Virtual Currencies: Coining the New Change
Joshua A. T. Fairfield, Michael Paul Bombace · SSRN Electronic Journal · 2013
Virtual currencies are transitioning from a tool for game developers to monetize games to a system of value for consumers. This transition is fueled by consumers’ assignment of value, both in their time and money, to virtual currencies. Virtual currencies are leading much of the development of online spaces from games to Internet services, such as micro blogging, because of the assignment of value. The promise of a legitimate alternative to online advertising to monetize the Internet may come from virtual currencies. The problem this article identifies and seeks to address is the current narrative around virtual currencies. That narrative focuses on virtual currencies as a tool for game companies only and not a legitimate form of value exchange. This narrative rests on two particular gaps, the first technical and the second legal. First, the current typology of “closed loop” and “open loop” currencies fails because most of the interesting currencies and the bulk of economic value lie in currencies that are in transition between closed and open loops. Second, current and emerging regulations restrict the movement of value. Open loop currencies are better for consumers: they prevent lockin, permit free exit, maximize welfare, and minimize transaction costs. Conversely, closed loop currencies permit corporate quasi-fraud through breakage and obfuscation of value. But the law currently permits what harms consumers, and may very well significantly impede or destroy what helps consumers. The authors seeks to correct this narrative This article examines the economic realities underlying the rise of virtual currencies, and comes to a conclusion that is new to the literature: virtual currencies are best seen as real, valuable forms of exchange in the hands of the consumer. Virtual currencies increasingly act as a medium of exchange, store of value, and unit of account — the hallmarks of “real” currency. Common corporate characterizations of them as simply lacking value have little or no staying power as a matter of legal reasoning or simple utility in today's world, real and virtual. Addressing this problem sooner rather than later is vital otherwise this view will cement based on government regulations that are now taking shape. A deeper question the article posits, and answers, is why this is important. Ultimately, virtual currencies are the next step in value exchange and mischaracterizing them now will have serious negative consequences. The article proceeds in three parts. First, the article will provide some brief background into currencies and value exchange in general, and the rise of virtual currencies in particular. Second, the article will then analyze the economic realities underlying transactions in virtual currency, and will argue that there is no principled distinction on which one can rest the current corporate consensus that these currencies lack value in the hands of the consumers. It will also detail why this discussion is important and why virtual currencies are the next step in value exchange. And finally, the third section will discuss two collateral attacks on this new approach — one from the “gamist” side of the literature, which would assert that currencies have no value because they are merely part of a form of non-serious amusement, and one from the “corporate” side of the literature, which would assert that courts should permit corporations the sole ability to determine the legal characteristics of the currencies that they issue to their consumers.