Saturday, June 5, 2010

The future of money - Virtual currencies?

Facebook seems poised to launch a virtual currency of its own sometime in the next few months. Twitter has flirted with the concept as well. Games like Second Life and World of Warcraft already have well-entrenched virtual currency systems which can be exchanged (with various degrees of legality) on the market for real currencies.

As we do more and more of our business online, it seems very likely that we will conduct more of our transactions in a currency other than the familiar dollars or euros. If a virtual currency became ubiquitous enough, we might even see real-world retailers accepting payments in these currencies.

This trend alarms me. As I see it, it poses some grave economic dangers not unlike the problems Greece is facing right now as it struggles under the weight of a currency over which it has no control. The Federal Reserve is kept in check by the President and the Senate, who appoint and confirm the board of governors, respectively. Thus, its incentives are largely in line with the public’s goals. But its effectiveness is only as strong as its ability to control the amount of money in our economy. If we adopted a virtual currency en masse, our monetary policy could be decided by a large corporation with no public accountability. I shudder to think of the economic ramifications; a corporation would not have the same incentives as the Federal Reserve. For example, it would have no reason to cut interest rates during a recession to fight unemployment.

It seems like a good idea for nations to tightly regulate any emerging virtual currencies, lest they find their own currency supplanted by corporate competition. One useful regulation would be to limit the use of virtual currencies to the company on which they originated. Want to use Facebook Credits? Fine, as long as you don’t use them anywhere other than on Facebook. Prefer Linden Dollars? Have fun, but don’t even think about spending them outside of Second Life. This restriction would prevent any virtual currency from becoming ubiquitous enough to challenge the supremacy of real-world currencies.

It is better to get started now to nip this in the bud before it grows large enough to become a serious economic threat. Ultimately, the future is what we make of it. Just because virtual currencies will likely become ubiquitous if left unregulated does not mean that no other alternatives are available.

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