Cryptocurrency: it’s a concept right out of sci-fi movies, but you’ll be surprised to know that digital money has real legs.
Bitcoin, a computer-rendered form of digital money that mirrors cash online, is catching on among online gamers and other cybercitizens in ways that could challenge the physical nature of money and create real headaches for regulators intent on following the trail of money.
Bitcoin operates on a peer-to-peer network. When a sender sends bitcoins to someone, they create a message that attaches the new owner's public address on the network to an amount of bitcoins and authorizes it with the sender’s private address. The transaction is then broadcast to the entire bitcoin network, so the entire network is made aware that there is a new owner of the coins. That allows users to trade cash through a wire transfer to an exchange, or Paypal, for digital bits that can be exchanged for goods and services just like cash, but on a largely anonymous, untraceable basis. You can buy bitcoins from individuals, or on a number of trading exchanges.
That’s the promising part of Bitcoin to digital enthusiasts, and the harrowing part for banks: Bitcoin starts from the proposition that digital cash can be sent from one party to another with no need for a financial intermediary. So, rather than the many cost implications of a trust-based, verification-driven system of exchanges, Bitcoin relies on a sophisticated series of digital exchanges to prove the existence of value, eliminating the need for authentication and allowing anyone to send digital value to anyone, anywhere, in real time. Best of all, it’s free, unless you want to elect to accept a nominal fee for lightning-fast delivery.
Mindblowing, eh? It’s unlikely to replace cash anytime soon, but it offers a tantalizing glimpse of the future of currency in a digital-dominated world, and it’s gaining real traction in the world of online gaming, in which players use Bitcoin to replace cash to purchase playing time and virtual objects.
Bitcoin reports that there are more than 9 million Bitcoin accounts active, worth more than $45 million to date.
A sure sign that Bitcoin is catching on: a Bitcoin exchange, created by the technology firm BitInstant, allows Bitcoin users to fund Bitcoin transfers from their bank accounts or through Dwolla, an online currency exchange popular among gamers.
BitInstant has agreements with major banks like Bank of America, JPMorgan Chase and Wells Fargo, allowing users to wire or transfer money electronically to BitInstant, which serves as an exchange to buy or sell value in Bitcoins.
Unbeknownst to most of us, virtual commerce is a booming marketplace, where gamers and other online aficionados buy online goods and services using digital currency like Bitcoin or Zynga, another major alternative currency.
Facebook is another major frontier for alternative currency. The social network’s platform encourages outside parties to create virtual currency in the form of Facebook credits.
To see a real-time example of where all of this is headed, look no further than Plink, which operates a Facebook currency that gives users credits for purchases at participating retailers and online merchants. Register your credit card with Plink, and when you make purchases at Plink merchants, you’ll get Facebook credits worth about 50 cents apiece for each transaction. You can let those credits build up and then use them for online transactions just like cash.
Plink offers Facebook credits through merchants such as Dunkin’ Donuts, Outback Steakhouse, Burger King and Taco Bell, as well as a wide range of online merchants and big-box retailers. The company reports that merchants participating in Plink see as much as a 65% increase in sales.
There are a host of competitors entering the virtual cash and online rewards businesses, from Zynga, which recently announced a partnership with American Express, to TrialPay, which Visa invested in recently. And in a sure sign of how far digital currency has come, the Royal Canadian Mint has rolled out its own digital cash, called MintChip.
The downside to all this digital currency, not surprisingly, is security. Bitcoin and its competitors provide none of the traditional protections that credit cards offer for fraud, and hackers already have managed to breach security in at least one high-profile incident. Still, it’s a tantalizing glimpse at the cashless future, and while it’s too early to say that cybercurrency will supplant cards and cash, the early returns are evidence of the growing momentum around new ways to pay online.
Image: skodonnell / iStock.