Virtual Currencies – Where Next?

Introduction

There’s a rush and excitement around virtual currencies.  Much of it is being driven by social media giants, and the expected virtualization of everyone’s wallet that NFC will soon bring.  But which virtual currencies have the greatest potential and do these pose any threat to the fiat currency regimes of the physical world?  This article looks at these topics in more detail.

Growth

“Measured in real-world U.S. dollars, virtual transactions total $2.1 billion a year in the U.S. and $7.3 billion globally, according to Sometrics’ founder and chief executive, Ian Swanson. That is up 61% since 2008.” ~from Bank Technology News.

Many companies, not just start-ups, are getting into the virtual currency market.  Facebook, Visa, American Express and even the big banks see the possibilities of owning, controlling and growing private digital currencies.         But what’s fueling this rise?  What is everyone getting so hopped up about?

Arbitrage –  The most obvious eye popping opportunity is exemplified by the rise and fall of BitCoin.  The graphic below comes from Wired Magazine, and shows the phenomenal investment opportunity you had for in 2010.

Tax Shelters –  Corporations, the rich, pension funds, hedge funds, and others with too much money are always looking for some way to hide their capital gains from the taxman.  What better way than to invest in digital assets using a virtual digital currency?  Talk about off the books.  But wait…. is that legal?  Well it’s not regulated, at the moment, but governments around the world are aware of this phenomenon and many are watching it closely.

Deflation/Inflation Hedge –  Particularly pertinent today, the potential for fiat currency de-valuation or appreciation in the face of mounting debts and uncontrolled deficit spending has given everyone with significant wealth an interest in finding a liquid, hedge to the big 3 ( dollar, yen, euro ).  Gold has been the traditional favorite in this spot, but with gold prices soaring and the threat of a bubble looming….the need for alternatives is strong.

Power – Less obvious on the radar is the sheer power that comes from managing an entire economy’s money supply.  A currency in isolation isn’t much.  The dollar without the U.S. economy is little more than paper.  What people find valuable in the dollar is the ability to buy goods and services from the single largest economy on earth.  For that reason the dollar provides a very stable store of value and means of exchange.  Similarly if a private virtual currency were to achieve such economies of scale…..say….dominating the global internet commerce business, then one could imagine the influence available.  Even large physical economies like the EU and Japan ( and their respective central banks ) would need to listen to the issuer of such a currency.

Who Will Lead?

So there are three types of virtual currency players in the market today:

The Wildcats  – These are the Ven and Bitcoin makers ( among others ).  They’ve built their virtual currencies and are asking people to adopt it.  It’s a hard road, with little incentive to convert your hard earned dollars, euros, or yen outside of arbitrage….it seems unlikely they’ll gain wide adoption.

The Closed Social Media Economies – With a captured market that has goods only purchasable using their currencies, these companies have modeled the very structure and incentives that make our modern physical economies today.  The challenge is extending this concept outside of Facebook ( or whoever ) to other sites.  But, the base is there.

The Banks – Ah….the banks.  Long ago, private currencies were common place in Scotland and the Wild West of America.  But when a bank went belly up…so did its currency….leaving all its depositors and paper holders staring down an empty well.  Banks have a ready made market in their dealings with the wealthy, corporations, hedge funds, pension funds, etc.

The Transaction Grabbers – This is PayPal, Google, and maybe Isis. They’re seeking a sliver of the transaction fee market from their mobile payment platforms.  But there’s no reason these players couldn’t introduce a virtual currency of their own.

So which group has the highest potential?  My money would be in Google Dollars and Goldman Sachs Coins.  This isn’t to say innovative new players won’t spring up, but the transaction grabbers and the banks already have the real audience needed to leverage a virtual currency and the financial wherewithal to make it a reality.  Clout is important here.

Challenge to Fiat Currency

Private digital currencies at the moment pose no threat to the world’s central banks.  But innovation has a way of challenging commonly held assumptions….especially ones as stodgy and long standing as government issued currency.  The internet has flattened the economic landscape and opened opportunities for global domination.  The digital, internet economy is owned by no country, no government.  There are no regulations guiding which currency an e-commerce site should use.  There’s nothing to stop someone from trying to capture this global digital economy and manage its money supply.  Therein lies the opportunity for those quick enough, connected enough and risk-averse enough to realize it.

