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Private
Currencies
This page looks at digital private currencies, internet-based
schemes operating in competition to national currencies
such as the US Dollar or Yen and distinct from electronic
payment mechanisms that use traditional currencies.
It covers -
concepts
Private currencies have a long history and have been
the subject of enthusiasm roughly every thirty years since
the 1850s, timing that we attribute to generational change
or the business cycle.
In essence, any individual or institution can issue a
private currency that is independent of the national currency
and underpinned by contract law (or merely good will)
rather than the national powers highlighted at the beginning
of this guide.
One guru thus quipped that
he
who owns a computer not only owns a printing press,
but also a mint.
The
key challenge is to secure widespread acceptance of the
nongovernment money - irrespective of whether it is embodied
in paper, on a chip or merely consists of digits in cyberspace.
Governments - as libertarian icon Friedrich von Hayek
noted in his Denationalisation of Money: An Analysis
of the Theory and Practice of Concurrent Currencies
(London: Institute of Economic Affairs 1976) - tend to
have greater suasion than the currency issuer next door
who is equipped only with a photocopier or a personal
computer.
Establishment costs have been high and consumers have
been inhibited by what one observer characterises as the
"you first syndrome" (the currency version of
network externalities): few consumers will seriously engage
with 'funny money' until it is in general use and offers
clear advantages over the national currency.
As a result, there have been few recent attempts to establish
large-scale private currencies that are fully negotiable
and that aren't restricted to customers of a specific
business, participants in an industry sector or members
of an affinity group or geographical region.
Most private currencies offline have been quite restricted
-
'frequent
flyer' or 'air miles' loyalty schemes run by specific
airlines and not convertible into cash or negotiable
outside that business
Disney Dollars and other coupons used instead of national
currency within a particular precinct
consumer loyalty tokens such as trading stamps, offering
delayed discounts on goods from retailers and not recognised
by financial institutions or businesses that don't participate
in the particular scheme
transaction card based incentive schemes, such as Flybuys
in Australia, that reward use of a particular card/account
(and have largely supplanted trading stamps in many
countries, despite efforts by US trading stamp issuers
to rebadge their operations, with S&H Green Stamps repackaged
as Greenpoints
and Gold Bond stamps similarly refashioned as Goldpoints.
)
barter-style community currency schemes on the LETS
(Local Exchange & Trading Scheme) model - concerned
with local services and not intended for redeption outside
the particular community - or internet-based schemes
such as the defunct US Lassobucks.com
Academic
interest has centred on von Hayek's notion of competing
private currencies, claimed to be less susceptible to
debasement or other manipulation by government that he
attributed to inflation and depression.
The chief executive of Australia's central bank somewhat
tartly dismissed that notion as an academic exercise -
these
proposals really belong in the world of technical curiosities.
They can be argued to work in theory, but the fact is
that there is no working example of such a system anywhere
in the modern world ... [with] proponents describing
something that is either not workable ... or something
that is much more radical than most people would be
prepared to accept.
the schemes
The 1990s saw promotion of a range of private currencies
that were promoted as a unique "global digital currency",
"the first web currency" and "a new kind
of money for safe online transactions".
That reflected claims that
the
real questions are not whether there will be digital
money, but how long will it be before most paper currency
and coin is eliminated, what portion of digital money
will be issued by private institutions, as against governments
and central banks today, and how much of that will be
gold. Digital money will eventually become the dominant
form of money because it is less costly to handle than
cash, cheques, or credit cards, and it is more secure
and efficient.
It
also reflected perceptions that consumers were eager to
engage in B2C, particularly across national borders, but
were fundamentally inhibited by credit card fees, currency
exchange costs, uncertainty about exchange rates and anxiety
about online fraud. We have suggested elsewhere on this
site that the strength of those inhibitions was overstated
(and is changing as the online population normalises).
The new digital currencies were independent of government
- a major attribute for some promoters and consumers -
and were not recognised by major financial institutions.
They were thus distinct from stored value cards or other
schemes that used existing currencies such as the Deutschmark.
Most were designed for use online only. Several were explicitly
promoted for use as an international currency in transborder
electronic commerce (no conversion fees, minimal establishment
and administrative charges, no restrictions on currency
flows).
