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Social money – what’s all that about then?

In this penultimate part of looking at how the internet world is
creating new models of banking and finance, we’ll look at social money,
currency, cash or whatever you’d like to call it.

Before I do however, I forgot to mention one of my favourite examples of social finance yesterday BillMonk,
which keeps track of who owes who money in social networks. Sure, I
know that all of you bankers out there won’t need this type of service,
as you manage this professionally, but I remember my student days and
opening the fridge screaming: “Who’s used my milk? Who’s used my milk?”

It was darned annoying keeping track of the nickels and dimes we were
all lending and borrowing from each other, and so a nice application
that does this online is great.

Anyway, back to social money.

Social money is the transfer of money electronically through any social
media (blog, podcast, video) or network (Facebook, MySpace, Second
Life, etc). 

Social money applications are all about buying games and emoticons, getting tips on blogs and charity fundraising.

Anything where your social world needs a payment.

It has been around for years as an electronic IOU with the largest provider of social money being PayPal, although there are many other social money providers. Who remembers Beenz for example, and today there is everything from Web Money Transfer to c-Gold, from moneybookers to Ecocard.

The list is long, although the best known and trusted are from the largest online providers such as PayPal, Amazon and Google.

These providers can be plugged in as widgets to almost any social media
or social network, and hence are the real fuel for social money
applications.  For example, there are new developments in social money,
such as Facebook's Pay Me  and Spare Change, as mentioned on Tuesday, powered by PayPal. 

It is not just limited to PayPal and internet money transfers as mobile
money is also key, although I will pick up on mobile money and how this
relates to social media and networking tomorrow.

Social money also takes us into the realms of new money, such as Second
Life's Linden Dollars, as mentioned in some of the comments yesterday.

I've blogged a lot about virtual worlds in the past,
and everyone talks about Second Life being a lot less popular today
than it used to be, but it is worth explaining why that is.

Second Life's popularity disappeared when although their banking system
collapsed in summer 2007.  The banking collapse was a reaction
to Second Life being forced to close down gambling facilities in their
virtual world in July 2007.

Until then, the website had been a phenomenon, growing from virtually
no users to over 10 million in a year. This was incredible, and
everyone felt it demonstrated the new emergence of business models.

In particular, the fact that Second Life allowed real commerce to be
transacted by converting real US dollars to virtual dollars, meant that
everyone started to test commerce in virtual worlds through the
service. For example, several banks invested in major projects in
Second Life, including ING, Wells Fargo, SAXO Bank and Deutsche Bank.

However, several banks also operated in Second Life that were managed by guys in their bedrooms. These included banks such as Ginko Bank, run by a Brazilian chap at home.

The trouble Ginko Bank experienced started when internet gambling was forced to close under US Laws.  The management of Second Life decided that they also had to close access to gambling in virtual worlds in July 2007 to comply with this policy, which led to a major run on the virtual banks.

Until this date, a lot of the commercial transactions taking place in
Second Life, where people converted real US dollars to Linden dollars,
were for gambling purposes apparently. Therefore, the closure of
gambling denizens in the virtual world meant that folks immediately
started to take money out of the virtual banks, a bit like Northern
Rock but worse.

So imagine you are Andre Sanchez in Sao Paulo, the one-man band behind the virtual Ginko Bank.

You have over a million real US dollars on account, translated into
around 275 million Linden Dollars that you are managing for the Second
Life community.

Suddenly, your customers demand their money be converted back to real dollars, and you drown in their demands so you just close down the virtual bank, leaving punters with losses of around $750,000 in real life.

This led to calls for compensation from Linden Labs, who operate Second
Life, but they said it wasn’t their job to regulate the banks.

Oh dear.

Result: Second Life’s popularity collapsed and, in a desperate move to
rebuild trust, they said that only real life banks with real world
banking licences can now operate virtual banks.

Talk about virtual life mirroring real life … mind you, I do note that
Linden Labs didn't come up with a million dollar bailout fund, so maybe
not.

This is one example of social money systems and how they can reflect
real world systems virtually.  There’s also the wonderful world of QQ
in China, which I’ve blogged about before, where currencies can be used for gambling and other illegal activities without governmental control. 

These are just a few of the trends taking place in these new worlds,
and we must not forget that there are many other areas we could talk
around, particularly social money in the games worlds such as WOW (World of Warcraft).

These virtual and gaming worlds are fertile grounds for potential money
laundering and fraud. By way of example, a fascinating report on
virtual fraud was released by ENISA, the European Network and Information Security Agency, last week.

