HindustanTimes Sat,27 Dec 2014

Virtual worth: Paperless currencies usher in new age

N Madhavan , Hindustan Times  New Delhi, March 30, 2014
First Published: 23:27 IST(30/3/2014) | Last Updated: 02:01 IST(31/3/2014)

“I owe you one.”

Heard someone say this? The person probably created a currency — in a manner of speaking. Anything of value that can be used to create a transaction between two people can be called money. Economists say that money is a unit of account, a medium of exchange, a measure of value and a store of value.

If you look at rupee notes, most of them carry a “promise” by the central bank governor — so it is just an IOU by an authorised state machinery.

But people, being what they are, get practical about creating their own “currencies” as long as it is honoured. In Africa, sea shells were used until the 19th century as money. But gold — practically useless but known for its short supply and lasting quality — has been the most popular non-currency form of money and is a standard for central banks.

Now, in the age of the Internet and digital technologies, money is undergoing an exciting makeover, with talk of virtual currencies, mobile wallets and software apps that pretty much do what gold has been doing for centuries and currency notes have been doing for a while.

Read: 10 things to know about virtual currency Bitcoin

But the path is not easy, as the controversy over bitcoin showed last week. The most popular of virtual currencies has been facing the wrath of central banks — either being banned or frowned upon with words of caution by governors.

Bitcoin, the best-known virtual currency, started circulating in 2009. Its current market value is estimated at around $8 billion, with up to 80,000 transactions occurring daily, according to accounting firm PricewaterhouseCoopers LLP.

However, Washington’s Internal Revenue Service ruled last week that bitcoins are not currency but more like property — let us say a plot of land or a share or a painting — and subject to capital gains taxes.

Fresh concerns have emerged on the currency after the collapse of Mt Gox, a Tokyo-based bitcoin exchange that filed for bankruptcy after losing $650 million worth of the digital currency.

Meanwhile, other virtual currencies have been taking off — and influenced by politics. Just as countries can create barriers or impose controls on foreign exchange (like India’s recent curbs on gold imports or trade), and just as countries can print money, there have been attempts to create new kinds of digital currencies.

In Iceland, which saw its banking system more or less wiped off during the 2008 global financial crisis, there emerged auroracoin — a new currency now estimated to be worth $11.37. This currency is aimed at fighting capital controls imposed by the Iceland government.

“The power must be taken away from the politicians and given back to the people. Cryptocurrencies are a very important milestone in this fight for liberty. They bring the hope of a new era of free currencies, immune to the meddling of politicians and their cronies,” said a document signed by the apparently fictional creator of the currency – “Baldur Friggjar Odinsson.”

Here is the essence: Money is often a matter of perception and psychology and virtual currencies can emerge as “parallel currency”.

In Scotland, a venture capitalist is offering 1,000 “Scotcoins” to every resident adult of Scotland. In Ireland, there is a “Gaelcoin” being offered to Irish citizens, 50 free coins for each.

But these are not the real deals in the age of digital technology. More practical and innovative applications are being spawned across the planet by merchants, companies and startups to focus not so much on money’s “store of value” but as “medium of exchange” and “unit of account”:

Telecom companies worldover, with support from central banks, are offering “mobile money” as a service.

Mobile wallet companies are helping users carry the equivalent of cash in their handsets (much like traveller’s cheques).

Technologies like near field communications (NFC) are being used to make the mobile phone an instrument of payment without your having to sign credit card vouchers—making the process more secure.

In general, software apps are being developed to substitute for money in various ways. Some companies like Starbucks allow “digital tipping” of its baristas through a mobile app.

Pre-paid cash cards are being used as swipe instruments where customers do not need credit cards or even bank accounts.

Next generation ATM machines will recognise your face through facial biometric technologies.

Who knows? Some day, you may not need even a mobile phone or ATM card to do a deal.

These developments are still evolving. Innovators, service providers, merchants and regulators are grappling with these in so many ways.

If the jump from gold coins to paper money was one big jump for the world, the shift to digital currencies could be a great leap forward.

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