[Dave Birch] Innovation in the sense of "building a better mousetrap" is certainly difficult, but you might argue that starting with a mousetrap and then working on a better one is much, much easier than starting with nothing and imagining a world with mousetraps. This is why, I think, that (the obvious example of PayPal apart) there hasn't been as much innovation in the world of online payments as I might have expected a decade ago. In general, nothing genuinely new has been invented for the online world and online payment methods tend to be "shoehorned" versions of existing offline payment mechanisms. There is one area of the online market, though, that has seen some real, entirely digital, money that exists only online and has no offline infrastructure or base, and that is "e-coins" in virtual worlds.
I think that an informative case study is that of China, where virtual currency has grown rapidly to the point where it has become an issue of concern for the government.
China lacked an efficient online payment system and had always had a fairly rigid regulatory framework which means that there are considerable restrictions on new payment scheme, making it difficult for innovators to move forward. The predictable result of this has been that virtual currencies, not originally intended for the purpose of generalised online payments, have stepped in to fill the gap. The example of Tencent's digital currency is illustrative. They produced an online currency called "QQ coins". Since Tencent's instant messaging platform dominates the Chinese market (it has four times the users of Microsoft's MSN) their QQ coins soon came soon came to dominate in online payments. It is interesting to note that the company has never allowed people to exchange the coins back for real money, yet QQ coins circulate as money within the general population much, I suppose, as Marks & Spencer or Carrefour vouchers might in Europe: they are entirely liquid because such a high proportion of the population can use them. And there is a secondary market in QQ coins, surely confirmation that they are money by any definition.
there's another factor: the lack of an online payment system meant that people had no choice but use QQ coins and, naturally, once they started using them the usual network effects too over.
The "QQ currency" is substantial: while it was created for use on the web, it is being used in other kinds of commerce (which, since I think that stimulating trade is one of the good things that a payment system should do, is probably a good thing overall).
[From Digital Money Forum: What kinds of competitors?]
The Chinese government has, quite reasonably, decided to begin taxing the profits made on virtual currency trading as income from the exchange of property. If in other words, if you buy coins for a dollar and sell them for two dollars, then you will be taxed just as if you'd bought a brick for a dollar and sold it for two dollars. Yet the trading of virtual currency keeps on growing. It is now a $600 million business for IGE, which is only one of a number of companies offering foreign exchange services between the real and virtual worlds.
The market is continuing to develop not only through the extended use of these generalised coins but also through the trading of currencies that are specific to individual games, such as the World of Warcraft or Lineage II. It seems to me that there is a strong analogy between players holding multiple virtual currencies in different games and the more traditional notion of "jam jars" for coins in the physical world, but that's a different issue.
Anyway, the point is that, in China, virtual currency has already matured to the point that it has all of the characteristics of what we might amusingly call "real" money: liquidity, savings and means of exchange. Yet virtual money is clearly not seen by the Chinese government, apart from anyone else, as being real money and its use is constrained. So while people happily trade real-world goods for QQ coins and QQ coins for World of Warcraft Gold, the use of virtual currencies to buy real world property (and, for that matter, the trading of virtual currencies) has actually been illegal since February 2007 when it was completely banned. This has had virtually no impact, and the currencies and virtual property are still openly traded on Chinese websites.
While it will undoubtedly take some time before we can judge of the long-term impact of virtual currency in the Chinese market, it is already clear to me that there are certain characteristics of the virtual money marketplace which we can use to inform thinking about the direction of the new payment systems in general. First of all, too much regulation hampers innovation, even when that regulation has been put forward for good reasons of consumer protection. Secondly, where innovation is held back in the the formal money marketplace, the Internet provides plenty of means for informal solutions to take over. Perhaps we need to help regulators to understand that while a certain degree of conservatism is undoubtedly appropriate to payment systems, innovation is to be enouraged.
Perhaps the most important use of money - It saves time.
Author W. Somerset Maugham (1943).
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