The report identifies that almost a third of gaming and virtual world users experience some form of fraudulent activity.

With over a billion players spending over €1.5 billion in real money a
year, there are some real issues here. For example, in just the last
year, over 30,000 new malicious programs have been found targeting
accounts and property in online games and virtual worlds, an increase
of over 145%.

Therefore, we do need to watch virtual and gaming worlds carefully, as
they often reflect and even predict the issues we will be facing in the
real world.

Before I finish talking about social money, it’s also worth a quick
doth of the virtual cap to complementary currencies, which I’ve
also blogged about before.

These currencies are on the rise as social money in the real world, and
fuelled for broader acceptability through our networked world.  For
example, if I can exchange a London Pound for a New York Dollar
of community effort via a trusted processor, then we could build a new,
global complementary currency exchange.

This is the idea behind the Terra,
a complementary currency promoted by the leading exponent of this area
Bernard Lietaer.  The Terra aims to be a social money, a complementary
currency, that would provide a global exchange for trade, managed
through internet technologies.

The problem with this currency is trust.  Until a banking system
operates such currencies they are hard to kick-start, which is why the
Terra has been around for a few years in concept, but needs help to get
started in practice.

In summary, social money is all about enabling the exchange of value
between individuals and businesses through electronic channels.

This exchange can be:

* formal, through electronic money transfer systems such as PayPal or
exchanges based upon backing from valuable metals such as Gold and
Silver; or

* informal through exchanging real money into other forms of value, including virtual money and complementary currencies.

All of these are internet-fuelled and managed, to support the wider sphere of social finance, networking and media.

Layered upon these we then come to social money and finance accessed
through other devices, where mobile money comes to the fore.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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I’ve blogged on some of the themes I’m going to cover below, but the story …

  • I think “social money” is a bit of a pleonasm, although I use it myself for lack of a better one.
    Money is fundamentally social. Which is why the social Web can be expected to impact banking/payments much more than it has so far operationally. I personally view the monetary system we live in today as a sort of AOL of money where one central organization and its affiliates have effectively a monopole on what is money and how it is created. I think that at the time of AOL, people had a difficult time imagining what an open, decentralized and resilient AOL would be, and how much it would force them to transform. Today, in my opinion, we are in the early days of this new decentralized money. We haven’t figure it’s version of HTTP, HTML, browser, SSL and DNS yet, that’s all.
    With regards to runs on communities’ money. I think it makes it very clear that an independent community with an independent currency should seek not just a 0 or positive balance of payments, but a balanced current account. As Paul Volcker (I think) said: “Trade matters”. The strength of a currency in other words depend on the resilience on the local economy to outside events. In the real world, free trade ideology and negligence of deficits has already cost some real countries dearly (Iceland) and many other countries including the US are at risk.
    With regards to adoption of community currency, I would argue that it is not just a problem of trust. The success of real-life currency is not because people necessarily trust them. It is primarily because demand for it is created by making it the only to pay for tax debts. One way to create demand for a currency is to have local businesses (i.e. org/people with public reputation) issue it and have community member agrees that the non-profit community service entities get their donations only in this currency.

  • I’m not sure we should use the word “social money” just to define currencies used along a social network: there is probably not something sufficiently distinctive to do that.
    I think that the extensive use lately of the word “social” is trying to characterize something different from the previous Web 1.0 wave. Web 1.0 was very much about creating new market places, where the anonymity of regular currencies (“electronic” or good-old-bank money) was perfectly appropriate. The social wave is all about links and networks. I would lean then to use “social money” for currencies that keep trace of the people using it. Michael Linton’s description- http://tinyurl.com/5gqan7 – of a money that remembers where it’s coming from would then fall in this category.

  • Guillame
    Agree with your thoughts 100%.
    I also agree with you and Frederic that the word ‘social’ is being over-used here, but am just maintaining that theme to keep in with the focus of this week’s blogging about social media and social networks.
    I’m happy to adapt to other definitions, although I’m not sure I’d go with money that remembers where it’s coming from and keeps trace … that’s maintaining an identity with money. A traceability.
    In the case of QQ, it’s anonymous.
    And, to be honest, a lot of social money will want to stay anonymous (and can).
    Therefore, I’ll still stick with exchanging value through social networks and media (which isn’t just money).
    Chris

