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Thursday, April 16, 2009

Virtual Currency Meets Main Street

Several months ago I wrote a blog item about the emergence of a virtual currency. I received a fair amount of criticism about this prediction. I think the term "your are crazy" was used a few times. Recently, some of my early critics have reached out to me and admitted that I might actually be right. I do not know if you have been following the accelerated rate of virtual currency trading and virtual item sales but it has been intense in the last several months. Please read the information on the following links Communities Print Their Own Currency, Poker Goes Virtual, ChangYou, Investment In Virtual Worlds, SpareChange, MyCoke, Viximo, Habbo. This is only a small sample of the buzz about virtual currency and virtual items.
My current radical thinking is that the convergence of main street and wall street businesses with the virtual world and gaming environments is going to tip this phenomena over the edge and bring about a formal business exchange process involving virtual currency and traditional currency. This is the next step in the march towards a single virtual currency that acts as a trading currency bridging the gap between disparate businesses and traditional currency.

So Why Is This Happening And Why Are Traditional Businesses Going To Jump In?

Traditional Businesses Have Been Issuing And Using Virtual Currency For A Long Time - We seem to forget that airlines, hotels and credit cards companies have been issuing virtual currency for years trading in virtual currency well before the virtual world even existed. We do not think about frequent flyer points as virtual currency but they are. In fact, they are rewards for a job well done in the flying game. The most proficient road warriors receive points for their dedication and hard work.

Main Street Virtual Currency Trading History - Airlines, hotels and credit card companies have a history of trading virtual currencies within exclusive clubs and partnerships. If you own the virtual currency of a company in the partnership you can trade it for another company's currency.

Virtual Currency Monetary Valuation - The trade of virtual currency within traditional company networks has established a real monetary value for virtual currency. Points exchanged for real items such as airline seats, hotel rooms, camera's and cloths establishes a traditional monetary value for the virtual currency. These valuations float and change as the businesses change and the relative value of the items change. Essentially, these companies have created an organic and informal trading and valuation platform for virtual items and virtual currencies.

The Gamer Generation - I know many gamers and it is striking to me how the demographics for this community are changing. We are accustomed to thinking of gamers as people between the ages of 12 and 18. Not so anymore. Video games, MMOG and MMOGRP games have been around for a long time breeding an entire population of adults that have played these games, understand virtual items and virtual currency.

Virtual Items Become Real Items - The more you play games with virtual items as an essential part of the game the more you consider these items to be no different then a real sword, pair of shoes or poker chips. A person that engages in these games on a regular basis does not think that there is any fundamental difference between a physical item and a virtual one. They both have value and are used for a specific purpose. This may sound subtle but it is very important. People that play games involving virtual items and virtual currency inherently understand the value of virtual currency.

Traditional Companies Go Virtual - I was at a social gaming meet up in San Francisco recently and had the good fortune to sit next to a person building virtual worlds for traditional companies like Coke, Disney, NBC, etc. These companies have bought into the importance of providing virtual experiences for their consumers thus bridging the gap between their brick and mortar operations and the virtual world.

The Dollar Is A Virtual Currency - The dollar and many other popular real trading currencies have no physical backing. The US went off the gold standard years ago. The dollar's value is based on its trading power relative to other currencies. Scary as it sounds without this trading value it would have no value at all. Is the dollar a virtual currency?

Online Payment Option Limitations - In many parts of the world it is a difficult to buy things online with traditional currency and traditional payment vehicles such as credit cards. The phenomenal growth of virtual worlds, virtual items and virtual currency in China is directly related to the lack of good ways to buy and trade things online in a traditional manner. This has spawned the need for a different way of transacting online that inevitably drives the adoption of online specific trading and currency models.

The World Economy Facilitates The Use Of Virtual Currency - You may not have dollars, yen or rubles but you most likely have virtual currency in some form. If you do not it appears that some outfits are allowing you to create and trade some. This is all about the failure of the traditional economy to put traditional currency into peoples pockets and the large stores of point and virtual currency amassed by gamers and consumers. Why doesn't someone take advantage of this and let people use these points to drive customers to their properties. provide discounts on items, etc? What a great way to stimulate the world economy!!!

How Will This Evolve?

1. )Bridge The Gap Between Traditional and New Age Virtual Currency Issuers -I think what will happen first is companies like Delta Airlines or Disney agree to exchange virtual points with game companies like World Of Warcraft or Zynga. This seems to be relatively easy and beneficial to both worlds.

If I am not mistaken frequent flier points are considered to be an accounts payable and therefore a liability on the balance sheet. This should motivate an airline to encourage their patrons to use as many of their points as possible. If they can't take a trip then play a game online or buy a virtual item.

2.) Networks of Virtual Currency Trading Partners Emerge - What a great way to increase traffic to your gaming property. Many games sites are hungry for players and more content to provide stickiness. Why not form a coalition of game and other virtual currency sites to increase your traffic and provide new and fresh content for your consumers. The way in is to trade one currency for another increasing the overall value of all of the currencies. In many ways it becomes a game in and of itself.

3.) Networks Grow In Volume And Complexity - At some point the complexity of trading virtual and traditional currencies is going to require an intermediary step between the trading partners. Just the handshaking alone will require a common API and some standard rules so everyone is not wasting their time doing their own and creating barriers of entry in the process. It could be that one of the currency issuing companies emerges as this broker.

4.) A New Virtual Currency Trading Currency Is Born - The sophistication and volume of trading will result in the creation of an intermediary virtual currency that all currencies are converted into and out of. This would make valuation easier and more understandable.

5.) The Intermediary Trading Virtual Currency Becomes A Standalone Currency - In the final step the intermediary currency now becomes a currency with its own value and companies start using this currency as their purchase and sale currency avoiding the need to create their own.
In conclusion, the notion of a universal virtual currency could be perceived as Utopian and perhaps unachievable because of all the complexities, laws and business forces that exist in the world today. However, one should consider the business need to merge the virtual world with the physical world. In fact, the virtual world may become a larger part of GNP then most people can image. We currently do not have a good way to universally trade and value this currency. Some form of common trading currency is going to be required to make this happen.

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Yolto.com said...

I agree. :)
Thank you for the great post.

BTW, airline miles were hugely devalued several times, last time after the Swiss Airlines bankruptcy (two times approx.).

Anonymous said...

The question still remains what hard asset is will the virtual currency be based on? Airline miles, game play, hotel points ect. are commodity in them selfs prone rapid shifts.

Lenny Raymond said...

Good stuff!

This has already happened, at a scale big enough to draw government regulation. A couple of years ago QQ Coins became sufficiently widely accepted for the purchase of real goods (as well as 3rd party virtual goods) in China that it prompted the government to issue regulations governing the use and convertibility of virtual currencies. There are numerous other examples, from the non-game world where this has happened too (e.g. the Octopus card).

The key to a currency getting traction and liquidity is its usefulness and the likely future continuation of that usefulness; currencies like QQ Coins and WoW Gold have a great deal of intrinsic usefulness from their base games, and will be around for a good long while, making them good candidates for morphing into effectively "real" currencies. Moreover, these deep (in the trading sense) currencies are easily converted into other currencies, making them a reasonable store of value, at least in the short term, and predictably fungible.

Kevin Flood said...

This is great information. One of my linked-in followers was concerned about the regulation issue and the potential for fraud. It is good to know that a government organization has already stepped in and taken the lead.

Carl Fravel said...

Ah, finally....



- Carl Fravel