Summary

Virtual currencies are still evolving, but growing fast.  Watch for the Transaction Grabbers and Banks to start making big moves in this space as near field communication and e-wallets become ubiquitous. Historically wildcat banking thrived in the lawless west….today it is thriving in the unregulated digital frontier.

Advertisements

Stoos – Some Thoughts

Much of what has been written about Stoos is nebulous.  For those of us looking to latch onto something concrete….we’re left befuddled.  Rather than a deliberate bullet list of actions; the Stoos group posted a wishy-washy communiqué that seems more like a summary of their meeting and a regurgitation of their personal feelings and war stories.

So what’s the point?  Is there one?

References to the agile manifesto abound with Stoos.  And like the agile group….they were meaningfully vague.  In this lap dance of ideas it appears their point was just to get us all thinking again about how organizations work.   Fair enough.  Things start with questions and wonder-ings.  Nothing wrong with that.

Perhaps the only shrivel of ideological meat that provided some sustenance for us definitive types was this from Jurgen Appelo:

For me the most concrete outcome is the core idea of seeing organizations as “learning networks of diverse individuals creating value”

This gets the wheels rolling a bit.  Maybe he’s onto something here.  Perhaps, with social media, mobility, and agile thinking its time for a new type of organization.  A virtual one where human ingenuity is rewarded handsomely  and it’s not about doing a job….but seeking, driving and growing value and profiting from it.  Meaningfully.

Those of us who work on the virtual cube-o-sphere today know that it’s not about showing up 9-5 and pleasing a boss.  If you’re a freelancer, 1099, contractor, inventor or entrepreneur you know it’s about finding your passion, networking and growing your value/brand.  Traditional organizations define what you should do for a salary.  Perhaps in the new Stoosian organization you define what you’ll do and share in the value it creates for the organization.  We dump stability for growth and a life’s mission.

Social Networks…….or………Virtual Countries?

Introduction

We commonly refer to Facebook, Twitter, and LinkedIn as social networks.  But couldn’t these communities also be seen as virtual countries?  This article attempts to explore the latent power behind these organizations and how they might effect, maybe even challenge, the traditional nation-state.

Community or Country?

What’s the difference between a gathering of people and a country?  Boil it down and there isn’t much.  Maybe scale?  Maybe not.  Knights of Columbus claims 1.8 million members.  The country of Luxembourg….511,846.

What about Geography?  Countries typically own and occupy land…right?  Yep…but what about the Vatican?  Isn’t that a religous organization?  Why do the Catholics have their own Sovereignty?  Putting that aside…there’s plenty of organizations that own massive tracts of land.  What would prevent Facebook from buying up thousands of acres and calling it ‘Facebookville’?

How about taxes?  Surely countries differentiate themselves on this level.  But, alas,  they don’t.  As a member of LinkedIn you can join free, but more privileged services require you to pay.  This is true of the nation state as well.  Many citizens live free of taxes due to poverty levels, while others pay more than their share and receive better treatment in the eyes of the law.

How about the ability to issue currency?  Nope.  Many social sites now offer their own private virtual currencies.  If you’ve followed some of my tweets on @goldzee…it’s becoming clear that these currencies, unlike the early days with Flooz and others, may actually have legs to stand on ( the eWallet will enable it ).  Furthermore, through virtual currency exchange sites,  these virtual currencies may become convertible and trade-able.

Probably the one area where nation states can and do differ from online communities is the ability to enact rules that, if broken by a citizen, and found guilty of breaking them, the citizen’s rights can be curtailed by force.   Nation states can do this….I have yet to see an online community do that.  Yes, Google could take away your Google + account, but you’re not in a prison cell after that action.

Social Networks as bold experiments in redesigning the nation state?

The similarities between countries and social networks are sufficiently complimentary to ask the question:  are we experimenting with new ways to organize and manage a population of people?   In other words…is this becoming more than just sharing your experiences from last friday night and making new friends?   Is Facebook a challenge to the world order?

There is evidence for this.  Take a look at the recent Arab Spring.  I wouldn’t dare propose that Facebook, Twitter, or Google caused this event.  Such a view is absurd, but it can’t be doubted, as was reported by many media outlets, that the community of  people in the Middle East who helped launched this revolution found *means*, even refuge  in these social services.  An abstract concept expressed in a virtual world…exploded into the real.  That can’t be taken lightly if you’re a national government.

