Leading financial institutions and experts are betting that virtual currencies such as those used in video games will become mainstream tender in the real world within three to five years.
HSBC’s global head of e-channels strategy and innovation, Andrew Davis, says his bank is gearing up under the assumption that virtual currencies would soon become a normal way of buying goods and services.
The rise of virtual currencies would signal a leap forward in the way people conduct transactions, while further blurring the line between online and real world retail shopping.
Where traditional currencies such as the Australian dollar are guaranteed by governments, virtual currencies such as BitCoin often have no central organising groups or value.
But despite the risks, usage is rising.
“We have a planning assumption that virtual currencies will become mainstream in three to five years,” Mr Davis said. “One of the reasons why we need to reach a view two to four years out is to influence our decisions around enterprise architecture, because it doesn’t change very often.
“How people place value on things won’t just be with hard currency in the future and we’re already seeing micro-currencies emerge around the world.”
Mr Davis made the comments during the PushStart FinTech Forum in Sydney, which brought large corporate banks and technology start-up companies together.
Macquarie Bank’s head of wealth management technology, Stephen Dunn, agreed that virtual currencies would become mainstream as cash and credit cards became less important, but said the key for banks was to make sure customers could use whatever form of payments they wanted.
“I don’t think cash or credit cards will disappear in less than five years but I think it won’t be as dominant,” he said. “But we shouldn’t be ruling it out today.”
Mr Davis said one example of virtual currency’s rising importance was American Express’s May launch of a card that rewards customers with “FarmVille” cash that can only be spent inside the popular computer game played by more than 80 million Facebook users. The virtual currency is spent by gamers who want to upgrade their virtual farms with items like fences, hay bales and buildings.
The RBA has considered virtual currencies as part of its report on innovation, due for release in the next two weeks. In its February 2012 summary of submissions, the RBA said organisations had “highlighted the emergence of ‘virtual currencies’, such as Facebook credits, and urged consideration of how these might interact with traditional payment systems”.
The Commonwealth Bank, Microsoft and PayPal all provided submissions discussing the challenges and opportunities raised by virtual currencies. And in February, CBA used an official blog posting to discuss whether or not virtual currency would mean the end of cash.
“The virtual cash revolution has fostered a means of exchange that is independent of both the banks and the state,” it said.
“But just like video didn’t kill radio, virtual currencies and online trading won’t herald the end of real-world currency and trading.”
City Index FX strategist Kara Ordway said virtual money could easily be a tradeable commodity not unlike the Australian or US dollar, once market demand and supply was established.
“Everything is becoming electronic – people are talking about a paperless foreign exchange market,” she said. “If you haven’t got physical Australian dollars [trading], what’s to stop there being some kind of internet or technology-related currency?”
University of NSW economist Tim Harcourt said HSBC was a good leading indicator of financial trends and virtual currencies would become more important as Australians used less cash.
“The more retail becomes international because of online retail . . . the more demand there will be for [virtual currencies],” he said. “I think virtual currency won’t become universal within three to five years, but it will certainly be common.”
Mr Harcourt said loyalty point alliances between companies such as airlines and retailers could lead to reward points being worth value in a range of stores as they formed alliances. But the Australian dollar would still be the backbone of the economy for now, he said.
“We still earn Australian dollars and it’s our main means of exchange, but this will be another means of exchange that people will use to exercise choice,” he said.
CSC general manager of financial services Stephen Kowal said companies and institutions were battling to become the hubs for new virtual currencies.
“You want to be the payments provider for this [phenomenon]. Virtual currency will just be another exchange rate, next to your, say, Aussie dollars,” he said. “People don’t trust virtual currency yet . . . but it’s not a matter of if but when. Maybe not in the next three to five years but definitely in the . . . next 10.”
He said regulators such as the RBA and the US Federal Reserve had to think of new ways to tax and manage virtual currencies as it became a valuable global commodity.
“You want to be the payments provider for this [phenomenon]. But I think the real institutions that could really control this are the [technology] companies themselves,” he said.
“If you use a company like Facebook as an example, it has 900 million users. If you give each of them a virtual $10 token for instance, you instantly get a tradeable currency. It’s like a country of its own. It instantly becomes a hub of this trade.”