A virtual economy is currently in development in the online world of Massive Multi Player Online Role Playing Games (MMORPG). These online games exist thanks to the web that allows interconnected computers to participate in the same game, persisting as a virtual world beyond individual players’ computers. These online games are also constantly evolving with time adding features to the virtual worlds. In these games, virtual goods and services are sold and bought using virtual currency. Currency can take the form of e-gold, PEDs, or credits of some type. This currency can be used to buy anything from virtual weapons, which help the game characters advance in the game by vanquishing an enemy or conquering new territories, to super powers, machines of all kinds, and virtual real estate. Like in the “real world”, virtual assets and properties help the game players advance in the game and acquire even more assets and power.

In the past decade, the exponential growth and popularity of online multiplayer games has introduced real economic rules to the game. Scarce resources are usually more expensive and harder to obtain. Goods and services are traded in virtual markets.  Specialization of characters in order to gain specific skills or resources is also prevalent. Actual companies have been set-up to obtain and trade this virtual goods for real revenue. Lately, financial transactions within the games have garnered the attention of tax authorities of several countries since these virtual goods can also be exchanged for real ones and game assets can be converted into real cash through a sale. Tax authorities have a hard time classifying this type of revenue as it does not fit in any traditional category the closest being online gambling. These transactions happen online and between individuals who are sometimes located in different countries. The question then arises, when a financial transaction that involves real money takes place virtually, who pays the taxes of such transaction and to whom should these taxes be paid, when players across the world are mostly anonymous and these transactions exist off the books of any national agency?

What started as a virtual game worlds has now become a true virtual economy, similar yet also different to the one that exists in the real world.   In this virtual economy, the transfer of real currencies coexists side by side with currencies that have no value in the real world. It is a strange hybrid of real and imagined value.  This new parallel economy throws our economic principles for a loop or, I would argue, calls for a reexamination of the direction our real world economy has taken.  Real economies are supposed to be closed. This means that the amount of money circulating is finite; it is attached to the value of “real” things and subject to supply and demand forces. In the online world, money can be “created”, for example by mining ore from virtual mines or by solving tasks and puzzles. This seemingly “infinite” supply of virtual currency could pose a problem to anyone who would want to trade it in earnest.  Inflationary forces could drive the prices of virtual assets almost infinitely if players were allowed to create currency as they pleased. However, at present, this does not tend to happen, as many games have clearly formulated rules that dictate that players must “work” at amassing their virtual bank accounts, through accomplishing tasks and winning challenges, like in the real world.  As a result of the rules and parameters that guard the virtual economy, entrepreneurs have jumped in and established specialist companies inside these games, dedicated to trading specific types of assets or performing tasks that some players might not be interested in doing, akin to real world brokers and contractors.   Purchasing of virtual assets using real currency is common place and real profits can be made by selling these assets. In 2009 Buzz “Erik” Lightyear purchased a virtual property called the Crystal Palace Space Station in the game of Entropia for $330,000.  This purchase beat the previous record, a purchase of a virtual asteroid for $100,000  in 2005.

Even though it has remained mostly within the realm of online gamers and unknown to most non-gaming people, this new kind of economy is rapidly developing, with the potential of becoming much more relevant.  In the future the “real” economy and the virtual economy might merge, as improbable as this may seem.  This is a real possibility because, thanks to technology, the virtual economy is looking more and more real while the real economy is looking more and more virtual.  We live at a time in which real banks regularly have leverage ratios of 10:1 and in many cases much more, so for 1 real unit of currency, banks “create” 9 more units, unattached to any real asset.  Money is moved around the world electronically, almost instantaneously.  These financial transactions happen within computers only, in virtual terms, and physical money is never exchanged. Furthermore, money is created from thin air by countries willing to sell bonds to eager investors and this allows them to print more money. In many ways, this violates the principle of a closed monetary system, with consequences that we are currently experiencing.  Countries are defaulting on their debt obligations and have to be rescued, least they be left bankrupt, destabilizing the whole economical system of trust.

