Most of the world’s money consists of electronic ledger entries that happen to be backed by one central bank or another. At need, they may be turned into paper inscribed with promises to pay the bearer a certain sum. If someone brandishes one of those pieces of paper at a central bank governor and demands redemption, he would merely exchange it for a similar piece of paper. The magic of a currency is that so long as people use it to exchange goods and services requiring real resources to produce, it has value.
Given the nature of central bankers’ promises, is the backing of a sovereign authority really required to create a successful currency? The question has been asked many times, notably by Hayek and Friedman. Now, answers from cyberspace suggest that it may not, in fact, be necessary. Many virtual currencies are in use on the interwebs as media of exchange for an array of goods and services. These can be converted to each other, and into “real” currencies. The 3-D virtual world, Second Life (which was developed by Linden Labs) runs on a currency called the Linden dollar (L$). A small commission on L$ transactions adds up to over $100 million in revenues for Linden Labs. Most massively multiplayer online games (MMORPGs), such as World of Warcraft or The Sims Online, also use virtual currencies. These can be exchanged for various virtual goods, or for dollars, won and euros. There was a recent scandal when it was discovered that prisoners in Chinese labour camps were being forced to play MMORPGs to generate virtual credits sold for dollars. Some such virtual currencies are administered by the site concerned. Other sites use the Bitcoin, an open-source currency administered and controlled by a peer-to-peer network. Singapore-based First Meta is the pioneer among virtual currency exchanges, which cash out virtual currencies for real-world cash. Auctioneer eBay also carries extensive virtual asset listings, auctioned for real cash.
The scale and breadth of virtually-denominated transactions is increasing. There is also more integration of virtual economies with the real world. Advertisers, for example, offer surfers virtual cash to watch advertisements online. The market research industry pays online survey responders in virtual cash. The pornography industry offers virtual credits redeemable in cybersex minutes. But Facebook may be a game-changer due to its sheer scale. The social network has over 900 million users — close to one-sixth of the global population. Its virtual currency, FB Credits, is available in 20-odd real currencies, at an exchange rate of about 10 FBC = 1 US dollar. FBC is popular among gamers across the Net. Developers like Zynga, Playfish, CrowdStar, Digital Chocolate, PopCap and Arkadium all use FB Credits. People have been known to pay each other in FBC for cross-border transactions, such as an Indian hiring a bedsit in France. Some coffee houses in Silicon Valley accept FBC. Post-IPO, Facebook is exploring the possibility of expanding its virtual economy by allowing a wider range of goods and services, perhaps including mainstream personal electronic products, fashion items, consumer goods, and so on, to be traded or sold onsite in FBC-denominated transactions. At some stage, the taxmen will undoubtedly get more interested and thus, reduce the current frictionless convenience of virtual transactions. Nevertheless, the virtual economy is already too large and too globalised to be derailed.