Wednesday, November 24, 2010

Virtual Currency Exchanges Moving Virtual Currency Closer To Wall Street

By Kevin Flood
Kevin's Corner
Monday, November 15, 2010

I have been writing about virtual currency for some time and have witnessed its emergence from an obscure form of monetization and reward system in role playing games(RPG), virtual worlds(VW), airline and hotel bookings to a world class currency system challenging the valuation of the Yuan and the creation of the Facebook credit universal virtual currency. I have also suggest that regulated and sophisticated virtual currency trading is inevitable given the proliferation of virtual currency in gamified business applications and the popularity of online games using virtual goods and currency as a proxy for conventional e-commerce transactions. It is estimated that virtual goods/virtual currency revenue will reach 2.5 billion USD by 2013. This is a difficult number to ignore considering the worldwide slow down in traditional commerce. Virtual currency is international and becoming common appearing in retail stores in the form of virtual currency cards and as a bonus and award system for shopping. This is causing currency trading business(real and virtual) to take a much closer look at the viability of legitimate virtual currency exchanges.

We are now seeing Wall Street style monetary exchange trading systems specifically designed to handle virtual currency exchange. Startup companies, traditional currency traders and online game related businesses are stepping up their efforts to seriously integrate virtual currency trading into their business models. The ultimate goal is to establish valuation for virtual currency based on transaction activity and to allow for the free flow of goods and services between virtual currencies and eventually traditional virtual currencies such as the Dollar and Euro. Yes , these currencies are virtual as well because they are not backed by any physical assets and derive their valuation based on the amount of currency in play and their value relative to other economies and currencies.

The following are a few companies that have either contemplated launching virtual currency trades or are already up and running.

-Hi5 is a social network that has moved from a generalized social network to a focused online gaming social network. Hi5 is encouraging online game operators and providers to offer their games within the Hi5 environment. Hi5 helps these game companies by promoting and advertising the game providers content to the HI5 community providing a virtual currency exchange system between Hi5 virtual currency and the game providers virtual currency. The currency valuations are calculated everyday based on the volume and amount of virtual currency in the Hi5 system. The level of sophistication of Hi5's valuation system mimics the way currency traders and governments value traditional currencies. Hi5 has an interesting model allowing a business or game property to maintain their currency(and branding) and co-exist in the Hi5 environment. This trading system could easily exist outside of HI5 on its own platform.

FirstMeta - First Meta is a relative new comer to the virtual currency trading world. It is unique because it is a distinct trading platform divorced from the business of generating virtual goods or virtual currency. This business model comes closest to a traditional independent currency trading company. It is also interesting because the co-founders are not gamers they are bankers, investors and Wall Street type traders.This is significant because the company's model does encourage the exchange trade business to take a closer look at how virtual currency can and will be traded on open exchanges.
- My Year Book is the grand daddy of virtual currency exchange. They started this exchange to move players and consumers form one property to another increasing the player pool for gaming companies and to increase their membership. This is similar to the airline game with the exception that My Year Book has been more aggressive offering virtual currency exchange between online game properties and their business.Companies such as IMVU and Wee World are just a few of the companies that are in the MyYearBook system. Although the virtual currency exchange system is not currently a separate business it will not take much of an effort to move it out of My Year Book and into an open public exchange.

PlaySpan - In the true sense PlaySpan is not a virtual currency exchange platform. However, it is not far from it. . Playspan let's individuals buy and sell virtual currency for a number of different game sites. The relationships that PlaySpan has established with various virtual game and currency providers has positioned PlaySpan to launch a fairly robust virtual currency exchange with a wide array of virtual currencies.

Forex - I have to mention Forex, the traditional monetary exchange big boy on the block for traditional currency exchange. They have been considering virtual currency exchange for at least two years. Unfortunately, I can not reveal my sources. There has been reluctance to move forward because of the quasi legal opinion on virtual currency trading and the lack of real volume. With the emergence of Facebook credits as a virtual currency and billions of USD virtual currency transactions we have to believe that Forex is going to give this another look. Obviously, they are very well positioned.

The mentioned green shoots of activity in virtual currency trading are only a few of the total number of startups and conventional companies either considering or already in this space. Virtual Currency Exchanges(VCE's) are like so many previous online trends they start slow almost unnoticed by the general public and all of a sudden they become big really fast. Virtual currency trading will be no different. The early movers that stake a claim to the space will be winners and future common brand names in the financial services industry.

Kevin Flood is the CEO of Gameinlane, Inc. and writes extensively about gamification, online games and the impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Reprinted with permission.

For further reading:
"The Rise of Virtual Economies", Max Miller, November 16, 2010
"Virtual Money in Electronic Markets and Communities", Levent V. Orman, June 7, 2010
"Cosmetic Real Money Trading in World of Warcraft", Jennifer Martin, Virtual Economy Research Network, May 12, 2010
"Linden Dollar and Virtual Monetary Policy", Philip Ernstberger, January 23, 2009

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