[Dave Birch] When it comes to virtual money, as in so many things, China makes for a fascinating case study. It lacks an efficient online payment system and, together with its somewhat inflexible regulatory framework,this means that there are significant dampers on businesses ability to innovate around payment schemes. There, the results of this unfullfilled market demand has been the development of virtual currencies. These currencies, which were not originally intended for the purpose of generalised online payments, have absolutely exploded over the last few years. The key case study of TenCent is illustrative. They produced a virtual currency called QQ Coins and, as their IM platform dominates the market there, they soon achieved almost universal acceptance. Note that while TenCent has never Iallowed people to exchange the coins back for real money, QQ Coins circulate as “real” money. They are liquid because people have no concerns about the coins being accepted (a bit like Marks & Spencer’s vouchers in the UK: everyone will accept them because they know that if they don’t want to use them, someone else will).

A benchmark of the realness of virtual money is that the Chinese government has, quite reasonably, decided to begin taxing the profits made on virtual currency trading as income from the exchange of property. If in other words, if you buy coins for a dollar and sell them for two dollars, then you will be taxed just as if you’d bought a brick for a dollar and sold it for two dollars. As it happens, the use of virtual currencies to buy real world property (and, for that matter, the trading of virtual currencies) has been illegal since February 2007 when it was banned by the Chinese government. This has had virtually no impact, and the currencies and virtual property openly traded on Chinese websites. This doesn’t seem to have held back the business and the trading of virtual currency keeps on growing. It is now a $600 million business for IGE, which is only one of a number of companies offering foreign exchange services between the real and virtual worlds.

While it will undoubtedly take some time before we can judge of the long-term impact of virtual currency in the Chinese market it is already clear to me that there are certain characteristics of the virtual money marketplace which we can use to inform thinking about the direction of the new payment systems in general. First of all too much regulation hampers innovation, even when that regulation has been put forward for consumer protection. Secondly, where innovation is held back in the formal money marketplace, the Internet provides plenty of means for informal solutions to take over. Thus, the regulators should be looking at potential frameworks for positive support and management of “alternative” currencies now, not waiting until these currencies have a sizeable fraction of the market.

In the meantime, the market is continuing to develop not only through the extended use of these generalised coins but also through the trading of currencies that are specific to individual games, such as the World of Warcraft. It seems to me that there is a strong analogy between players holding multiple virtual currencies in different games and the more traditional notion of “jam jars” for coins in the physical world (and the use of multiple prepaid cards in the future — in fact the connection between prepaid cards and alternative currencies is, to my mind, a potential disruptive innovation).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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