Virtual money could have very real effects for companies that help people transfer money.
There are now more than 70 virtual currencies, with the largest players being Bitcoin, Ripples and Litecoin. Another group tried to launch Coinye last week, though its backers abandoned their efforts on Tuesday after receiving a cease and desist letter from lawyers representing Kanye West. Some stores accept Bitcoins as payment.
Analysts say not all these currencies will last and very few people actually use them at the moment. But in the long run, virtual currencies could disrupt the market for traditional finance companies like banks, or remittance companies like Western Union, which handle money transfers. For one, the Royal Canadian Mint demonstrated MintChip, a digital payment platform, on Monday, the first country entering the game.
A Rush For Virtual Gold
Few of the many virtual currencies will last, says Nick Holland, senior analyst at the research firm Javelin Strategy & Research. In the latest forecast, his group estimated the virtual currency market would have doubled to more than $10 billion by the end of last year. He says they haven't seen signs that suggest otherwise.
"It's something of a gold rush right now; there are a lot of them out there," Holland says. "A lot of them will not make it at all; a lot of them are just science projects that people are playing around with."
However, if the currencies themselves don't stay, the idea driving them will, according to Holland and Joshua Gans, professor of strategic management at the University of Toronto.
"It's surprisingly difficult to transfer money between banks, and the question is, 'Why should that be?' " Gans says. "Some of these [virtual currencies] are trying to see if they can eliminate that, but of course the banks will come in and say, 'Well, we were charging people for those things in the past; we won't anymore.' "
Banks and companies like Western Union charge a fee for transfers, as much as $45 for international wire transfers, and you need the recipient's name, bank account information and the bank's routing number; with virtual currencies, some claim this could be cheaper and almost instantaneous. Holland and Gans compare it to how Skype disrupted the market for telecommunications companies: Making calls over the Internet made business harder for traditional phone companies charging for long-distance calls.
Actual Use Still 'A Drop In The Ocean'
But just to take Bitcoin as an example, the exchange rate is far from stable. Also, Holland cautions that just as voice-over-IP technology like Skype took years to become mainstream, the same will be true for virtual currencies, even ones that have been making headlines lately.
"Look at Bitcoin as a canary in the mine," Holland says. "The actual usage among the population at large is a drop in the ocean."
But, some significant players have noticed that drop.
On Monday, the Royal Canadian Mint demonstrated MintChip, a digital money transfer platform, at the National Retail Federation's convention in New York City. Although it is not a virtual currency, Holland and others say this shows that governments are starting to pay attention; a sign that virtual currencies are more than just a fad. Bank of America Merrill Lynch recently released its first assessment of Bitcoin, saying the cryptocurrency can become "a major means of payment for e-commerce" that "may emerge as a serious competitor to traditional money transfer problems."
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