One simple typology could be created by beginning with distinguishing fiat and non-fiat currencies. Fiat currencies (the name comes from the Latin – remember “fiat lux”?) are currencies that are not backed by anything. Examples are World of Warcraft gold pieces (WWGs) and US Dollars (USDs). You can’t go to the Federal Reserve and ask for your dollar to be redeemed for anything other than another Federal Reserve Note (FRN, aka “greenback”) and—I admit I haven’t read the terms and conditions in exacting details—you can’t go to Blizzard and ask for your WoWGs to be redeemed in anything at all.
Fiat currencies that are issued by the central banks of nation states are the special kind of currency that we are used to calling “money”. They are like frequent-flier miles, but backed by a standing army and (in some countries) legal tender laws. So let’s call them conventional currencies. Remember how we used to think that having an airline was one of the defining characteristics of a sovereign nation, and now we don’t think that any more? We still think of having a conventional currency as being a defining characteristic of a sovereign nation. Creating it’s own currency was one of the very first things that the world’s newest sovereign nation, South Sudan, did earlier this month. Now, of course, the link was broken in Europe when the euro became the currency of multiple now-sort-of sovereign nations. But the link will surely break in another way, as we develop currencies that are not linked to sovereign nations.
As Facebook starts to host all sorts of commerce—and is now mandating the use of its currency—perhaps it’s time to stop thinking of it as a company and start thinking of it as a country.[From Facebook: Pay our way or get out – Fortune Tech]
But would you accept a fiat currency that was backed not by a sovereign nation, but by the market? Like Bitcoin? Bitcoins only have a value because people believe that they will be accepted, but there are currencies that are accepted because they are backed by something else. These are what are generically called non-fiat currencies. They are currencies that are backed – that is, they can ultimately be redeemed for something else. Broadly speaking, I have a “3Cs” model that divides these into commodity currencies, community currencies and concocted currencies.
A concocted currency is a currency that is redeemable in another currency or basket of currencies. At the national level, these are managed by currency boards: for example, in a Latin American country that has been through hyperinflation, the government might fix the local peso in terms of dollars and only issue pesos against a dollar reserve. The pesos are now backed by something that is a better store of value, even though that something isn’t backed by anything. You may also have synthetic concocted currencies, such as the Special Drawing Right (SDR) used by the World Bank or the World Currency Unit (WoCU), discussed here a couple of months ago. These are created from a basket of currencies for the purpose of reducing volatility in trade and therefore stimulating it by implementing a reliable means for deferred payment. An example might be the Brixton Pound.
A community currency is a currency that is backed by a community that doesn’t have a standing army (ie, not nation states), it’s worth being that the members of the community agree to accept it as a means of exchange in return for goods or services. Generally speaking, these communities have been quite small because the trust relationships at the heart of them don’t scale, but since the earliest days of the internet interested parties have been looking at using new technology to deliver large-scale solutions. An example might be a LETS scheme in the physical world, but more interesting examples are to be found online, where new currencies ranging from Facebook Credits to World of Warcraft gold pieces are already in use in huge and vibrant communities.
A commodity currency is a currency that is backed by a commodities or group of commodities. Any tradable commodity that has a large enough market to establish a price will do, but the better choices are commodities that cannot easily be manipulated. Precious metals are an obvious category and gold in particular is the archetype. There are some people who think that society should go back to gold as a way to achieve monetary stability (eg, Ron Paul) and there are a number of states in the US where bills are being introduced to do just that.
HR 4248 would abolish the legal tender laws, allow the establishment of private mints, and repeal capital gains taxes on gold and silver, allowing them to compete effectively as currencies[From The Monetary Future: Ron Paul Testifies on Behalf of Free Competition in Currency Act]
I’m not so sure about this, because I suspect the new economy needs new currencies, but that’s a different issue. Anyway, I think these give us something to work with, and I’m genuinely looking forward to your comments. But back to the beginning of the post. Why are we thinking about the obscure topic of currency terminology?
As I concluded in piece about Bitcoin for Prospect Magazine, there’s a discussion starting up. The future of money is on the agenda. We’re in the position of agricultural economists trying to work out the best kind of money for the industrial revolution, waiting for central banks to emerge as an institution, waiting for new technology for manufacturing coins, waiting for Isaac Newton to come along and invent the gold standard. We need to look at experiments like Bitcoin and learn from them, whether or not we think that they may be part of that future or not.