Many have argued that without indefinite economic growth, our real economy is unsustainable.  Is the greedy quest for new avenues of growth why financial institutions are taking advantage of “virtuality” to a detriment to the economy and the soundness of economic principles?  The financial crisis of 2008 has shown us how fragile the whole financial system of trust really is. Banks lent money that was not backed by any real assets and created financial instruments, such as credit swaps and collateralized insurance, which derived their value exclusively from speculation. Leverage (debt) ratios grew to unsustainable levels and the whole system collapsed under its own weight when investors wanted out.  Trillions of dollars disappeared in an instant. Trillions that, I would argue, did not exist in the first place. Traditionally, the role of financial institutions had been to move money in order to keep the economy moving and their profit came from their cut for performing this service. This time, banks became very greedy and they all bought into the same funny money funds each one was creating and used them as real investment instruments.  Ten trillion dollars later, the result of this failed experiment of trading virtual assets left the US with its biggest debt in history. The loss of this virtual money has translated into the loss of real money that will not be available in the future to build real roads, bridges, schools, businesses and many other aspects of the real world infrastructure.

Paradoxically, many aspects of our daily life have been gradually migrating to the virtual world. Our music is now digital, played over digital devices and computers. Print media has also moved from the physical to the virtual world. Entertainment, in the form of TV, online games, and the internet, exist sometimes exclusively in the digital world.  Today we use our online presence to communicate with others in virtual social environments such as facebook, twitter, Google, and other platforms. New social phenomena, like online games, online forums, cybersex, and cyber bullying, occur only in the virtual world.

Our reality is becoming more and more virtual and the need for virtual assets more apparent. When most of our digital content and information (our music, books, important documents etc.) exists solely in “the cloud”, allowing them to be efficiently accessed from anywhere in the world, shouldn’t our monetary assets too?  From an economic perspective, the move to a virtual currency makes a lot of sense. A currency that is not prone to government manipulation and one that would eliminate the inefficiencies and arbitrages associated with exchanging one currency into another. Moving and securing large amounts of physical money (cash) from one place to another seems quite archaic. The value of money has long stopped being backed up by physical things (gold, silver etc.) Today’s money is only worth as much as a country’s trustworthiness and its historical ability to pay back those who are willing to lend money to it. However, the fact that each country can create its own money makes the overall system dangerously flawed.  While the introduction of new money diminishes the ability of some countries to exchange goods and services, others have an unfair advantage, as their currency remains strong in the face of large and looming debts. The current worldwide financial system is unstable and subject to manipulation and crashing.

A world wide virtual currency has the potential to solve significant issues of our current global economy.  It would eliminate the exchange inefficiencies that I mentioned before (leaving many a hedge fund managers without a job).  It would provide the world with a finite global pool of money that cannot be easily manipulated (barring hackers – virtual security would have to be at a maximum) and that can only be increased through economic growth.  This virtual currency would be backed by people’s willingness to pay a specific price for a good or service that could vary for different parts of the world, based on the laws of supply and demand.  The same currency could also be used to buy virtual assets, as we migrate our lives more and more into virtual realms.  Currently, we use real currency to purchase virtual “assets” such as access to relevant people (think LinkedIn plus), online domains, virtual companies, etc.  And as our social interactions migrate online, we will also seek to purchase things like online wardrobes, jewelry, houses, and other “necessities” for a proper standing in our developing online society, blurring more and more the line between our online life and the real life.  Money, cash, e-cash, e-gold, whatever we want to call it, in the future, our monetary assets will have to be able to seamlessly travel between the real and the virtual world.  The notion of a universal virtual currency might seem unrealistic to many who grew up going to brick and mortar banks and who keep safes at home. While this concept may seem strange to those still skeptical of the web and the social phenomena developing online, for many  on the facebook/google/twitter generation who already do not see a distinction between online assets and real ones, this notion will come as second nature.

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