A followup to the QQ story:
[ for best read go to site below ]
freemarketnews.com
PRIVATE VIRTUAL CURRENCY IN CHINA: THE QQ COIN
Thursday, April 05, 2007
Is irredeemable private money feasible? I have long argued no, because of the temptation to cheat: without a contractual obligation to redeem, copious over-issue promises nearly unlimited profit and nearly no penalty. So how do I explain the success of the private online ("virtual") currency in China, the "QQ coin", as reported in the Wall St. Journal last week? Simple: the QQ coin is redeemable. The issuer (Tencent Holdings Ltd.) redeems QQ coins at posted prices for such items as "virtual flowers for instant-message buddies, cellphone ringtones and magical swords for online games". To many Chinese gamers, that's valuable stuff.
Originally, Tencent Holdings sold the coins, awarded them to winners of online games, and sold them to other firms (like Coca-Cola) to give away as promotional premiums. The "coins" are what writers in the "new monetary economics" have called a "pure accounting system of exchange," held only as account balances. Tencent Holdings has 233 million regular registered users, so that's a lot of people for whom QQ coins are valuable as a medium for buying Tencent Holding's virtual goodies. Btw, "QQ" is the name of a cute cartoon penguin who is Tencent Holding's mascot.
The remarkable thing about the QQ coin - and what has attracted the attention of Chinese authorities who see it as a threat to their exchange controls - is that its usage has spread beyond a closed circuit. A market emerged to swap cyberspace currency (QQ coins) for meatspace currency (the Yuan), so that skilled gamers with lots of coins can sell them for Yuan to less-skilled gamers. Online sites other than Tencent Holdings began accepting QQ coins in payment for physical goods ("real-world items such as CDs and makeup"), once they knew that they can unload the QQ coins for Yuan. Following the logic of Carl Menger's theory of the emergence of money, the marketability of the QQ coin has been self-reinforcing.
The surprising thing here is that the QQ coin has not emerged out of barter, as in Menger's scenario, but as a parallel currency in an already monetized economy. Why don't online sellers find it easier just to be paid in Yuan? The key seems to be that the ease of making online payments in Yuan is limited. Online payment devices we take for granted in the West, like credit cards, are not so readily available in China. A QQ account balance was already useful for buying at the Tencent Holdings site. For a user without a credit card, it has become even more useful as more websites have begun accepting payment in QQ coins.
The WSJ article, by Geoffrey A. Fowler and Juying Qin, contains the following unfortunate passage:
"Economists say virtual currencies work like any other currencies, so long as people trust the institutions behind them. The U.S. dollar, which lost its gold backing in 1971, survives because people trust the U.S. government."
I wouldn't explain the positive value of the fiat US dollar quite that way. Paper dollars initially gained acceptance as claims to gold. They lost their domestic gold backing well before 1971, by the federal government's outlawing of domestic use of gold-denominated money, confiscation of monetary gold, and declaring of the irredeemable Federal Reserve Note as legal tender in 1933. The fiat dollar survives because Americans find it the most useful medium of exchange, gold and silver having been forcibly demonetized. Unlike fiat money, virtual currencies work by being redeemable, either for money or goods, at announced rates.
The WSJ article continues:
"The trouble starts when a virtual currency that isn't backed by a trusted government, becomes linked to a real one that is through an exchange rate. Virtual currency brokers call that RMT, or real-money trade. When that happened to the QQ coin, it effectively turned into a parallel currency operating alongside the yuan, says Yiping Huang, the chief Asia economist of Citibank. The creation of too many QQ coins, he notes, could, in theory, create a surge in China's total money supply, leading to inflation."
What trouble? A parallel currency is not trouble but rather convenience for its users. It is trouble only for a government that has a fetish for controlling transactions. The creation of too many QQ coins would, in theory, not lead to inflation in Yuan prices, but merely a depreciation of the QQ coin against the Yuan.
Unfortunately for the Chinese people, the Chinese government is taking steps to limit the exchange and use of the QQ coins. The People's Bank of China has announced that "the government will bar users from trading virtual currency for real money." That won't stop inflation of the Yuan. At most it will make its effects slightly less visible, at the cost of making millions of transactions less convenient.
Lawrence White, F.A. Hayek Professor of Economic History
Leading free-banking theorist
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