In practice, start-ups such as Beenz.com, Flooz.com, E-gold
and Goldmoney.com
and noncommercial initiatives such as MojoNation have
not moved beyond serving as online trading stamps or the
passports issued by self-declared principalities. They
are useful in conjunction with a specific promotion, service
or vendor but in most cases did not gain the necessary
recognition from consumers or businesses. And after considerable
angst among central banks and other currency regulators
midway through last decade, they consequently appear to
be causing less concern to government.
Beenz and Flooz
Beenz.com for example was founded in March 1998 but folded
two years later. Competitor Flooz.com commenced in September
1999 but expired along with Beenz. The groups had expanded
from the UK and US to employ around 500 staff in 27 offices
across the globe.
They were conceived as internet micropayment schemes.
Etailers initially provided consumers with the new currency
as a reward for purchases (akin to traditional trading
stamp and electronic loyalty schemes such as frequent
flyer miles). The promoters also freely distributed some
of the new currency, both to gain publicity and to ensure
that there was enough currency in online circulation to
secure the interest of etailers.
Consumers could use that money to purchase goods/services
from the issuing etailer or from another entity that accepted
the currency. Money in the currency could be transferred
online from one member account to another, but its negotiability
was restricted. Customers did not have the right to convert
the digital money into traditional currency at the issuer.
It was not recognised by banks and wasn't convertible
into other virtual currencies. Consumers were not entitled
to "any compensation of any kind" if the currency
issuer suspended operations.
The demise of Beenz highlights problems when the currency
issuer goes belly-up (a circumstance that is more likely
than the national repudiation of sovereign debt or destruction
of a currency's value). With the writing on the wall Beenz.com
told holders of its currency that they had 10 days to
spend their beenz money. Most beenz-accepting etailers
thereupon refused to accept the currency, as beenz.com
would no longer convert it into cash.
That was particularly painful for consumers holding large
amounts of beenz: like participants in airline frequent
flyer or other loyalty schemes they found that when the
issuer expired they were left holding ... nothing. (Holders
of Tsarist of Confederate government bonds or shares in
exotic railways at least had a colourful document for
recycling as wallpaper: you can not use a digit in your
harddrive to exclude the wind, paper the holes in your
shoes, wrap garbage or build a kite.)
Legislative and business responses varied. Germany's 1999
and 2000 electronic commerce legislation has been construed
as prohibiting use of digital private currencies by that
country's retailers. In the UK, where the government had
repealed the Trading Stamps Act 1964, there were
suggestions that a new cybermoney enactment would be necessary.
The earlier Act, like other consumer protection measures
in Australia and the US from the 1950s, had regulated
issue and advertising of trading stamps. They were required
to be redeemable for cash, with clear identification of
their cash value and the issuing company.
goldbugs
Other digital private currency schemes claimed to be backed
by gold or, even more dubiously, to enjoy special protection
because the servers were located in the Carribbean islands.
E-gold is characterised as "gold itself, circulated
electronically ... the ultimate worldwide free market
currency" acessible from your personal computer or
mobile phone:
100%
backed at all times by gold bullion in allocated storage.
Other e-metals are also issued: e-silver is 100% backed
by silver, e-platinum is 100% backed by platinum, and
e-palladium is 100% backed by palladium.
... e-gold is always as good as the gold it's backed
with - this year, next year, a thousand years from now.
... e-gold is entirely backed by a physical commodity
rather than debt or other financial instruments; therefore,
e-gold is the only currency in the world free of financial
risk.
E-gold
was reported as having around US$5.47 million in revenue,
US$16 million in gold and 114,000 accounts in 2000 (compared
with PayPal's US$100 million
revenue, US$1.5 billion transactions and 17 million customers).
Other gold schemes include GoldMoney,
3PGold,
OSGold and e-Dinar.
E-Bullion
exhorts people to
Send
us your gold coins, bars & bullion and we'll convert
them to international E-Bullion™ currency.
e-Dinar has attracted attention over claims that it is
used - or merely might
be used - by Islamic terrorists, although traditional
currencies seem to be just as popular.
