Virtual Money Scheme - Personal Statement Example

Student’s name Course code+name Professor’s name University name Date of submission Development of money can be traced into seven major stages since its inception as a concept of trade. The first stage is the commodity money which was widely used during pre industrialization. Commodity money majorly involved exchange of goods and goods hence the concept of commodity money (ECB, 2012). Second stage in the development of money is the fiat money which was developed in 700BC. Thirdly is the fractional Banking Money where people used to take portioned of their income in form of gold into the bank. The fourth one is Fractional Banking Money + Central Bank ‘Lender of Last Resort where reserves banking took centre stage in the transactions and development of banking system. The fifth stage is the development of liability management where people were borrowing money from the bank due to security and trading activities (ECB, 2012). The sixth stage in the development of money is the Securitisation and lastly is the Market diffusion of money. Despite all these stages in the development of money, the three major functions of money relatively remain constant through out the development stages of money, these includes; Medium of exchange: - be it commodity money or fiat money, all of them were generally accepted as a medium of exchange by the society at large. These made the transaction among societies easier and simple as the needs and wants of people could be made met. Unit of account- throughout the development of money, always money is regarded is a unit of measurement as always commodities could be viewed and quantified in terms of monetary value. Store of value; throughout the development of money, the money could be stored and retrieved for use in future so the money as always act as a store of value. Virtual money came into existence in 1980 after the establishment of World Wide Web, the development and growing in the use of internet encourages the use of virtual money. One of the reasons for development of virtual money is the existence of internet which as encourage the development of virtual communities. The cyberspace as encouraged the existence of these communities as they could easily meet and interact and those with common interest and goals could pursue their goals (ECB, 2012). Examples of these virtual communities include social networks like twitter, face book and MySpace. The development of these groups of people as encourages the development of virtual money as a medium of exchange as this could make them to easily pursue their own interest amongst themselves (ECB, 2012). Existence of goods and services which are distinct and different from other services which are being offered in the real market, in the virtual world, so this as encouraged the virtual communities to develops digital medium of exchange which is virtual money (ECB, 2012). Their innovativeness to some extend has contributed to the development of current digital money. Both the Bitcoin’ and ‘Linden Dollars’ has developed as a result of innovativeness and common inters among these group of people. The development of these virtual money in most cases affect the economic performance, Bitcom money value is based on the fiat money system which in most cases created by the government to act as a medium of exchange among players in the market (ECB, 2012). Bitcom followers and school of thought hold strong view that through online Bitcom transactions the value of money is maintained and could spell out in appropriation by any government. They believed that; i. They see Bitcoin as a good starting point to end the monopoly central banks have in the issuance of money ii. They strongly criticize the current fractional-reserve banking system whereby banks can extend their credit supply above their actual reserves and, simultaneously, depositors can withdraw their funds in their current accounts at any time. iii. The scheme is inspired by the former gold standard The design under which Bitcoin was developed was such a way through which, the control is decentralized and no single central authority could control its circulation in the market and the creation of any additional money is only through mining activities. Following this, Bitcoin development and circulation does not depend in any monetary policy to control its circulation hence could pois a lot of threat to the development of economy as a whole. If the circulation and supply of any currency does not depend on any monetary policy then several side effect might arise including inflation and devaluation of the currency. The excessive supply could be dangerous to the economy and in case of the shortage is also dangerous to the economy so there is need for control (ECB, 2012). In the case of second life economy, before the development of linden money, it works like batter economy where goods could be exchanged with goods among the virtual community. As Bitcoin is kind of closed economy, second life was quite open as the amount of dollars which was being traded was high and the Linden lab was controlling the movement and supply of the Linden dollars just like any central Bank in any other part of the country (ECB, 2012). Linden Lab was the main controller of Linden money supply and controller’s hence monetary value was purely created from Linden lab. Since the market was open, market forces like demand and supply was the factors controlling the supply of money. Factors of production are the same and they include land, labour and capital (ECB, 2012, pp 18). Though the second life was an online thing, the truth is it went beyond the real world in terms of monetary issues as it was interacting with real economy. Since the only authority which could control the circulation of Linden dollars was linden lab without involvement of any public authority, this created a great threat both to the economy as in case of any imbalance in trade then it would cause the general economic impact (ECB, 2012). With the development of second life, many companies also started trading online which includes advertising and marketing of its goods and services, with this development, ore interaction of second life economy with the actual economy increases complicating its impact in the real economy (ECB, 2012). With second life economy, online infringement of rights existed though they had developed Digital Rights Management technology, there have been several claims related to the infringement of intellectual property rights. Moreover, a number of paying users have filed a class-action lawsuit against the company and its founder. Apparently, the terms of virtual property ownership were changed, and residents were forced to agree to new terms of service that eroded their ownership rights to virtual property and goods (ECB, 2012). This has general effect on the innovation and development of individual entrepreneurs as they could not reasonably benefit from their innovativeness due to online infringement (ECB, 2012). The two kinds of virtual economy expose a lot of risk to the economy in terms of:- Price stability and monetary policy; the major challenges in these two aspect includes; i. Preservation of unit of account ii. The risk to the effectiveness of monetary policy iii. The distortions to the information content on the monetary aggregate. These could experience on the total effect they have in the actual demand on the supply on the real money supplied by the central bank (ECB, 2012). If for example the second life economy could use the digital money created by Lindel lab to purchase the real goods and services then this means that among the second life community, the total demand for money supplied by central bank would go down hence the value of real money would go down has the value foe Lindel dollar value increases (ECB, 2012). This has direct effect in the value of general price level within the economy. In general the impact of this currency would be experience due to their impact on; a. Their modification effect on the real quantity of money b. Their impact on the actual velocity of money i.e. the use of cash which in turn would influence the general monetary aggregate of money measurement. And lastly c. The existence of real interaction of virtual money and the actual economy which is generally exhibited in the Second life Linden dollars b) Incase of being a general governor of the central bank I would actual initiate the depreciation of Linden dollar in the second life economy. First I would legalize the trade through necessary legislation and this could help in having some level of control over it. Secondly the control of its supply should be with the central bank but not the Linden lab as it s per now. Third the Linden dollar should be directly linked with the actual currency and the value attached on it should be less than the actual currency in circulation. Fourth, I would limit the transaction and goods which can be purchased using the Linden dollar hence its value would decrease. Lastly the creation of virtual money would be limited to central bank as with this the bank would have control over its supply hence its demand. The general aim is to put its preference among people low hence most people would prefer bank notes compared to the virtual money. Conclusion Virtual currency is growing at a high rate and should not be overlooked by the central government and monetary policy makers as this would have adverse effect on the stability of prices and the general monetary policy within any economy. They have made the transaction and exchange of goods and services easier than before and in most cases then gain popularity among money people more than the central bank issued notes. The government should step up their efforts to control such virtual currencies within their economy. Bibliography European Central Bank, 2012 VIRTUAL CURRENCY SCHEMES October 2012: http://www.ecb.europa.eu Read More