More evidence goes to population sizes.  Facebook claims 750 million members as of writing this article.  That puts them just behind China and India.  Freak you out?   It should.  Let’s say the average Facebooker has a salary of $10,000.00 a year.  That would make Facebook’s GDP;  $7.5 Trillion.  In third place behind the U.S. and EU.  The ability to influence, communicate and coordinate 750 million wealthy people ( I realize many be inactive users ) is nothing to be ignored.   If influence is power than those who wield over the Facebook world are emerging titans.  The population numbers point to how much people enjoy just being a part of Facebook.    There’s no tangible product here.   It’s not like billions and billions sold at McDonald’s.   People aren’t coming to Facebook for consumption or service.  They want to connect, communicate, and be part of something.  Something.

Cultural norms are something that identify a country.  But increasingly the world is becoming one culture.  The U.S. probably jump started the global culture thing, but a quick look at Facebook and Twitter shows how music, art, jokes, news, sayings, etc all flood through through their networked members at hyper speeds.  Indeed these social networks are owning the global culture.   Something that’s popular and gets tweeted gets re-tweeted exponentially and people talk about later.  “Did you see that video clip on YouTube…HA!”.   These things become our identity, our representation.   More and more the world’s cultural borders are melting and we see more in common with some fellow 3000 miles away in Kazahkistan than we do with our neighbor next door.   This is an unmistakeable challenge to physical countries today.

Ultimately though,  a grouping of people need a way to make decisions; voting in our physical countries.  We use representatives ( proxies ) today to handle our decision making.  But its been well known for decades that technology could circumvent the need to have politicians.  So is there a way to decide and bind those decisions in a meaningful way?  In some ways..yes.  You can ‘Like’ something and Facebook has opened up some of its website governance to its users.  But these are far cry from tough decisions like whether to go to war, send someone to prison, or enact a new law cutting healthcare benefits.  Perhaps governing a virtual world is less demanding than governing a real one.  But if we think these virtual communities could provide an experimental new society…then they’ll need to prove they have a way to manage these tough nuggets.

A real virtual country

So is there experimentation going on that resembles nation crafting?  Yes…..but probably only as a side effect to pacifying member wishes.   A real virtual country has yet to come.

But, What would a true virtual nation look like?  Let’s take a ludicrous stab at this in the hopes of provoking debate:

1. A reason for being –  A virtual country would need to have a reason to exist.  People would have to feel truly compelled to abandon their physical countries for an alternate new virtual one.  An example of  such a reason might be the current fiscal issues facing many sovereign countries today.  Such an issue, in its severest form, might be enough for people to say “We can make something better.”

2. Open and Beneficial for All –  A true virtual country would be open.  It wouldn’t be a place that was owned for the benefit of a few people.  It would exist for the entire community.  Facebook exists for it’s shareholders…like it or not.  It’s motive is profit for them, not the people on the social network.   A virtual country would change this by making each contributor a shareholder/owner of the network too.  They would participate in any costs and share any profit.

4. Economy – Like any successful country the virtual one would require a market economy whereby owners find means to pursue their interests and livelihood.

5. Justice and Rule of Law – A way to mitigate disputes and resolve issues  as well as a body of laws that provide guidelines for behavior are equally important.  We often take these for granted, but let’s face it….no one wants to live in a country where everything boils down to how many armed men you command.  Anarchy is the abscence of organization.

6.  Legitimacy – Any social network hoping to claim itself as a  country would need to seek legitimacy in the eyes of organizations like the IMF, United Nations, and others.  This is a massive challenge because each physical country would see some threat in the inclusion of virtual countries.  Would someone be  a citizen of Zimbabwe, Virtual Nation X, or both? Could a virtual country claim each member’s home as sovereign territory?  Would virtual citizens refuse to pay taxes to the physical country if they were doing so to the physical one?

Conclusion

Ultimately, today, the social networks are businesses; not countries.  They are seeking profit and they do this by satisfying their members desires.  The more views, the more advertising dollars, and the wealthier they become.  While each social network has some of the makings of a nation state….they aren’t directed on that purpose.   The virtual world is not tied to Facebook, Twitter, or Google.  It’s the other way around.  It’s probably more likely that these networks will remain just a new abstract organization of people, but it’s fun to think of what could evolve and that was the purpose of the article.