the question: "Are all these helping to get us used to living without cash?" Andrew discussed that "we could become a cashless society within a few short years." Andrew continued, "All the necessary technology is already available." As for what is preventing this cashless revolution from becoming the norm? "Our emotional attachment to banknotes and coins, and the unwillingness of some of us to embrace change." That being the case, Andrew concluded in that "there's a good chance that one day during your lifetime you may suddenly realize that you haven't seen a bill or a quarter for months."

In June 2011, a post from Steven Levitt and Stephen Dubner's Freakonomics blog explored the question of whether the cashless revolution will wipe out panhandling. Dubner commented on the idea, "If we do ever get truly cashless, presumably you could transfer money from your digital wallet to a panhandler's digital wallet." As for whether a panhandler would be sophisticated and tech-savvy enough to have a digital wallet, Dubner noted that "if they are ubiquitous, the cost of a digital wallet itself would likely be near (or even below?) zero." Of course, regarding technological development, digital wallets, and panhandlers, I am reminded of the verse from Deuteronomy, "There will always be poor people in the land." Dubner also commented that personally, he would be happy to not have to deal with cash: "It's dirty, inefficient, and produces a lot of troublesome by-products."

Many traders are familiar with issues related to the US dollar and the substantial gains in silver and gold over the past several years. In this way, it is interesting to compare virtual currencies with the US dollar -- as the Internet seems to lack a "gold standard" with respect to virtual currencies. For example, with the Second Life Linden dollar, the exchange rate between Linden dollars and US dollars can fluctuate. Currently, one US dollar is roughly equal to 265 Linden dollars. That being the case, Linden Lab has ultimate authority over Second Life's economy. In this way, Second Life could be perceived as being a sort of fiat currency scheme where the currency could be arbitrarily manipulated at will -- not the most solid model for a viable, stable currency in the marketplace.

Among the "eight well-known virtual currencies" discussed in the aforementioned Fox Business article, Andrew mentioned Bitcoin, Facebook credits, and World of Warcraft gold. I have some reservations regarding Bitcoin owing to historical trends and speculation with the virtual currency. At one point, one Bitcoin was worth as much as $33 and fell to $3 in a matter of months. Some have suggested that Bitcoins may contribute to money laundering and/or illegal transactions. It would appear that there are formidable obstacles (in terms of value and reputation) in the path of Bitcoin's becoming the digital/virtual "gold standard" currency of the future.

As for Facebook Credits, I've never used them, I've never heard of anyone I know using them, and I don't know if anyone I know has ever used them. Facebook Credits sound like an interesting virtual currency, but as with the entire Facebook phenomenon, I cannot help but have my doubts. In light of the new features on Facebook and historical issues with social networks, though I could see Facebook Credits somehow becoming a somewhat useful virtual currency in the context of Facebook applications, for various reasons I cannot see them becoming practical outside of the realm of Facebook. Why? In so many words, it's because when people sign into and use Facebook, they're normally not doing so with the intention of spending money. Facebook seems to be more of a "friendly" environment and less of a "business" environment.

Along the same lines as Facebook Credits, outside of the realm(s) of World of Warcraft, I do not see World of Warcraft gold becoming a "gold standard" with respect to virtual currencies. As with Facebook, there may be generational considerations to take into account in terms of cultural appeal with respect to a virtual currency based on a video game.

In contrast to the abovementioned virtual currencies, I could see a digital currency coming about based out of a website like Google GOOG or Amazon.com AMZN that could take the lead in becoming a "gold standard" with respect to online transactions that deal in virtual currencies. In the image for this article I've provided hypothetical, parodical logos for a "Google Bux" currency and an "Amazon Zen" currency ("zen" being a subtle play on the word "Amazon" and the word "yen" as a currency). In contrast to Bitcoin or Linden dollars, such a currency may be able to maintain stability without being overrun with out-of-control speculation or arbitrary manipulation. Obviously, were a corporation like Google to issue its own digital currency, in the beginning there may be a rush to own the currency owing to personal or social interest -- as many may want to "collect" Google Bux or Amazon Zen.

Further, a corporation like Google or Amazon.com would have the advantage of already being a familiar household name whereas consumers may be comfortable in using the website for business transactions. For Amazon.com, a virtual currency may have advantages similar to local currencies (like Ithaca Hours or BerkShares) whereby a product that may be US$35 may be offered at a discounted rate at Z. 30.00. "You can purchase this book for US$17.99 or you can enroll in Amazon.com Zen and pay only Z. 14.99!" Whereas such a website could offer giftcards specifically denominated in the virtual currency, the system could offer benefits for both the website and consumers. Thus, even if Z. 1.00 is equal to US$1, one might find more online deals in a gift card worth Z. 50.00 than in a gift card worth US$50. Given the respective stability of a websites like Google and Amazon.com (that are not online fly-by-night operations), such hypothetical virtual currencies would also come with the awareness that they are backed by financially-healthy corporate entities. This fact could also provide marketability in speculating and trading on such virtual currencies (or even ETFs or other securities based on such currencies) thereby opening up new, innovative markets for currency trading.

In comparison to social networking websites, individuals may feel a greater need to use a website like Google on a daily basis. Whereas Facebook is used mainly for connecting with family and friends, a website like Google can be used in general everyday contexts. In contrast to Facebook and World of Warcraft virtual currencies, a virtual currency issued by Google would have cultural advantages in terms of appealing to most citizens without carrying with it social implications.

Interestingly enough, Yahoo! News' Natt Garun had a recent article on how "Google considered the possibility of creating its own currency called Google Bucks, much to the likes of the Bitcoin cash system." (I should note that I came up with the above parodical logo for such a concept prior to reading Garun's article. There appears to be something intuitive about a hypothetical "Google Bucks" currency.) According to Garun, "the [Google Bucks] project was eventually nixed because of the various laws about currency in different parts of the world which would deem the system illegal." Even further, "The concept would also make it easier for potential money laundering scandals." With this in mind, Garun concluded that "we can only wonder when America will have its own reliable web currency system."

Of course, one might consider a transition to a global RFID-chip-based currency, but even that concept comes with its own controversial issues and concerns. Thus, it would appear that there are significant obstacles to the establishment of a "gold standard" virtual currency for web and everyday transactions. Nevertheless, in light of the aforementioned discussion, the prospect of inflation, and Rep. Ron Paul's recent remarks before Federal Reserve Chairman Ben Bernanke regarding allowing Americans to use alternative currencies, there appears to be a growing market for virtual currencies for everyday transactions. Though a "gold standard" for virtual currencies appears to be absent from the contemporary marketplace, perhaps one day in the near future such a virtual currency will exist.