[Dave Birch] In 1660, the English Parliament passed an act forbidding the export of gold or sliver, mistakenly thinking that exporting bullion made the nation poorer. After six months, His Majesties Council of Trade were petitioning the KIng and parliament to revoke the law, since not exporting bullion had, far from making the nation richer, made the nation considerably poorer. Such is the law of unintended consequences when it comes to politicians mucking up commerce. The effect of the law had been to persuade international trade to abandon London for various continental destinations: no merchants wanted to bring gold and silver into England if they couldn't get it out again, so there was no gold or silver around to settle transactions, so trade went where there was a working means of exchange. It always does.

Money is an enabler for trade. Whether in seventeenth century England, 21st century Zimbabwe or in the World of Warcraft. If there is a means of exchange, then trade will spring up on the back of it make everyone better off. What would we need to do to bring a new means of exchange into a new space like, for example, the Internet?

More trade means more prosperity, and this is as true in the virtual world as the physical one. If we can make means of online payment simple, effective and inexpensive then we can create a genuinely new economy. This is one of the reasons why I've been so interested in the steady evolution of Facebook Credits. Some time ago, in something I was preparing for a customer, I wrote that

The news that Facebook is experimenting with a payment system is hardly unexpected, but notable nonetheless. There is an expectation that the existence of a secure and convenient micropayment scheme for Facebook users (of which there are tens of millions) will stimulate the development of a new marketplace within Facebook's "barbed wire". This seems plausible to me — in fact, if it had been up to me, I would have added a spurious green element to the proposition somehow (getting merchants and other organisations to give out Facebook credits to reward environmentally desirable behaviour) — and I hope they succeed.

Re-reading this brings a couple of questions to mind. Facebook aside, I wonder who else might enter a more competitive currency market? And why would anyone want to enter that market? It's not simply volume or value of the transactions, although goodness knows that's reason enough.

Facebook credits can be used to buy virtual gifts – such as cupcakes, toys and flowers – from the Facebook Gift Shop. Select developers may soon be able to incorporate Facebook credits into their games and applications, with Facebook getting a cut of the profits. Business Week recently reported that Zynga, creators of the Mafia Wars Facebook game, could make $100m from its virtual offerings this year, mostly from Facebook sales… only a company of Facebook's size can deliver the "brand promise" that would give a universal currency widespread appeal. Hale thinks that eventually there will be "a few dominant virtual currencies that by dint of their size become exchange currencies, just as the US dollar is to the global economy today".

[From Are online currencies finally striking gold? | Technology | The Guardian]

Well, let's hope they set their sights a little higher than that! Incidentally, I have a good friend who is totally addicted to Mafia Wars and will attest to its efficiency in converting real to virtual money. But there's something more than a transaction cut to this play.

Virtual currencies have gained popularity because they reduce two major points of friction – consumer inconvenience and merchant cost.

[From The universal currency wars are coming | VentureBeat]

Facebook isn't introducing it's own payment scheme but its own virtual currency and that is a very different opportunity. As the Bank of England will undoubtedly confirm, issuing your own currency beat issuing your own debit cards into a cocked hat.

Facebook has slowly introduced its virtual currency, Credits, to third parties over the last few years.

[From As Facebook Gears Up for Credits, Here’s the Exchange Rates for the 15 Supported Currencies ]

When I was discussing this recently, someone pointed out to me that there's no need to have another currency, because people are happy using dollars, pounds and euros. So why would anyone convert their trusted euros, backed by the full faith and credit of the European Central Bank (ECB), into Facebook Credits (or Zits, as I call them, with the ISO currency code ZIT) backed by absolutely nothing at all. That's a good point.

With faith in real-world currencies shaken by the financial crisis, perhaps virtual ones will find a more receptive mainstream audience in future.

[From Are online currencies finally striking gold? | Technology | The Guardian]

Perhaps. I think the play is more about convenience than international currency speculation though. People will use zits because they are easy, not because they are a long-term hedge against the dollar or an investment strategy to avoid volatility in international currency markets. And that's enough: if even a fraction of Facebook users shift even some of their money into zits, zits will be a big business because they will enable a huge market to spring up where none exists at present.

In Asia, such 'nanopayments' have been making big money on social networks for years. In 2007, China's Tencent raised $523million in revenue – that's four times as much as Facebook, in a country where the average monthly wage is less than $20 – with operating profits of $224million. Yet only 13 per cent of revenue came from ads. Two-thirds came from internet services like games and digital goods: 'gifts' such as virtual flowers, background music for users' profiles, virtual pets, fashion items to dress avatars in, and so on.

[From How nanopayments finally came of age | News | TechRadar UK]

Wow. That's serious money. But that's not the end of the story.

But the domination that would come from a consumer-embraced universal virtual currency is just a massive opportunity.

[From The universal currency wars are coming | VentureBeat]

Now, suppose that there are hundreds of millions of satisfied zit users out there. Let's say I'm one of them, and I'm in Greece. I want to put some money away for my pension. Should I buy a Greek government bond that will deliver a risky 5% per annum in euros, or should I buy a Facebook bond that will deliver a safe 4% per annum in zits? Provided that Facebook convinces the market that they can manage their zits properly, no problem. I'm sure an advert for the head of monetary policy for Facebook will appear in The Economist in my lifetime.

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


  1. I’d read about the 1660 Act before but I hadn’t thought of the implications – banning the export of good means that foreign merchants will never bring any gold to England, and won’t accept gold as payment for anything they sell. Behaviour economics! (Your post also got me thinking about liquidity and zits, which quite put me off my lunch.)

  2. Nice article, as always. I’ve been looking at this recently too in reference to the SEPA ePayments Framework. I’m still wondering if the ECB has missed a trick by not creating a ‘virtual euro’ that could be used on these sorts of sites.
    Worthy of note on top of your Tencent example that the Linden Dollar (L$) used in Second Life (yes, it still exists!), which according to Linden Labs is being used for over 50m USD worth of user-to-user transactions each month. The L$ also has an active currency exchange which is leading to some very interesting results.
    However, it seems to be the crossover of these virtual currencies into real economies that has got Politicians worried – particularly in China where the Tencent Q coin is pegged at 1:1 with the yuan and usable at many online retailers outside of Tencent. It’d be interesting to see what would happen if Zits were pegged directly against a major currency instead of this loose dollar tracking as they have a more global market then Tencent’s primarily China focus.

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