Virtual Currency Gets Real

Will Facebook Credits and other social scrip challenge government-backed currencies?

3 min read
Facebook credits

Virtual currency is what you use to pay for a virtual tractor for your virtual farm or for a healing elixir for your avatar. But the market for digital scrip is expanding, leading some to speculate that virtual currencies will one day grow so large that they’ll have a big effect on real-world economies. Opinions are split about whether that will be a good thing or a bad thing.

What’s beyond dispute is the fact that business is booming. Revenues from the sale of virtual goods in online games and social networks is expected to rise to an estimated US $2.4 billion this year in the United States alone—up a good 40 percent over last year, according to researchers at Javelin Strategy & Research, based in Pleasanton, Calif. Some estimates suggest the global market could be 10 times as big.

One of the big drivers of this growth is Facebook, which now boasts 
more than 900 million users. Last year the social network mandated that 
Facebook games use its own currency—Facebook Credits—when accepting
 payments. So far, the currency’s utility is limited. Facebook Credits can be purchased using dozens of currencies, but they can’t easily be converted to cash. So, for example, you can use them to buy that virtual tractor in a Facebook game or rent a movie, but you can’t send them to your friends as a gift or pay for something in a private transaction. And the app developers who receive Facebook Credits are charged a steep premium—Facebook skims 30 percent off each transaction, roughly 10 times as much as what credit card companies charge U.S. merchants.

But the emergence of Facebook Credits highlights a changing landscape. “Virtual currencies are no longer isolated play-money systems,” says Edward Castronova, a professor of telecommunications and cognitive science at Indiana University, in Bloomington, who studies the economies of virtual worlds. “I think it’s just a matter of time before Facebook Credits—or something like them—break free of cyberspace and have a big effect on the economy.”

If virtual currency continues to grow, there may be some reason for concern, says Beth Robertson, Javelin’s director of payments research. First, the international nature of virtual currency could make it fairly easy to launder money. Second, because they are privately managed, virtual-money systems could present an alternate route for trading sovereign currencies by exchanging, say, dollars for World of Warcraft Gold and then World of Warcraft Gold for yen. If an exchange rate is attractive enough, it could cause a flood of trading through a virtual venue, resulting in the rapid devaluation of a government-issued currency. “At the moment, virtual currencies aren’t sufficiently big to destabilize any particular economy, but if [the industry] grows rapidly, it could have the potential to do that,” Robertson says.

The growth of virtual currency has already driven some new regulation. In 2009, an explosion in the trade of prepaid cards for online services and the selling of gaming currency prompted China’s Ministry of Culture and Ministry of Commerce to issue a rule banning the exchange of virtual currency for real goods and services.

But it’s unclear how big virtual currency will get. One key limitation is trustworthiness. “Right now most companies treat virtual currency as something that you have a license to, and if your account is terminated, your license is terminated, and they don’t have to pay you the value of it,” says James Gatto, a partner at the law firm Pillsbury Winthrop Shaw Pittman. The question of ownership is still a new one for the courts. “There’s just a whole host of unresolved legal issues that relate to this area,” he says.

There is also the issue of utility. Unless a law is passed that transforms a virtual currency into legal tender, companies and individuals won’t be obligated to accept it as a form of payment. The chances of such legislative changes occurring are slight, Gatto says: “I think virtual currency will continue to be used as it’s currently used, at least for the foreseeable future.”

But even if virtual currencies can never easily be used to pay for a cup of coffee or settle a debt, they still perform many of money’s most common functions. And all signs suggest that their presence in our lives—as a convenient and relatively inexpensive way to make micropayments—will only grow.

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