The Cashless Society

Social Cash

Could Facebook Credits ever compete with dollars and euros?

Facebook CEO Mark Zuckerberg
Facebook CEO Mark Zuckerberg

Photograph by Justin Sullivan/Getty Images.

Nonstandard digital currencies have been around for almost as long as there has been a digital world. My first exposure to them was back in the late ‘80s, when I hoarded rupees, the currency of the fictional land of Hyrule in the Legend of Zelda. You could carry up to 255 rupees at any given time (the maximum quantity that can be stored in 8 bits of memory). Every time you fired an arrow it cost you a rupee, and rupees could be used to buy in-game items. Nobody confused this clunky kind of fictional money with the real thing, but as software has grown more advanced the distinction between real money and digital game money has been breaking down. Massively multiplayer online role-playing games (MMORPGs) like the World of Warcraft feature in-game economies that tend to spill over into the real world, with players trading real dollars for online currency that can be used to buy digital goods. There have even been examples of Third World gamers who play MMORPGS in sweatshop conditions and then trade in-game achievements for real-world money from rich country residents with more money than time on their hands.*

Which brings us to the latest, and perhaps most important, evolution in the world of digital currencies: Facebook Credits. Facebook, whose total population of users would make it the third-largest country by population, has launched a quasi-currency of its own. You buy them for 10 cents a pop (plus volume discounts if you buy in bulk) and use them to buy premium content inside games and applications like Zynga’s CityVille or EA’s the Sims Social . Though display advertising remains the company’s overwhelmingly dominant source of revenue, credits-related payment revenue is a growing source of earnings and one the company is hoping to expand upon to diversify its economic model. Facebook Credits raise the question: Could a gigantic nonsovereign like Facebook someday launch a real currency to compete with the dollar, euro, yen, and the like?

It turns out that there is no clear definition of what is and isn’t an actual currency. Instead, economists usually say that money has three attributes and that different things can manifest them in varying degrees.

First, money is a unit of account. When we say that Bill Gates is worth billions of dollars we don’t mean that he has a briefcase full of money. Rather, we count up the values of the various financial assets at his disposal and denominate them in terms of dollars. Second, money is a medium of exchange. People carry dollars around in their pocket and keep money in their checking accounts in order to be able to buy things. Last, money is a store of value. Dollars in the bank are not the highest-yield investment in the world, but it’s perfectly legitimate to save for the future by stockpiling cash and cash-equivalents.

Facebook Credits as currently constituted are primarily a unit of account. As a rapidly growing transnational community, Facebook faces the difficulty that it would be extremely annoying to list the price of everything in a dozen or more different currencies. Credits offer a systemwide pricing scheme for app vendors. A similar dynamic is at work in credits systems for Microsoft’s Xbox live and Sony’s PlayStation Network. As with arcade tokens, these quasi-currencies can’t be redeemed. Once you hand over dollars to Facebook for credits, it has your money until you actually buy something. In effect, you’ve handed over an interest-free loan.

This feature makes Facebook Credits and similar systems poor substitutes for standard currency. Nonconvertible money is hardly unheard of—it was typical of the Soviet Bloc economies—but it sharply undermines the use of a currency as a store of value. If you can’t convert the credit into something else of value in the world (gold, a dollar, a stock, a car), then it is a much less effective currency. Cuba gets by with a nonconvertible currency because it’s a largely closed society with an authoritarian government. China, more open but still authoritarian, gets by with a semi-convertible currency. But Facebook can’t force people to accept salaries in Facebook Credits, and Sony can’t stop sensible PlayStation fans from storing the vast majority of their wealth in dollar-denominated bank accounts. And since online quasi-currencies aren’t a good store of value, they’re not a very good medium of exchange. They’re accepted as payment in situations in which network operator rules mandate their use, but nobody else really wants them. By contrast, everyone’s happy to accept dollars as payment.

Convertibility would change all that. If Facebook Credits could be turned into yen or euros on demand at some floating exchange rate, then stockpiling them would make sense and the Credits would be broadly useful as a medium of exchange for a wide variety of transactions.  So far, that’s explicitly not the direction Facebook has taken, going so far as to explicitly ban the use of Credits “as payment for tangible goods” and warns developers of Credits-enabled applications that “you may not sell, trade or exchange Credits with any third party, nor may you enable or allow others to do so.” That’s because Facebook extracts a hefty 30 percent fee when vendors redeem their Credits in dollars. Keeping the virtual currency crippled ensures that redemptions will take place and preserves this revenue stream.

But by thinking small, the company may be leaving a bigger opportunity on the table. Right now the process of transferring funds from individual to individual is ludicrously clunky. Paper checks are still the best method available in many circumstances, and PayPal has built an entire business around circumventing banks’ inability to come up with a system of their own. But to use PayPal you need to create and fund an account all on your own. The genius of Facebook is that it’s already ubiquitous. Easily tradeable, swappable credits could quickly establish themselves as the payment medium of choice for informal cash transfers. Square is trying to establish itself in that business but using it requires a little plastic device to attach to your smartphone, and Square charges a 2.75 percent transaction fee. A widely used social network, especially one that makes money largely with display advertising, could easily undercut that on both price and convenience. Splitting the check for dinner could be as simple as everyone pulling out a phone and beaming some virtual money over to whoever put the tab on his card.

Of course dangers would also lurk. The closer network-dependent virtual currencies come to resemble real ones, the more likely it is that banklike activities will also emerge. Part of the origin of the financial panic of 2007-08 was a divergence between which institutions were regulated as banks, and which were engaged in the basic enterprise of banking—borrowing short-term money and making longer-term loans at a higher interest rate. Privately issued bank notes were a perennial source of instability in 19th-century American finance, and the repo transactions of the new “shadow banking system” became a 21st-century version of the problem. Private label virtual currencies could create a whole new version of instability. On the other hand, if you think the status quo banking system in the United States is growing too fat and happy on implicit and explicit government guarantees, the emergence of some new blood from other industries might be just what we need.

Correction, Feb. 29, 2012: This article originally stated that in-game achievements could be sold to people who have “more time than money on their hands,” when buyers of in-game achievements are people with more money than time on their hands. (Return to the corrected sentence.)