Tuesday, September 22, 2009

Virtual Currency Small but Growing Threat

By Victoria Ho
ZDNet Asia
Tuesday, September 1, 2009


Virtual currency is still a small threat to real-world economies, but its growth could translate into numerous issues for countries in the long run, said an analyst.

According to Rodney Nelsestuen, financial strategies and IT investments senior research director at TowerGroup, these could come in the form of money laundering, fraud and the chance of the collapse of a virtual economy.

He told ZDNet Asia in an e-mail that virtual money has emerged as a money laundering vehicle over the past year, and remains a small but growing threat.

Virtual money also creates no actual economic value, and has "questionable sustainability", he said.

The Chinese government in July outlawed the use of virtual currency to trade for real-world products and services.

This includes virtual credits such as popular Chinese portal, Tencent's QQ coins.

Should other governments look into banning virtual money? Nelsestuen said outlawing it will drive it away from the public consciousness but will still be an issue for gamers, as virtual currency trading goes deeper underground.

In 2007, a virtual heist in Second Life ruffled feathers as online criminals made off with an estimated US$10,000 of Linden dollars, Second Life's virtual currency.

Furthermore, there is some real-world value created by virtual money, such as stored value cards offering retailers a new avenue to expand sales, he said.

One academic applauded China's move. Edward Castronova, Indiana University Bloomington professor of telecommunications, said in a New York Times report, virtual currencies could pose a threat to world economies, by shifting control of the money supply from the central bank to game developers.

Web payment facilitator PayPal, responding to an e-mail query from ZDNet Asia on the impact of the ban on revenues, and its plans to offer other goods and services, said only: "PayPal adheres to all local legislation in the markets in which we operate."

For further reading:
"In China, New Limits on Virtual Currency", The New York Times, July 1, 2009
"China Limits Use Of Virtual Currency", InformationWeek, June 29, 2009
"China bans online 'gold farming'", Dave Rosenberg, June 29, 2009
"Wildcat Banking in the Virtual Frontier", Matthew Beller, February 5, 2008
"QQ: China's New Coin of the Realm?", The Wall Street Journal, March 30, 2007
"Online Game Economies Get Real", Wired, November 6, 2002


  1. Well, the Chinese outlawed the use of virtual currency in the real currency world....like they outlawed fake Rolex watches and Fendi purses. But we still see them all each day, don't we? I suppose with a few more articles like that from ZDnet and we'll have some virtual hysteria on our hands. Isn't this kind of Deja Vu for any new Internet product?


  2. Hi Mark, typically, I would stay away from posting articles on virtual currency (because they are not backed by some form, or percentage, of commodity money); however, this specific article cited a challenge to monetary authorities, and the Chinese virtual currency companies are ahead of the US virtual currency companies in terms of market penetration.

    Those facts are interesting to us in the DGC industry, because it has to do with circulation and acceptance issues. Also, I wanted an excuse to list my sources for further reading.