The virtual is more real than we think (how real is money?)

I am not a computer gamer, nor do I play one on TV. I am a techie, though (or was until fairly recently) so games are on my radar, and I thought I had a reasonably good take on what’s happening. In recent weeks, I’ve had to do a lot of reading up on them for work, and gave a presentation on Thursday to a very diverse group of professionals, explaining to them how most of their professions can have an application in game design (much to their surprise). As a demonstration, and talking point, I showed them the famous Leeroy Jenkins machinima piece.

I’ve been doing a lot of exploring in Second Life as well, as you’ll have guessed from the spate of recent pieces about that. Thanks to Preetam’s directions, I found the virtual Singapore, which seems to be growing fairly quickly. Most of the people I’ve met there seem to be students (which here in Singapore means schoolkids rather than university-level as elsewhere), but I hope I’ll run into older people there at some point.

What’s got me thinking about this even more is finding a story in the WSJ on the rise of the QQ coin as a virtual currency in China. As the discussion about the story in Slashdot points out, most currencies are virtual anyway, since they’re no longer backed by reserves of precious metals. This was pointed out during my MBA finance courses as the dirty secret of the currency trade: although a currency may be ’sound’ based on economic and trade figures, intangible and irrational issues such as political events, rumours, or a simple lack of confidence can cause the currency’s value to crash, often with little warning. (This sort of thing is often done deliberately – George Soros, I’m looking at you!) In other words, a currency holds value only as long as traders believe in it.

This sort of process is happening now in China, with the sudden and unexpected rise of the QQ coin as an alternative microcurrency. Unless the Chinese government clamps down (which they inevitably must do) this is bound to develop in to a bubble, and a crash. Even so, one of the most interesting points of the article is that a virtual currency has occupied the economic niche that elsewhere is filled by credit cards. As a meme, I think that this means the genie is out of the bottle, and can’t be put back. Will this mean irreparable harm to the credit card in China? If young people (the only ones who will ever be affluent enough to be potential credit card users) are now attuned to using virtual money, who will meet that need? Will the credit card companies be able to change their model? Or will an indigenous Chinese or Hong Kong bank introduce a virtual currency and dominate the Chinese market? If China adopts “game money” instead of credit cards, what trends will that kick off in the rest of the world?

Of course, the QQ coin isn’t the only privately issued virtual currency to have a ‘real-world’ presence: Second Life’s Linden dollar also does, as one example. These game currencies are therefore just as real as Scottish bank notes or Hong Kong dollar notes, which are also privately issued. The difference with China, as always, is the number of people involved – and that as with other other technologies, China seems to be leapfrogging generations of financial tools, going straight from cash to e-cash, and bypassing cheques and credit cards.

It’ll be interesting to see where this goes. I’ll also point that in Neal Stephenson’s Snow Crash and The Diamond Age, the collapse of the traditional states, and the rise of elective, non-traditional dispersed nations is credited to the inability of states to control online transactions, and the subsequent erosion of their tax bases. With the growth in the value of trade in Linden and QQ dollars, governments will eventually seek to tax them – but since the participants are global and often untraceable, it’ll be interesting to see how this could be done. If the Chinese and US governments try to do this via the parent companies, there will be the inevitable temptation to reincorporate in the Caribbean, or some other haven; what then?