The Emergence of Digital Currency

By PF Wilson - 01/12/2011 11:00:00

People have been shopping and banking online for years, and more recently people have been getting paid via the Internet. With so much financially related activity online, the inception and use of digital currency was inevitable. Indeed according to Ian Swanson, founder and chief executive of Sometrics, virtual transactions have increased 61% in the past three years alone.^[1]That increase in activity was part of what motivated American Express (AMEX) to purchase Sometrics, a company that assists video game manufacturers build virtual currencies and commerce into their games. AMEX hopes the $30 million acquisition will help them establish a beachhead in the world of digital currency, and hopes to move the concept into other areas. Shortly after purchasing Sometrics, AMEX filed a patent for a system allowing consumers to spend loyalty rewards as a currency.^[2]

 

Digital currency encompasses everything from the aforementioned virtual funds used in online games, to reward points given by merchants, to digital money such as Bitcoin. Facebook has its own digital currency, which is in the process of moving beyond the social network allowing users to spend their digital money on third party websites. Then there’s Coffee & Power, a start-up that connects people to real jobs that pay in digital currency.^[3] As mainstream financial institutions encourage customers to conduct transactions online, we may be seeing the decline of hard currency altogether, especially given the increasing amount of time people are spending on the Internet.

 

However, most people aren’t on the Internet every waking moment-- not yet at least. The outside world is still there, and you need real money if you’re going to buy things in it. Or do you? More and more merchants are accepting debit and credit cards. Stores and restaurants have their own cards that can be preloaded via their websites. Starbucks is a good example. Some have even started accepting Bitcoin, which can be exchanged for dollars and Euros and vice versa.

 

The main challenges to digital currency appear to be ease of use, and the ability to exchange one form of digital currency for another. The exchange problem, particularly for Bitcoin, has stemmed from a rivalry with PayPal. The dominant online pay service has blocked the use of Bitcoin, and credit card companies are starting to follow suit, mostly over legal issues. A decentralized currency like Bitcoin is very attractive to criminals. In fact, it was unscrupulous activity that brought down another digital currency, E-Gold. Hackers too have been attracted to Bitcoin, with even MAC users being vulnerable to theft.^[4]

 

While the security and legal issues seem to be Bitcoin’s biggest problems, there’s also the difficulty of getting enough people to use them. Robert Mann, a professor at Columbia law school, told NPR’s Planet Money that within ten years Bitcoins won’t exist.^[5]

 

The future for other forms of digital currency though, seems to be pretty rosy. Consumers feel very comfortable using gift cards with online merchants and online banking continues to gain traction.

 

Just when we’ll have the ability to truly move seamlessly between digital and real currency is unclear, but all indications are that such a capability is not far off.

 

References

 

[1] Button, Keith. “Virtual Currencies, Real Potential.” AmericanBanker.com. Web. 11-16-11.<http://www.americanbanker.com/btn/24_11/virtual-currencies-real-potential-1043673-1.html>

 

[2] “American Express files virtual currency patent.” Finextra.com. Web 11-16-11 <http://www.finextra.com/news/fullstory.aspx?newsitemid=23113>

 

[3] Duffy, Jill. “Real World Workers Get Virtual Payment via New Startup.” PCMag.com. Web. 11-16-11. <http://www.pcmag.com/article2/0,2817,2395704,00.asp#fbid=mhFEvPzR9l->

 

[4] Yin, Sara. “Mac OS X Trojan Leeches Off Your GPU to Mine Bitcoins.” PCMag.com. Web. 11-16-11. <http://www.pcmag.com/article2/0,2817,2395624,00.asp#fbid=mhFEvPzR9l- >

 

[5]  Goldstein, Jacob and Kestenbaum, David. “What is Bitcoin?” NPR.org. Web 11-17-11. <http://www.npr.org/blogs/money/2011/08/24/138673630/what-is-bitcoin>