Know BitCoin? It’s a weird peer-to-peer internet payment system.
Why is it weird? For two reasons: the first is that no one controls it or formally issues the currency. The money is used (and created) by operation of algorithms, through a peer-to-peer network (like BitTorrent). The second reason is that the creation of this currency is unrelated to actual economic activity. BitCoins are created as a result of using computing power, but their value fluctuates as a result of (limited) market operations, and some actions within the algorithms (e.g. the number of bitCoins created is halved each 4 years). But you can’t close down BitCoin any more than you can close down the Pirate Bay or other BitTorrent sites.
However, there are clear risks involved in using BitCoins. What happens when your account gets hacked, or there is some crash? How do we know that the algorithm does not contain some bugs or viruses, or that users are who they are? We don’t, of course.
Is this a currency? Yes, but not as we know it. Suffice to say that BitCoin creates financial instruments, i.e. money. Some people are concerned that, because payment with, and use by, BitCoin is untraceable, it may be used for paying drugs and other illegal activities.
BitCoin will probably not survive in any useable form, not because the IT is bad, but because the economics of the system don’t seem to work. However, it is a first sign of peer-to-peer currency. I would bet a (small) amount on seeing better forms of peer-to-peer currencies appearing in the near future.
What about Groupon?
Groupon is a “deal-of-the day” website. It basically advertises itself as an online marketing organization. You offer your customers a discount, and Groupon allows you to publicize it and that way, hopefully, those customers will find you, and then later come back and spend more.
Groupon is clearly part of the alleged internet-bubble 2.0.
However, as this blog explains, Groupon is, in effect, a credit provider. I.e. Groupon creates money.
So here we have two kinds of “Internet money”. They did not exist before the Internet, and they depend on new technology for their existence.
The first question is: how do we know how much of this money exists, and what effect will it have on what we still call the “real” economy?
Nobody knows. There is obviously no clearing or regulation of all this virtual money. But make no mistake, this virtual money is very real.
To me, it looks real enough to have the same effect as real tulip bulbs – they can act as real currency, and, when used wrongly, they can have devastating effects on the real economy.
The second question is: how does this new, virtual money, relate to the new, virtual economy?
There is a lot of economic activity generated by new technology that is not captured in official statistics. I know this, because at least one of my clients explained that the VAT administration has, effectively, no clue what he is doing, and how they should tax him. My guess is that the value he adds to the economy is, effectively, not taxed, or indeed reported or included in official statistics. But it is real economic activity, and there is real value there. Imagine a million long tails of the Internet economy, none of them included in any economic report.
So we have real new economic activity (through use of virtual networks) that is not captured by economic measurement or taxation. On the other hand, we have the creation of new, virtual money, which is not captured by financial measurement, and unrelated to economic activity.
In an ideal world, money creation accompanies new economic activity (e.g. when a bank grants a mortgage loan to someone who uses it to build a house or an office building).
But how do we connect these new activities to this new money?
The third question is: can you “own” virtual money?
The algorithm creating BitCoin is secret. No IPRs would apply to it.
But would it be possible to have exclusive rights (IPRs) to a technical way of creating virtual money? In theory, it’s perfectly possible. Anyone who would succeed in doing this (e.g. through a patent on a business model, related to a technical invention), would effectively patent a virtual money printing press, printing virtual money that can buy you real goods and services.
Imagine being able to levy a license fee on any euro, dollar or yen created in a particular way. You’d be laughing all the way to your virtual central bank.
It remains to be seen, though, whether governments will accept that a private organization or person obtains exclusive rights to “e-minting”.
Watch this space!