In 1991, Paul Glover created an alternative paper currency to trade goods and services within the Ithaca, New York, community. It sounds crazy, but with several million dollars in value, Ithaca Hours is a huge success, and is now one of the oldest and largest of numerous local currencies in the U.S.
As commerce shifts from cash transactions to electronic payments and more exchanges move online, new forms of electronic currency in the spirit of Ithaca Hours are starting to take hold. The most well-known is Bitcoin, which describes itself as “an experimental new digital currency that enables instant payments to anyone, anywhere in the world.” By allowing users to remain anonymous and by operating outside of any government or entity, Bitcoin has the potential to transform banking, international trade, and even illicit trade.
As a general purpose currency, Bitcoin may be gaining traction steadily, but it’s still far from being widely used. In the meantime, application-specific and in-game virtual currencies like FarmVille Cash, Microsoft Points, WoW Gold, and Linden Dollars have been growing very quickly. In 2011 alone, $2.3 billion was spent on virtual goods using in-game currencies.
In the same way Ithaca Hours have to stay in their local community to retain their value, virtual currency also must be spent within its original marketplace, creating a virtuous cycle of engagement, transactions, and ultimately revenue for the company. This type of behavior can be seen in highly engaging games like Second Life, where users spend over 100 minutes per visit. I’ve also seen it firsthand at Listia, the online marketplace I founded, where people can trade real goods using a virtual currency called Listia Credits. Rather than concentrating on making money or receiving goods, users on Listia seem to be motivated more by altruism, recycling, fun, and increasing their reputation, values which I think would be greatly muted if generating money was the primary objective.
That’s an example of an even more abstract alternative currency: “social currency.” It can come in many forms, such as a reputation score, a collection of badges and followers, or the amount and quality of content generated. Social currency is an important part of online communities such as Quora, StackOverflow, Reddit, and Pinterest. These communities all have content consumers and producers (not unlike buyers and sellers) that trade insights and knowledge, not for money, but for the satisfaction of contributing and building up their own reputation or social currency. It’s no surprise that all of these companies have experienced exceptional user growth and engagement.
As new forms of currency evolve, they will significantly change how we interact online. We’ll spend more time and money on casual entertainment like social games, where virtual currencies are so well integrated and easy to use, we hardly feel like we’re spending real money. We’ll also be more helpful to each other and move from being consumers to producers within our favorite communities. The ease of gaining reputation and credibility through social currency will help us do this. And if a currency like Bitcoin evolves into a true global currency, we’ll be able to buy and sell things internationally without the involvement of banks; individuals will be able to set up global storefronts with the same reach as multinational retailers.
What will make that happen? Three big shifts in technology will help accelerate the growth of these non-cash forms of money over the next few years:
1. Mobile: People are interacting with their favorite services increasingly through mobile devices, but mobile monetization is still a big question mark, due to clunky input methods, poor connectivity, and small screen sizes. While mobile payments continue to evolve, virtual currencies could become an easier option.
2. Social: Social networks are ubiquitous, and entire industries based on virtual currencies–like social gaming–have been built on top of these networks. As commerce becomes increasingly democratized, social commerce is going to be the next big disruption to ride on top of social platforms. Big retailers used to have a unique advantage because of their credibility, but the increasing value of social currency enables anybody with a good product to quickly build up enough goodwill with potential consumers to compete with them.
3. Online Privacy: Privacy has become a big concern as we start to share more of our lives online, and there’s a new movement towards protecting that privacy. However, no matter how secure we keep our networks and software, there’s still no way to remain anonymous if we need to pull out our credit card to buy something. A currency like Bitcoin could be the solution to privacy concerns.
In the end, businesses that embrace this trend toward alternative currencies will be rewarded with increased engagement, better protection against competitors because of currency lock-in, and more revenue-generating transactions due to the ease-of-use of virtual currencies. Traditional money isn’t going anywhere soon, but there’s a huge opportunity right now for well thought out alternatives to disrupt the status quo.