One of the most unexpected and interesting effects of the Cyprus crisis has been to shed light on the emerging role, which they will increasingly play, of virtual currencies, in the staggering degree of change in modern finance, for better or for worse.
Created over twenty years ago, their primary role was to allow the granting of specific goods, made available through fidelity programs (Award Miles); and then to allow a computer player to buy weapons for a fighting game or accessories for a building game.
These virtual currencies can be obtained as a reward for progress in the game or by acquiring them from a seller against real-world currency. They are rarely transferable (I cannot give my miles to whoever I want) and even less usable when buying elsewhere other than on a specific list of suppliers, except by the establishment of a network of several suppliers of loyalty points among themselves and with the credit card companies.
What is at stake this week with one of them, Bitcoin, is particularly interesting. First described in 2009 by an unknown individual, with a Japanese pseudonym, Satoshi Nakamoto, the bitcoin trades without charge versus the USD, using Peer to Peer, (especially on sites like BitPay and Mt.Gox) with fluctuations in the dollar value of bitcoin. It allows to buy goods on a large number of video games, at more than 1000 cyber merchants (the blogging site WordPress, the domain registrar Namecheap), in hotels, restaurants and even at Amazon, using the Paypal model. The monetary base of the bitcoin network seems to stand at over $1 billion USD today. It is issued in favor of those who are willing to take charge of a portion of the calculations needed to validate the transactions by using an open-source program. The network is programmed to increase the money supply until the total number of bitcoins reaches a hard limit of 21 million bitcoins during the year 2140, which will be worth, at the current exchange rate, more than $2 billion.
This system provides a huge opportunity for those seeking new means of payment, especially where there is no banking system. Kenya has already set parallel currencies such as the M-Pesa, as a competitor to PayPal, and Western Union.
However, these currencies open the door to two dangerous abuses, that we already know in the rest of the financial system:
First, it is a place of extreme speculation: at the end of 2011, the price of bitcoin rose from $2 to $30 within a few days, to hit a low of $14. Very recently, on 10 April 2013, in the midst of the Cyprus crisis, it exploded again at $266 (probably in an attempt to launder some of the questionable money placed in the banks of the island) and then to hit very quickly a low of $100.
Then, its anonymity encourages its use for criminal purposes such as trade in illicit drugs, trade in arms and other trafficking of sexual services.
Moreover, these currencies reveal that monetary creation is no longer the monopoly of states. They can even be created by companies, local communities, NGOs, terrorist movements.
Money is becoming a commodity just as any other commodity. If we do not regulate these instruments, the worst is certain. If we tame them, they can be a source of new abundance.
j@attali.com