Virtual Money Revolution: currency in the digital age

Private currencies have always existed, from notes printed by individual banks to the S&H Green Stamps that consumers once redeemed for household items. Today’s economy has seen an explosion of new forms of monetary exchange not created by the federal government. The virtual money market is proliferating in new and interesting ways.

Edward Castranova’s new book Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy poses some crucial questions about the ways in which we understand and use currency. As an expert on the economics of virtual worlds, founder of scholarly online game studies, and professor of telecommunications and cognitive science at Indiana University, he evaluates the current phenomenon of virtual currencies, and looks at what it will mean politically, legally and economically to own things such as the ‘bitcoin’ in the future. In doing so, he provides a fascinating, often surprising discourse on the meaning of money itself – what it is, what we think it is, and how we relate to it on an emotional level.

Virtual money

Bitcoin: currency in the digital age

In this interview with Edward Castronova, he explains the potential affect of virtual currencies

INTERVIEWER

What are virtual currencies? Have they existed for a while or are they new?

CASTRONOVA

Virtual currencies are about 30 years old, or 30,000 years old, depending on how you think about it. We know that early Cro-Magnons traded with shells, objects that, hundreds of miles from any ocean, could only have had symbolic value. Digital virtual currencies came into being in the mid-1980s, with the first network multiplayer games.

INTERVIEWER

How are virtual currencies different than ‘real’ money?

CASTRONOVA

They’re not that different. Most real money is just bits in a database, just like virtual currencies. The difference is in who owns the database. With real money, banks own the database; with virtual money, it can be anybody – often a game company, but sometimes just a private person. Real money is managed by government actors and the banking sector; virtual money is managed by the people who develop the monetary software.

INTERVIEWER

What is Bitcoin?

CASTRONOVA

Bitcoin is a private currency that has no human manager. It operates on a peer-to-peer basis; everyone who has the bitcoin software can trade coins. The software is used to validate transactions and even to let people ‘mine’ for new bitcoins.

INTERVIEWER

How do you buy Bitcoin? Do you have to be a gamer to use it?

CASTRONOVA

Just go to bitcoin.org and download the software. It’s about the same complexity as working with your bank’s ‘pay my bills’ function.

INTERVIEWER

Can you treat Bitcoin like an investment and make money?

CASTRONOVA

Yes. You can take dollars and use them to buy bitcoins. So can everyone else. As a result, there is an active ‘foreign’ exchange market between dollars and bitcoins. If you use dollars to buy bitcoins when they are cheap, and then sell them back into dollars when they are expensive, you will make money. But good luck with that. Bitcoin values fluctuate rapidly. It’s a risky play.

INTERVIEWER

Bitcoin has been attached to many negative news stories, such as facing accusations of being used to launder drug money, and the bankruptcy filing of Mt.Gox, which was a digital exchange for Bitcoin. With all these problems, should Bitcoin worry me?

CASTRONOVA

No, bitcoin is not the worry. Virtual currency is the worry. Bitcoin shows us that anyone can make virtual money. Whatever is good or bad about bitcoin will fade away as soon as someone creates the virtual currency that explodes all over the net. Just as Facebook exploded from a mix that included MySpace, Orkutt, and Friendster, some virtual currency will explode out of the mix that bitcoin is creating. There are already several other cryptocurrencies that approach things in a slightly different way. One of them will truly take off. That is what causes worries; it also brings hope. Many people feel that the economy is too regulated; an economy based on cruptocurrencies won’t be. At the same time, many people feel that it is important to regulate the economy to prevent abuse, inequality, and crime; a wild money economy will heighten all those problems. My main concern is with the state in general. We all sense that the state’s power is weakening under the heavy burdens of the information revolution, the decay of core social institutions like the family, intractable problems like global warming. Wildcat currency can only make the state weaker. It’s hard to tax a completely peer-to-peer economy. Without tax revenues, what will the state do?

INTERVIEWER

Are these virtual currencies legal: can people just invent money?

CASTRONOVA

Yes. You cannot invent money that looks and feels like real money; that’s counterfeiting. But you can invent a fake money and use it if you want. It’s been quite common historically. Frequent Flyer Miles, Green Stamps, company money. In the depression, restaurants used to issue coins usable locally; I have one such coin for 25 cents – a lot of money back then – which is good at ‘Ted’s Place’ in Durand, Michigan. In the 19th century, farmers sometimes issued their own money because the smallest official bill was $1 – much too large.

INTERVIEWER

Do wildcat monies create risks by creating unstable currency systems? Does this pose dangers on a larger scale to our economy?

CASTRONOVA

Unregulated currencies are extremely unstable. What really makes money tick is faith. We accept money from others if and only if we are confident that others will accept it from us. That confidence can break down; watch the bank run scenes in Mary Poppins or It’s a Wonderful Life to see how. It used to be pretty common for money to lose value from time to time. Since 1950, though, governments have done a very good job of sustaining our faith that the dollars we receive today will be acceptable to others tomorrow. With virtual currencies, though, we will once again live in a world where nobody knows exactly how confident they should be in the money they are getting. It will be a bit like the stock market, where we are usually advised to select a broad portfolio, because any given stock can crash at any time.

INTERVIEWER

Where is wildcat currency headed? What’s next?

CASTRONOVA

Virtual currency is where social networking was in 2005. A bunch of systems are cropping up, and one of them will take off. Unlike social networking, the emergence of a truly powerful non-state currency will ignite a rather large policy and political struggle. In those debates, we will establish a stance toward not only virtual money, but virtual phenomena in general. We’re about to have a big debate about how to respond when technology turns virtual things into real ones.

INTERVIEWER

How should the government respond? The IRS just made a ruling that Bitcoin should be treated as property but not currency.  Is this a step in the right direction?

CASTRONOVA

In the short term, it saves a lot of trouble. Many regulations and laws would have to be written if bitcoin were accepted as a formal currency of the United States. But in the long run, such a ruling won’t make any difference. Bitcoin is money. The state can’t turn something into not-money just by saying so. If the whole country wanted to start using cigarettes as money – this happens all the time in prisons and PoW camps – then cigarettes will be money no matter what the government says.

INTERVIEWER

Are there any concrete policies you recommend?

CASTRONOVA

Above all, the government should take care to treat apples like apples and oranges like oranges. There are many virtual entities growing up out there on the internet. Some of them, like bitcoin, are quite serious and should be treated as elements of the real world. Others, however, only have value because they are not part of the real world. Just as it is a mistake to treat bitcoin like play money, it is a mistake to treat play money like real money. If a game company wants their game to have gold coins, they should be allowed to do that without fear of taxation and regulation. But if a bank wants to grease its real-world trading network with a virtual currency, they should expect to undergo government supervision. I hope the government is able to distinguish the playing of games from the performance of real and serious work.

Virtual money

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