How videogame currencies could effect real-world economies

This article is part of a collaboration with iQ by Intel.

The economies inside of videogames have been laying the groundwork for a revolution in money, and for proof we look no further than Mt. Gox, which, for much of 2013, was the center of media attention thanks to its involvement with Bitcoin. The hacking, the search warrants, and the scandal of $450 million worth of bitcoins vanishing without a trace would come later. Before the boom and bankruptcy of the world’s largest cryptocurrency exchange, Mt. Gox, or Magic The Gathering Online‘ eXchange, was a website where Magic players could buy and sell cards for the game—for instance, Creature: Duskdale Wurm—for the going rate.

Five years later, in 2011, Mt. Gox’s founder Jed McCaleb decided to repurpose his by-then defunct trading hub into a Bitcoin exchange. Unimpressed, he sold the domain to Mark Karpelès, a French expat who under the pseudonym MagicalTux cultivated it into a thriving money market from his computer in Shibuya, Japan, although the physical whereabouts is unimportant, since the virtual currency is largely unregulated and independent of any government.

The virtual currency is largely unregulated.

What is important is how online games have shaken up the future of the world economy like a can of Fanta riding a mechanical bull. “Virtual currencies in game worlds created the cultural testing place. It was the proof of concept, the demo,” says Edward Castronova, the author of a great number of books on synthetic worlds and virtual economies, including his latest, Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy.

Apparently, the insurgents are numerous and quite volatile. Right now, a high number of Bitcoin competitors—including Dogecoin, Mastercoin, BBQCoin, ValutaCoin, Peercoin, and many more—are vying to become the stable virtual currency everyone uses. None of the contenders seem particularly well-suited to last. This is troublesome for governments, like that of the United States, who traditionally earn revenue from taxing a single, non-virtual currency: the dollar, in the US’s case.

In a sense, they have wizards and ogres to blame. It turns out the big ideas underlying Bitcoin originated in the history of videogames. Long before the coin rush atop Mt. Gox, Magic: The Gathering players were among the first to pay hard-earned money for particularly rare cards that granted them an advantage when playing the game. This in turn instilled the idea that virtual stuff could be exchanged for real stuff. A few years later, in 1997, Ultima Online ushered in large-scale virtual economies, although it was kind of a disaster, with hyperinflation and one dude hoarding 10,000 identical shirts. Sony’s EverQuest, which came next, was significant because it let players wheel-and-deal their merchandise, hawking it in an online bazaar. Here we see an important, potentially threatening, shift: two parties could exchange virtual currency for something of value totally independent of a central bank.

This is why real-world governments get concerned. The whole economy is based around the dollar, or the yen, or the peso, depending on which country you’re living in. Today, if I go to the coffee shop and buy an espresso shot, I’m going to pay in dollars and cents. But in 5 to 10 years from now, according to Castronova, I’ll have a digital wallet on my smartphone, similar to the peer-to-peer payment interface in a MMO. “You’ll wave your phone at a cash register and it will say: We accept Bitcoin,” he tells me. The two computers will do their thing and the transaction will be completed, but it won’t get reported for sales tax, because Bitcoin transactions are anonymous. Right now this amounts to pocket change for Uncle Sam, but eventually it could add up to a huge drain on the economy. “Either they’re going to have to put software on all our computers, or…,” Castronova tells me, his voice trailing off. “It’s a real clash of civil liberties and monetary innovation. It could get scary.”

“It’s a real clash of civil liberties and monetary innovation.”

Unlike credit cards and paper money, cryptocurrencies never tie into the dollar machine that is the Federal Reserve. So where do they come from? Surprisingly, Bitcoin has its roots in Chinese gold-farming, where unskilled laborers would spend all day playing World of Warcraft, mining gold in-game. Then, they’d sell the gold for real money to players looking for shortcuts. Likewise, mining is at the rock-bottom heart of cryptocurrencies. Essentially, if you log-in to the Bitcoin network and let your laptop crunch numbers for long enough, you’ll be compensated in bitcoins. “The whole idea that you create something that has value by making it hard to mine—that comes from games,” Castronova says. And not just any games, but the most time-intensive online role-playing games, which require a huge level of investment for players to enter.

Cryptocurrencies have a reputation of being outlier currencies for people who distrust the government, but their arrival could signal a large trend: people simply aren’t participating in the economy as much these days. “Rather than buying big cars and big houses, more and more people are leaving the real world and going into the world of imagination, in some sense,” Castronova says, “into the world of information and digital and virtual.” It would only take a small shift away from big object consumption to create a long-running stagnation in the economy, he theorizes, though there aren’t enough economists currently studying the trend to say with much certainty.

Magic: The Gathering image via Ninniane

Bitcoin images via Antana