  • Guillame
    Agree with your thoughts 100%.
    I also agree with you and Frederic that the word ‘social’ is being over-used here, but am just maintaining that theme to keep in with the focus of this week’s blogging about social media and social networks.
    I’m happy to adapt to other definitions, although I’m not sure I’d go with money that remembers where it’s coming from and keeps trace … that’s maintaining an identity with money. A traceability.
    In the case of QQ, it’s anonymous.
    And, to be honest, a lot of social money will want to stay anonymous (and can).
    Therefore, I’ll still stick with exchanging value through social networks and media (which isn’t just money).
    Chris

  • Guillame
    Agree with your thoughts 100%.
    I also agree with you and Frederic that the word ‘social’ is being over-used here, but am just maintaining that theme to keep in with the focus of this week’s blogging about social media and social networks.
    I’m happy to adapt to other definitions, although I’m not sure I’d go with money that remembers where it’s coming from and keeps trace … that’s maintaining an identity with money. A traceability.
    In the case of QQ, it’s anonymous.
    And, to be honest, a lot of social money will want to stay anonymous (and can).
    Therefore, I’ll still stick with exchanging value through social networks and media (which isn’t just money).
    Chris

  • Actually there is nothing in the traditional definition of money (a unit of account, a store of value, and a medium of exchange) stating anything about anonymity.
    With all these talks about social, I was just thinking that it would be great to organize a “What Yogi Berra could have said about social media and networks?” contest. Would you be ready to offer a 10 Chris-Skinner-dollar prize to the winner?

  • Actually there is nothing in the traditional definition of money (a unit of account, a store of value, and a medium of exchange) stating anything about anonymity.
    With all these talks about social, I was just thinking that it would be great to organize a “What Yogi Berra could have said about social media and networks?” contest. Would you be ready to offer a 10 Chris-Skinner-dollar prize to the winner?

  • Actually there is nothing in the traditional definition of money (a unit of account, a store of value, and a medium of exchange) stating anything about anonymity.
    With all these talks about social, I was just thinking that it would be great to organize a “What Yogi Berra could have said about social media and networks?” contest. Would you be ready to offer a 10 Chris-Skinner-dollar prize to the winner?

  • Aha Frederic
    The anonymous piece is a critical part of real world money, e.g. cash and the tax-avoidance economy.
    This is something I’ve also talked about a little bit before (if you missed it, checkout http://thefinanser.co.uk/fsclub/2008/02/we-are-living-i.html
    Meanwhile, I like your Yogi Berra contest, so a copy of one of my books to the one that’s the best.
    Here’s my kickoff for a start:
    “If I’d known that they would call sitting behind a screen typing is being social in the future, I’d have stayed in the bar.”

  • Aha Frederic
    The anonymous piece is a critical part of real world money, e.g. cash and the tax-avoidance economy.
    This is something I’ve also talked about a little bit before (if you missed it, checkout http://thefinanser.co.uk/fsclub/2008/02/we-are-living-i.html
    Meanwhile, I like your Yogi Berra contest, so a copy of one of my books to the one that’s the best.
    Here’s my kickoff for a start:
    “If I’d known that they would call sitting behind a screen typing is being social in the future, I’d have stayed in the bar.”

  • Aha Frederic
    The anonymous piece is a critical part of real world money, e.g. cash and the tax-avoidance economy.
    This is something I’ve also talked about a little bit before (if you missed it, checkout http://thefinanser.co.uk/fsclub/2008/02/we-are-living-i.html
    Meanwhile, I like your Yogi Berra contest, so a copy of one of my books to the one that’s the best.
    Here’s my kickoff for a start:
    “If I’d known that they would call sitting behind a screen typing is being social in the future, I’d have stayed in the bar.”

  • I agree that anonymity of coins and notes is a property that will guarantee endurance to this form of cash. Bank cash on the contrary is not that anonymous and widely used. Anyhow, the point is that we now have means of embeding traceability within new forms of money, and we may actually find use to this – appart from trading with prostitutes of course.
    Here is my first shot to get a copy of one of your books:
    “I’m trying to be social as every other man, but I had to draw a line when my mother asked to be part of my network.”

  • I agree that anonymity of coins and notes is a property that will guarantee endurance to this form of cash. Bank cash on the contrary is not that anonymous and widely used. Anyhow, the point is that we now have means of embeding traceability within new forms of money, and we may actually find use to this – appart from trading with prostitutes of course.
    Here is my first shot to get a copy of one of your books:
    “I’m trying to be social as every other man, but I had to draw a line when my mother asked to be part of my network.”

  • My shot on the Yogi Berra quote: “Web 2.0 is about being less social with more people”