Banking Review

On the virtual money?

Virtual currencies are a nightmare for governments to regulate,
but social media savvy customers find them engaging and convenient

BY CHARIS PALMER

Virtual currencies such as Bitcoin are here to stay and represent an opportunity being overlooked by financial institutions, says Gartner banking analyst David Furlonger.

Bitcoin, which is a decentralised peer-to-peer currency created in 2009 that uses cryptography to create value, has been attracting the attention of US politicians and the media of late after a Bitcoin user’s account was hacked.

But Bitcoin and similar virtual currencies are part of a broader trend towards alternative currencies, says Furlonger. It’s a trend being driven in part by social media, says futurist Vanessa Miemis.

“As the sheen of social networking wears off… We’re transitioning from social networks to value networks _ who do we really want to be connected to and how do we mutually benefit each other?” says Miemis.

Miemis says people are finding alternative ways to generate and exchange value via social networks.

“It ranges anywhere from harnessing community potential, leveraging reputation and influence and different social metrics, to potentially disintermediating centralised banking,” says Miemis.

“There is significant opportunity to be attached to that trend and one wonders if anyone outside of banking or financial services will be able to capture some of that opportunity _ is it a telco, is it a retailer, or is it some other network provider?” asks Furlonger.

Virtual currencies raise big questions for governments managing monetary policy and taxation, acknowledges Furlonger, but the reality is there’s already many of them in existence.

“There are thousands of complementary currencies… many of these currencies are supported by governments because they’re an alternate form of financing in local communities.”

At the same time, there are already more than 2,500 ‘community currencies’ being traded around the world, says Miemis.

“Virtual currency doesn’t have to have any relationship to monetary value. There’re a lot of these collaboration platforms, knowledge exchange platforms and open innovation platforms where they have a virtual currency but it’s really a reward to help encourage participation.

“Whether you’re earning points, getting to the top of a leaderboard or earning badges, these are just different ways to entice people to participate and give them validation and status and contribute to their social currency.”

Banks losing traction
But the fact Americans are already paying for real-world items with Bitcoins has bankers questioning how a currency can operate outside of the bounds of traditional regulators.

Bankers may still think that as long as the organisations they work for own the ‘pipes’ banking transactions are conducted with, they will maintain an advantage, but Furlonger says two broader trends are running counter to this.

The first is the consumerisation of IT, which Gartner first flagged in 2005 as the most significant driver of IT change. Furlonger says this means the control banks have over the pipes, as they were, is not as strong as it used to be.

The second is the trend towards the ‘componentisation’ of services, which is driving intermediaries such as aggregators, and things like self-service. Furlonger says this trend presents a real challenge for financial institutions that are used to slower technology development.

“Will it be brought under the control of the regulator or has the horse left the barn?” asks Furlonger. “I don’t really have an answer for that except precedent would suggest in other industries that the horse has left the barn here.”

The real test may not be can a virtual currency survive regulation but, instead, argues Furlonger, can it achieve ubiquity, liquidity and security?

Miemis says it’s important to consider the role of currencies pursued as an end in themselves, versus those that are much more linked to social dynamics.

“You trust it as much you trust the community within which it’s operating.”