Is virtual money real today?

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During the late 90’s a number of innovative payment schemes such as virtual currencies (Beenz, Flooz), tokenized payments and web payment cards (not affiliated to schemes) emerged. While some of these survive, such as Tencent QQ coins in China, they are now viewed by regulators as distorting physical economies and are currently under increasing regulatory scrutiny. The anonymous nature of some of these products also has the potential to circumnavigate AML systems, despite the lack of guarantee of value retrieval at the point of redemption. Consequently the future is unclear for virtual currencies.

However, the early experiments with virtual currencies have recently led to the appearance of ‘virtual economies’ within online communities and massively multi player online role-playing games (MMORPGs) such as World of Warcraft and Second Life. Designed to make the games more like real life with the ability to trade and earn, in less well policed examples of MMORPGs, the virtual economies use virtual currencies, pegged or traded directly against genuine currencies, which then are apparently used for payment of goods or services in the real world.

The biggest example is the virtual economy in Second Life, an online virtual reality running since 2005. Using a currency called Linden Dollar (L$), which is traded against real-world currencies via an in-game currency exchange. The system allows acquisition of virtual real-estate, virtual businesses and virtual employment. Exempted from European Electronic Money legislation, AML and TF by officially describing the currency as a service, the Virtual Economy is home to real-world businesses trading and claims to be profitable for many of its residents. The system currently processes user-to-user transactions valuing 50 million USD every month.  

Another new development is the virtual currency world is the creation of currency exchanges such as Currency Connect. Working in a similar way to real-life FX systems, these sites give customers the ability to exchange the virtual currency of one site (e.g. Facebook credits) for those of another (e.g. IMVU credits) and thus make the virtual market more interoperable. Potentially this could create a true rivalry to cash as the system is oblique while essentially supporting transition of cash outwith the financial system (as do bank notes). There is also scope for new virtual FX traders to appear with the potential to make revenues from virtual currency trading and return of these currencies to natural currencies – for example, 15 Facebook credits cost 1,11 EUR in Belgium, yet 1,50 USD, which at today’s exchange rate (from is 1,12 EUR – OK, it’s not a stunning difference, but in volumes it could be significant. And perhaps more interesting for the traders, this is as yet unregulated territory…
Update – Comment received via LinkedIn:
“I do not really see how virtual currencies can be a potential rival to virtual currencies, as the latter is only to be used in an online environment where cash has no role (electronic money on the other hand is). Is am I making a vocabulary mistake here, as cash being real money?”

Response: The big issue in China with Tencent QQ coins was that they were orignally designed for buying virtual and digital goods within the Tencent environment (avatar items, ringtones, funky icons…) but people started selling, for example, virtual mobile phones, which they then shipped as physical goods (and other more illicit items allegedly) so payment was made using the virtual currency. QQ coins were tied 1:1 with the remnimbi which made trade easier and kept the transactions invisible to the authorities (particularly tax!).


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