The World Gold Council, understandably, was cautiously
optimistic about anything that would encourage consumption
of the shiny stuff, releasing a report on Digital Money
& Its Impact on Gold (PDF)
that commented
the
costs of using digital gold will need to be competitive
in comparison with other payment methods, such as credit
cards, bank transfers, and alternative digital payment
methods, and there will need to be an increase in the
availability of liquid gold debt instruments in which
to invest. The success of companies who enter this market
will depend on their ability to design and market digital
gold products that meet the needs of consumers, businesses
and investors to a greater extent than current systems.
That is consistent with Peter Bernstein's crisp account
in The Power of Gold: The History of An Obsession
(New York: Wiley 2000) of popular responses to the shiny
stuff. A 1999 article by Michael Swaine, noting the enthusiasm
of some fringe political groups for alternative currencies
commented that
E-gold
is more like a banking system - I think. But it's a
banking system for people who consider existing banking
systems a fraud and an invitation to disaster because
there is nothing real backing the bank notes and other
tokens of value in circulation. This system is backed
by gold.
... which matters greatly to some people. Perhaps it
should matter to me, but I don't see why. I freely admit
that I have no idea why anyone should want to use this
particular metal as a fundamental basis for value in
all exchanges of goods and services. What this service
does suggest to me, though, is that we may before long
have competing currencies that reflect the politics
or paranoia of the spender. Sort of like having "Save
the whales" printed on your checks, only more so.
the new political order?
The following year Rich Karlgaard in Forbes Magazine
asked
Where do you store your wealth? As much as I like the
American dollar, I like American private currencies
even more. I trust John Chambers and Scott McNealy to
do the right thing and to treat my wealth with respect
more than I trust [US Treasury Secretary] Larry Summers
to do the right thing.
Experience
with major corporations such as Enron and WorldCom (and
with their accountants/auditors) suggests that trust in
individual businesses to provide a stable currency long-term
might be misplaced.
A 2001 profile
in Wired, with characteristic hype, commented that
Finding
bits of 141 bars of gold circulating on the Net is a
little like a coelacanth, a financial fossil come to
life. Don't be fooled. E-gold is hotter than plutonium.
... if the Internet is going to become the engine of
global commerce it's cracked up to be, it needs a currency
it can call its own - a currency as nonproprietary and
international as the Internet itself. "And gold
seems to be the logical candidate," he says, "because
after all, that's gold's traditional role. It's international
money."
But
if gold does good things for the Internet, says [GoldMoney
entrepreneur] Jackson, the Internet does even better
things for gold. E-gold isn't your great-grandfather's
gold standard. It's new and improved, Jackson argues,
fortified by the rigor of free-market discipline and
the openness of digital networks. And if you think that's
no big deal, well, Jackson - a 45-year-old former oncologist
and entirely self-taught economist - would like you
to know that his invention represents "an epochal
change in human destiny" and "probably the
greatest benefit to humanity that's ever been thought
of."
In
promoting "peer-to-peer finance with nanobucks"
Kevin Kelly's Out of Control: The New Biology of Machines
(London: Fourth Estate 1994) trilled
-
e-money
will break the monopoly of financial Brahmins. ... All
manner of clever financial instruments will surface
once the masses can drink from the same river of electronic
money as the pros. ... The law of the Net is: he who
owns a computer not only owns a printing press, but
also a mint, when that computer is linked to e-money.
Para-currencies can pop up anywhere there is trust (and
fail there, too).
US
libertarian J. Orlin Grabbe's 1999 Smart Cards and
Private Currencies explained
that the target was both Big Brother and the Brahmins
-
the
whole objective is to denationalize money, to decentralize
it, to put it beyond the control of regulatory authorities
who operate to maintain a government or central banking
monopoly, to create mobile network banks that do not
become sitting targets for Big Brother information collectors,
to distribute private currency operations in such a
way that they can be said to exist in no single political
or legal jurisdiction — or for that matter cannot be
said to exist in any jurisdiction. Electronic monetary
transactions will take place out there, somewhere in
cyberspace, unobserved by third parties. The intent
is to deliver an honest service at an honest price,
and to give the user of the system complete privacy.
