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The Cost of Virtual Currency

(This article was originally published in The Mantle)

By Jake Perry

This summer has been bookended by two fairly significant events that have put the concept of virtual money squarely back on the table. The first was the hacking of a Bitcoin (an “experimental new digital currency that enables instant payments to anyone”) account in June, and now the soft launch of Google Wallet, Google’s new Android app that turns a phone into a wallet. And while both of these happenings do seem to signify a further shift towards accepting the idea of an even more cashless society here in the States, it’s probably not quite time to abandon the legal tender just yet.

Before diving in, it’s good to remember that digital money is, obviously, nothing new. A good amount of the world works on credit and debit cards, which has abstracted cash into the mere moving of numbers from one account to another. Also using new technologies to facilitate this moving of amounts is part and parcel of the money experience. From mobile banking apps to something like the M-PESA mobile-phone based money transfer service in Kenya, huge swaths of the world are already well acquainted with transactions of the virtual kind.

Bitcoin and Google Wallet are looking to push to the next step. Bitcoin gets its name from the file-sharing site BitTorrent and is basically a peer-to-peer, decentralized “internet commodity”—or a kind of online eCash. Instead of banks and governments issuing currency, a network of Bitcoin holders’ computers track issuances and exchanges. It says it’s untraceable and cryptographically created, which has allowed a few problems with using Bitcoins (or BTCs, as they call them) exclusively for online purchases of illegal drugs and the like. But many of the world’s currencies can be exchanged for BTCs and vice versa. As of this writing there were over 7 million BTCs in online circulation, which at current market prices (bidding for one BTC was around US$5.50-$5.71) equals just over US$41 million. Not quite something to sneeze at.

The advantages seem awesome, in light of the current global economic crisis. Virtual money and virtual transactions can occur strictly between people, or person to company—banks and governments aren’t included. They can be traded with fair, level exchange rates that are (ideally) reflective of the BTC marketplace. And, to expand this idea further, competing online currencies could pop up, keeping prices honest and acting as a check and balance to currency monopolies. And for a time it was awesome, even with one investor purchasing $20,000 worth of BTCs at less than a dollar each in February 2011, only to turn around and sell them that June at $30 for a single BTC. That’s a 45,152% growth rate, and one hell of a way to make millions with twenty grand.

Then a great correction occurred in the form of a computer hack. Mt.Gox, the leading BTC exchange, was attacked in mid-June first by newly discovered Malware that pilfered away $300,000 worth of BTCs, then later that week a Bitcoin account was hacked into and the perpetrator tried to sell 400,000 BTCs (6% of the total circulating at that time) for $17.50, the going price in June. This amount of BTCs up for sale led to a massive devaluation sending the exchange price below $1.

And so there are some drawbacks to the virtual currency model—namely security and value protection. Also, as long as people like Mr. $20,000-to-millions continue to look at Bitcoin as an investment, instead of as a currency, it will always bubble up with investor hype, then eventfully burst. Hardly the stability needed for the exchange of goods and services.

So this leads us to Google Wallet. To be clear, Google Wallet is in such a state of infancy the media coverage surrounding it is almost ridiculous. The app only works with one Android-powered phone (the Nexus S model), on one provider (Sprint) and, so far, only with one bank/credit card provider (Citi/MasterCard). But it is the first legit mobile payments platform in the U.S.—or made legit by the Google name and empire. Google Wallet utilizes the near field communications (NFC) chip in the Nexus S phone to transmit financial info to those pay-and-wave terminals at the checkout counter. Instead of tapping your card, or swiping one, you merely wave your phone, enter a four-digit code to authenticate, and presto: you’ve made a purchase. Google thinks this will be everywhere, compatible with everyone, and uber-convenient for all involved.

But, as with other Google endeavors, they’re also out for more information, namely personal financial information—the juiciest data going right now. Remember Google Offers, their Groupon doppelganger still in Beta mode? Google wants to streamline all of their platforms, from their “identity service” Google+, to Gmail, to Google Offers, to Google Wallet. This holy quatrain would give Google’s algorithms enough data on you to make any advertiser drool on their keyboard—and in real time­. Standing in Best Buy, in the video game section? Well your phone knows it, and by extension so does Google. And look: there’s a new deal on 25% off whatever game system brought to you by Google Offers. Buy it now with Google Wallet. Location data, purchasing history, bank account and credit info—all are known by Google at once. That's a lot of eggs in one basket.

What makes all of this interesting is the timing. The global economic mess, on some level, was made possible by the abstractification of currency (largely other people’s currency). Of course, in the financial world the virtual money concept is old hat. It’s not money per se that’s exchanging hands, it’s not even hands at this point—it’s numbers, figures, and the decisions to buy or sell is largely being made by computer programs and algorithms. Now take a minute and look where that’s gotten us. What happens when that method trickles down to the average citizen? When Google tells us what to buy under the guise of a deal at Subway. Or when that Bitcoin account you’ve been building up gets devalued in a day?

There is a gamification of currency buried somewhere deep down here, it seems. Like Angry Birds with your credit card account. And while mobile payments aren’t curently widely accepted, we are dealing with people and companies that, taking the cue from Apple, Inc., are interested in creating something we, as consumers, don’t know we want yet. 

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Jake Perry is a journalist based in upstate New York.

[Photo by Adam Crowe]

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