THE RISE OF THE VIRTUAL CURRENCY

virtualVirtual currencies have had an interesting existence since they first hit the web. There are often predictions that the life of cash as we know it is coming to an end. The market totaled about$3.7 billion in the U.S. alone during 2012. Currencies are complex but powerful things.

One of the most controversial universal online currencies has been the Bitcoin. Critics have insisted it’s a scam of Ponzi proportions, warning people to be very careful about trading in the digital stock. It’s a decentralised, anonymous currency, operated by its own global network of peer-to-peer users – which means banks have no control over it, and is why it can operate very cheaply. [Watch].

This anonymity is also why its infamous users have included WikiLeaks and drugs barons in the past. Despite being vulnerable to hackers, a growing number of vendors are accepting the currency, and one Bitcoin Casino has made £300,000 profit in just 6 months operation. Serious business. Currently, one Bitcoin is worth about £17 ($26).

A host of other major players have shown interest and even operated virtual currencies, with different scales of ambition – in the short term at least. There are, after all, significant advantages to being able to stipulate the terms of how a currency can be acquired and spent. Google Ventures last year threw its backing behind digital cash organisationPocket Change, a currency focusing on games which run on Android devices. It’s already ‘rewarded 40m’ of its users.

This sort of incentivisation is a relatively simple development in how many loyalty schemes operate, especially those run by major retailers offering spendable rewards. Tesco’s announcement of an imminent ClubcardTV this week is another example of how their loyalty scheme is acting as a broader currency. [Watch]. And news this week that Amazon will soon be launching its own tightly controlled virtual currency, Amazon Coins, shouldn’t really come as a surprise.

Amazon will be giving away millions of their digital coins for free in the coming months, but they’re being distributed quite specifically to be spent in the Kindle ecosystem. That means of course, that the digital cash is firmly directed at spending on digital products, not Amazon’s incredible catalogue of physical goods. It will be a major boost for developers who can profit from increased spending, users who get free stuff, and Amazon, who can focus their consumers’ attention rather sharply.

But it’s not all one way traffic in the world of virtual currencies. Back in 2011 we wrote about Facebook’s Credits, which were being rolled out as part of a process for making purchases on the social platform. But Facebook announced that they would end the 3 year project by 2013, to focus on a standard payment mechanism in dollars, such as that run by iTunes. So is that the end of Facebook and associated currencies? Probably not. [Read on].

Virtual currencies will continue to chop, change and develop over the coming quarters and years, and everyone from banks to retailers will no doubt have a role to play. We’ll be watching developments very closely. It’s an area ripe for innovation, running right to the heart of retail…

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