'Virtual currencies' power social networks, online games

[Eugen Leitl]

http://edition.cnn.com/2009/TECH/05/19/online.currency/index.html?iref=t2test_techtues# 

'Virtual currencies' power social networks, online games

By John D. Sutter

CNN

(CNN) -- When Santiago Martinez wants to give his friends birthday presents,
he buys a cake or flowers or sometimes a teddy bear.  Social network users
buy virtual currency and use it to send virtual gifts to friends.

'Virtual currencies,' like the hi5 Coin, shown here, are becoming more
important on the Internet.

But the 41-year-old, who lives on Mexico's Yucatan Peninsula, doesn't spend
pesos or dollars. He buys the gifts with an online-only currency called hi5
Coins.

He also doesn't deliver the gifts in the physical world. They appear
digitally on his friends' online profiles on a site called hi5, which is a
social network like Facebook or MySpace.

"They can't eat the cake. It is an image -- the thing that it represents,"
said Martinez, an accountant with a wife and two kids. "You can send the
feeling of that [cake] that you want to send."

In any given month, he spends the equivalent of $40 in this manner.

But Martinez is hardly alone.

As our identities migrate further onto the Internet, currencies that exist
only online are becoming a more significant part of commerce on the Web and
in the real world. Some, like the hi5 Coin, operate almost like tokens in an
arcade or tickets at a fair: They're a stand-in for real-world currency.

Other "virtual currencies," like Second Life's Linden Dollars, however, are
traded on markets. The currencies also fuel online gaming communities and are
becoming an important part of social networks.

Several online currencies are competing to be the economic engines for
MySpace and Facebook, which don't have their own unified currencies. Other
social networking sites, like hi5 and myYearbook, have created their own
units of money for their users to spend.

All of this movement leads some experts to see a future in which virtual
currencies enter the same trading space as their real-world counterparts.

The online monies are not robust enough to trade competitively against
real-world currencies, but people underestimate the large amount of cash that
is transferred from the real world into virtual currencies, said Edward
Castronova, a professor of telecommunications at Indiana University.

Castronova says people transfer at least $1 billion into the virtual
currencies each year, with most of that money going into online games. The
actual amount could be much higher, he said, but the market is hard to
quantify.

"The question is really one of scale," he said. "Is this big enough for
someone to take their 401(k) [out of real-world currency] and start looking
into this? No, absolutely not."

Sometimes, people collect online money simply by purchasing it.

In "World of Warcraft," players earn WoW Gold as they advance through the
game. The currency has become so sought-after that it is bought and sold on a
black market, experts said.

Low-wage workers in China are known to play the game for a living and then
sell the virtual currency they earn to avid "World of Warcraft" players in
the West. This despite the fact that the game's maker prohibits such
activities.

As the market for online-only currency grows, problems that plague real-world
economies start leaking in, said Charles Hudson, who runs the Virtual Goods
Summit, an annual conference.

"Once you get a virtual economy that's functioning, you run into all the
problems that we have with the real economy: taxation, interest rates,
inflation. All of the same problems that cause headaches for the Federal
Reserve come up in the virtual economy -- and the stakes are the same," he
said.

The solution has been for each social network or game that uses its own
currency to appoint a money manager. Hi5, for instance, employs a staff
economist for this purpose.

The site soon hopes to make as much money through its virtual currency
exchange as it does from advertising, which is the primary revenue source for
many social networks.

Mark Methenitis, a Dallas attorney who writes a blog called "Law of the
Game," said online currencies are "completely unregulated," which will make
trading them against each other dangerous.

"There is huge potential for fraud, for what would be the equivalent of
insider trading," he said. "Also, since these economies are completely under
the control of the virtual world owner, it's pretty easy to cause massive
hyperinflation."

Social networks and virtual worlds are currently trying to find ways to
manage or capitalize on their developing economies.

These networks' successes may hinge on how they are able to manage their
economies and currencies may, experts said.

Facebook is researching the idea of creating a unified currency but is "very
early" in the process and has not committed to it, the site said in a
statement to CNN.

Currently, applications on the site -- which allow users to play games with
each other and trade gifts -- are powered by currencies made by the
application's developers, not by Facebook.

These developers are making good money on the system, and Facebook is missing
out on profits in that area, said Hudson, of the Virtual Goods Summit.

Joey Seiler, who writes about virtual worlds, said virtual goods are becoming
more popular because people are taking their online identities more
seriously.

At first, it may seem ridiculous that someone would pay for virtual currency
in order to buy a T-shirt icon to put on a social-network profile. But Seiler
said more or his friends see the virtual T-shirts on his Facebook page than
see any T-shirt he wears in real life.

So being able to spice up his online identity has real value, he said.