A new breed of virtual currencies are starting to emerge —
and some of the giants of the web industry such as Amazon.com Inc.
AMZN +4.16% are edging into the market.
Gresham’s law famously stated that bad money would drive out the good. In the 21st century, it is now possible the law might be turned on it head. Good money might drive out the bad. If so, that matters to investors — for the simple reason that investing in the right currency makes a lot more difference to the kind of returns you can expect than what you actually put your money into.
But Gresham’s law applied to the age when it was formulated — Tudor England, where money consisted of the physical metal in the coins. If someone started minting coins with less gold or silver in them, they inevitably squeezed out the coins that had been properly made. But today’s world, dominated by paper currencies controlled by central banks, operates very differently. The money we use has no intrinsic value — so bad money could be driven out by the good.
We are starting to see a flurry of new currencies.
Amazon Coins: a virtual currency for Kindle Fire.
This month, Amazon launched its own coins — a virtual currency that can be used to buy stuff for your Kindle tablet. It is a very tentative move to start with: more like loyalty points on a reward card than actual cash. But every river needs to start with a spring — and with the web’s mightiest retailer behind it the coins could grow into something significant.
If so, Amazon coins will be far from alone. The virtual web currency BitCoin has already attracted a huge amount of publicity — and is steadily gaining in both circulation and value. After a crash last year — regrettably virtual currencies are just as prone to booms and busts as the real sort — it has steadied at around $25 and has gained acceptance.
There are virtual currencies swapped on games such as Second Life and Farmville that may one day escape into the real world. At the time of the launch of the iPhone 5, there was speculation that Apple
AAPL -0.19% would include a banking function, and perhaps even a currency — an iCoin would, of course, be much the same as everyone else’s money except twice as expensive and really cool to look at.
We might be reaching the point where virtual currencies start to pose a real challenge to the existing ones: the dollar
DXY +0.02% , euro
EURUSD -0.01% , yen
USDJPY +0.06% and pound
GBPUSD -0.02% . Indeed, at the end of last year, the ECB put out a paper warning about the competition from these new currencies. Although still small, the paper suggested they might undermine the credibility of national currencies.
It is not hard to see why central bankers are worried.
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