Currencies work as a means of storing and trading value because the people who use them have faith in their value. Faith involves putting trust in an entity more powerful than oneself, whether that entity is a market or a government. Even when the value of money was based on a commodity like gold, its value required faith that everyone would value the commodity similarly. This is still a step removed from when money was based on something that had a value in its use to everyone in the community, like wheat.
Our willingness to put faith in almost any medium of exchange has led to interesting developments. The same concepts that allow us to use legal tender, dollars and cents in the United States, allow different communities to develop their own currencies. If you spend time in computer games — and many people spend a good portion of their lives socializing in virtual environments and “worlds” created just for entertainment — you might need to trade your “real” money for virtual currency that can be used in the game.
The developers who control the game also have control over the exchange rate — how much one unit of game currency costs in the “real world.” If the world is big enough, they can let the market determine the exchange rate. Virtual currencies are popping up everywhere, because from a commercial perspective, whoever controls the currency can pull profit from the exchange.
- Facebook Credits operate in a manner similar to currency in virtual reality games. You can buy Credits to use in games and to trade for gifts online. Facebook determines the exchange rate and is also the “bank” where you store your Credits.
- Bitcoin is likely the most popular virtual currency because it is invading on the territory of actual, legal tender. You can buy products and services in the real world using Bitcoins, often as a secondary option to cash and credit.
As long as everyone agrees on the value of a bitcoin or of any other manner of currency, does it make a difference whether people use a currency backed by the government or not for private transactions? Should anyone be concerned that transactions occur using a currency not produced and maintained by the government in power in the land or lands where the transactions take place? After all, if I wanted to buy, for example, a printer worth $100 from a friend, I could give him $100 in cash or I could trade with him using, for another example, a mobile phone we agree is worth about the same as the printer. Why not transfer $100 worth of bitcoins to him, as long as we agree on the amount?
Virtual currencies open the door for manipulation and money laundering, so the government wants to apply the same financial regulations to these virtual currencies. Traditional banks — entities that deal with the currency supported by the United States government — need to file financial reports to the government for transactions exceeding $10,000 or otherwise suspicious activity and keep accurate records of their business. So far, companies that buy and sell virtual currencies have no such regulations, and are thus more inviting towards criminals who would use such currencies for nefarious purposes.
In fact, transfers using virtual currencies can be anonymous, unlike large transfers of money using government-backed securities. You can “follow the money” to trace transactions back to a source, most of the time without difficulty, when dollars are in use; with currencies that allow anonymous transfers, it’s easier to hide the true source of the funds.
There’s no evidence of Bitcoin-funded terrorism or any large cases of money laundering that have been public so far, but the Treasury Department isn’t waiting around. They will start applying anti-money-laundering rules to virtual currencies and the companies that deal with them. The financial industry, through the American Bankers Association, is keen to ensure that regulations that restrict the free flow of money to and from all sources apply to all vehicles the same. That’s a concern that comes not out of overall security for the country and the well-being of innocent citizens who might be harmed by financial fraud, but for the sake of their own firms who don’t have to face competitors in an unregulated financial Wild West.
The Bitcoin Foundation is fighting the move by the Treasury Department to regulate virtual currency, citing the burden it would be for bitcoin merchants to comply with the new regulations.
My use of bitcoins extended to a few hours when the currency was gaining popularity. I tried using the service, which required running an application on my computer continuously. This seemed to be more that what would be necessary to use a currency, so I uninstalled the program and didn’t think much of it. Also, I haven’t played any games that required depositing “real” money to convert to credits to be used within the game — I always figured getting my money back would be more of a hassle than it’s worth to play the game. But “kids these days” are more apt than I to use their money — or their parents’ money — to advance their characters in these role-playing games that use virtual currency.
Should the government have the power to regulate virtual currencies? Are national security and the protection of citizens from financial scams good enough reasons to require the government’s involvement with these transactions? I see little functional difference between a transaction in dollars and a transaction in bitcoins, for example, so if we must abide by regulations for one, we should need to for the other.
Published or updated March 22, 2013.