Private money in virtual worlds: will wildcat currencies shrink the state?

• Author: Castillo, Andrea
• Position: Wildcat Currency: How the Virtual Money Revolution Is Transforming the Economy - Book review

Wildcat Currency: How the Virtual Money Revolution Is Transforming the Economy, by Edward Castronova, Tale University Press, 288 pages, $30

EDWARD CASTRONOVA initially started researching the economics of cybernetic worlds as a joke, whimsically gathering stats on buying and selling in the roleplaying video game EverQuest starting in 2001. "Then," he says, "I saw how much money there is."

For those who know where to look, virtual worlds contain many riches indeed, from in-game currencies to Amazon coins to frequent flyer rewards. Castronova, a professor of media at Indiana University, has distilled his years of observing human economic behavior in online environments into a new book, Wildcat Currency. Evoking the so-called "wildcat banking" period in the mid-19th century, when American banks were only regulated by state governments, the book's title refers to the burgeoning system of digital currencies proliferating in virtual worlds. Equal parts ethnography, prophecy, and pre-emptive funeral oration for ubiquitous state control of financial activity, Wildcat Currency outlines the unprecedented opportunities the author believes virtual currencies will afford to private individuals--and the problems this poses for the established world order.

Could the mighty Federal Reserve one day be vanquished by the humble Linden Dollar? Linden Lab's official gig is developing the platform for Second Life, an online world intentionally designed without manufactured conflicts or set objectives. But for about a decade, the designers of this virtual world have stealthily moonlighted as a sort of central bank for its own ad hoc digital currency.

It all started with a simple in-game currency pegged to the U.S. dollar. As the Second Life economy diversified and more Linden Dollars changed avatars' hands, a more complex monetary policy was needed. So the developers created the LindeX, a currency exchange where users could trade Linden Dollars for real-world currencies. Linden Lab monitors the economic statistics revealed by the LindeX to tweak the growth rate of the money supply as needed. Monetary missteps have been made along the way: In 2007, major theft on the Second Life World Stock Exchange and a sudden ban on in-game gambling caused a banking crisis and recession, problems that could have been alleviated by a more accommodating Linden Dollar supply. Live and learn.

The Second Life economy's capitalization of over $600 million is nothing to sneer at. Still, it's hard to imagine that the Linden Dollar haunts Fed Chair Janet Yellen's dreams. Online communities and their currencies--well-managed though they may be--aren't "real," most thinking goes. As long as malevolent money laundering and fraudulent...