We
have suggested elsewhere in this site that privacy, trust,
'honest prices' and transparency are interrelated. Irrespective
of notions of social responsibility (with taxation paying
for community goods and the infrastructure so enjoyed
by the cyberselfish) it is unclear whether a currency
scheme based on "complete privacy" and unadulterated
by government involvement would be viable on a global
scale. Some reports have suggested that between five and
ten percent of Beenz in circulation were fraudulently
obtained.
An enthusiast for the Murabitun sect's Fatwa Concerning
the Islamic Prohibition of Using Paper-Money as a Medium
of Exchange asked
You
want to be radical? You don't need to blow up the bank,
just burn your bank account. For that you need an alternative.
What is the alternative? E-dinar.
In
practice the currencies do not appear to represent a major
advance on traditional retailer and airline loyalty schemes
(which added a few 'points' to every time the consumer
made a purchase).
Regulatory responses have been negative. In November 2004
Australian companies regulator ASIC (counterpart of the
US SEC) for example announced
the closure of electronic currency exchange businesses
that did not hold an Australian financial services licence,
required for dealings in non-cash payment systems. The
businesses had exchanged conventional currencies for electronic
currencies (and vice-versa), charging a commission for
that service.
studies
There have been no comprehensive studies of the digital
private currency schemes, perhaps unsurprising given their
quick arrival and even quicker departure.
Particular legal issues are highlighted in The New
Virtual Money: Law & Practice (New York: Kluwer
1999) by Olivier Hance & Suzan Dionne Balz. For banking
and inflation concerns see the 1996 Bank of International
Settlements' Implications For Central Banks of the
Development of Electronic Money (PDF),
Mark Bernkopf's 1996 Electronic Cash & Monetary
Policy article
and other resources highlighted earlier in this guide.
Funny Money: In Search of Alternative Cash (London:
HarperCollins 1999) by David Boyle offers a tour - for
us overly indulgent - of private currency schemes. He
edited the entertaining collection of comments from the
likes of Ezra Pound and US populist Ignatius Donnelly
(otherwise famous for claiming that the earth was hollow,
with entry points at either Pole ... so convenient for
parking one's flying saucer) in The Money Changers:
Currency Reform from Aristotle to E-Cash (London:
Earthscan 2002).
John Matonis' 1995 Digital Cash and Monetary Freedom
paper
and Richard Rahn's The End of Money - And The Struggle
for Financial Privacy (Discovery: Seattle 1999) highlight
libertarian attributes of digital private currencies,
at their worst a mix of survivalism and the freedom not
to pay taxes. Adam Mikkelsen's 1999 paper
on Electronic Money & the Market Process - How
Digital Developments are Opening New Frontiers for Liberalism
comments that
Perhaps
the most exciting aspect of digital cash is the potential
for it significantly to reduce the ability of governments
to collect tax. If individuals are paid in anonymous
and encrypted digital cash, without the need for intermediary
banks, declaring transactions conducted using digital
cash to the revenue, and the income derived from them,
becomes essentially voluntary. Unless government had
access to all phone lines, and to the decrypted information
contained on each hard drive of the computers in a particular
jurisdiction, it would be difficult to tax income derived
in digital cash, particularly income derived from assets
held or services performed offshore
Three
perspectives are provided by Harold Fox's The Economics
of Trading Stamps (Washington: Public Affairs Press
1968) - considering debate in the US since the 1930s about
competition policy, consumer protection, inflation and
other concerns - Barry Eichengreen's superb Globalizing
Capital: A History of the International Monetary System
(Princeton: Princeton Uni Press 1996) and Jerry Muller's
The Mind and the Market: Capitalism in Modern European
Thought (New York: Knopf 2002).
There have been no major public studies of claims that
most digital gold accounts relate to online game activity
and that enthusiasm has been exploited by ponzi schemes
such as E-Biz
Ventures ("returns of 40% to 100% in seven to
ten days" using the digital metal).
OSGold
- an "online monetary system which allows you to
convert money to gold, store it online, and spend at your
convenience" - once boasted more than 60,000 accounts.
It is alleged to bilked investors out of over US$250 million.
They had apparently been attracted by promises of guaranteed
monthly returns of 30% to 45% ... a nice demonstration
of the adage that if it is decorated with a dot but sounds
too good to be true, it probably is.
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