New York University media studies professor Douglas Rushkoff attributes dearth of open source currency to “centuries and centuries of programming.” Our current system of centralized monetary instruments, explains Rushkoff, dates back to the Middle Ages, when peer-to-peer economies flourished. As local currencies thrived, so did the middle class—threatening Europe’s aristocracy. Financial experts, hired by the rich to halt the threat, suggested that local currency be outlawed and replaced with a single form of money dubbed “coin of the realm.”[From Can “Complementary” Currencies Save Us From the Next Crash? | Show Me the Money | Big Think]
I don’t think Douglas is quite right with this analysis, but I understand the spirit of what he is saying. And he is not the only one saying that the “operating system for money” is broken.
Many people think that the time has come to think seriously about the next phase of monetary evolution, beginning with the nature of currecy. I am not alone in thinking that the idea of new currencies is one whose time has come in order to bring some stability to the world of money.[From Next-Gen Currencies and Banks as Utilities – Umair Haque – HarvardBusiness.org]
Now, I’ve written before about the kinds of currencies that might make sense, but the truth is this is a new subject and still in such an early phase of development that it’s really not clear what is happening.
I’ve already been approached by groups who are trying to get funding for systems to store value in renewable energy or local currencies. There’s something going on here, and I’m a long way from understanding it[From Digital Money: An eternal discussion]
Given the surge of interest in the subject—not only from cranks like me, but from government, thinks tanks and others—I created an expert panel on alternative currencies for the Digital Money Forum earlier this year, and I’m still reflecting on some of the views that emerged in the debate together with some of the discussions I got into at SXSW a month later. This made me interested in the new and hip topic of “gamification”, which I think our clients might find themselves more interested in as time goes by. If we take world of online games seriously (which I have for a few years now), this opens up some ideas about how currencies could evolve.
Consolidation – Will a handful of virtual currency/coupon providers become providers of all virtual currency/coupons? We are already seeing this with Facebook. We could see a few more “big” players step in to consolidate the market. This will help in the management of coupon, award and virtual currency accounts.[From Kevin Corner – Online Games Online Gambling Startup Fund Raising BlogKevin’s Corner: Gamification Drowning In A Sea Of Coupons, Virtual Currency And Awards]
Well, maybe, but I don’t think Facebook Credits or anything similar could do this in the mass market. Walmart Currency maybe, but not so sure about wholly virtual currencies based on importing existing ideas into the social media space. A currency based on reputation, maybe.
Virtual Currency/Coupon Exchanges – Will exchanges emerge that allow consumers to easily exchange virtual currency and coupons issued by different institutions allowing consumers to leverage coupons and currency outside of the issuing environment. The airlines have done this for years will the other issuers join in. Having a point, coupon or award only valuable within a single environment is not very useful. If exchanges emerge the issuer can still maintain an identity with the virtual currency and give the consumer more options to leverage the currency elsewhere.[From Kevin Corner – Online Games Online Gambling Startup Fund Raising BlogKevin’s Corner: Gamification Drowning In A Sea Of Coupons, Virtual Currency And Awards]
I’d say probable. Just as foreign exchange markets followed the need to trade in different currencies (although to be fair, trade is a microscopic fraction of today’s F/X) so virtual F/X markets will spring up to interconnect currency islands efficiently.
Merging Of Games And Commerce – This alternative is the most interesting with the distinction between an online game and a shopping experience disappearing. I have already seen this with a virtual world shopping experience under development. The consumer and merchant actually engages in the shopping experience as a virtual person transacting and then receiving the goods through the mail. This moves the entire shopping experience online with no offline complement except for the delivery of the good or service. Although virtual currency is issued there is no physical store experience allowing the consumer to avoid the trek to the store. It also allows for instantaneous virtual currency exchange between merchants in the online marketplace.[From Kevin Corner – Online Games Online Gambling Startup Fund Raising BlogKevin’s Corner: Gamification Drowning In A Sea Of Coupons, Virtual Currency And Awards]
This last point has, to my mind, fascinating implications, tapping the “gamification” meme. I went along to Jane McGonigal’s talk about her book “Reality is Broken” at SXSW this year and listened to some of her suggestions about the ways in which a generation raised on “games” can be engaged in conversation with the grammar of gaming and the syntax of virtual worlds. I’ve written elsewhere about how interesting it is that my kids, who have never had an economics lesson, understand money, and auctions, and trade, and futures, and all sorts of other things because of playing (primarily) “World of Warcraft”. A few years ago I helped to organise a session on money, trade and economics in virtual worlds for the CSFI and I’m sure that at the time many people saw the field as an amusing diversion, but I’ve always felt that what we insist on calling games have the germ of a genuienly new economy inside them, even if I’m not smart enough to see what that economy will look like.
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