Virtual Currencies, Micropayments and Monetary Policy: Where Are We Coming From and Where Does the Industry Stand?

The exponential growth of micropayments and the expansion of social networks produced the necessary conditions for the birth and growing importance of a distinct object that is fairly new to many disciplines: virtual currencies. This chapter attempts to survey the main issues and challenges that virtual currency pose to economic theory and to the design and implementation of economic policy. Particularly, we are interested in the implications that virtual currencies may have for: (1) The economic principles associated with voluntary holdings of different kinds of money; (2) The rate of return dominance by some currencies that may coexist with currencies offering lower real returns; and (3) The state-of-the-art monetary dynamic stochastic general equilibrium models with micro-foundations. We believe that virtual currencies share some important features of both fiat currencies—whose value is mainly determined by the issuer’s reputation and the people’s beliefs regarding its future acceptability in exchange for goods or services—and commodity currencies, with intrinsic value. However, virtual currencies are typically issued by private agents, not by the government, and thus regulation and appropriate monitoring arise as potential problems that we may have to deal with in the near future.