Electronic currencies: online vehicle for cash?

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SALT LAKE CITY — There is no mechanism for making online purchases with cash, and merchants grimace over the transaction fees they pay credit card companies when customers pay with a card.

Eliminating those fees has been an objective of a number of electronic currencies that exist only across computer networks with money held in virtual wallets.

"There's an incentive for consumers to use it and for vendors to use it because it lowers their costs," said Brigham Young University economics professor Rick Evans.

There's an incentive for consumers to use it and for vendors to use it because it lowers their costs.

–Rick Evans

When Visa or MasterCard, or to a lesser extent American Express or Discover, become the vehicle for online payments, the cost to the merchant can easily be 3 or 4 percent of each transaction. "If you can increase your profits by 3 percent and you're a Fortune 500 company, that's what you want to see," Evans said.

Most of the electronic currency developers are trying to get established are legitimate but have a formidable challenge achieving the kind of broad acceptance they need to be viable, he said. "Whether your money is seashells or dollar bills, a significant number of things in the economy have to be measured in seashells or dollar bills for the currency to have value."

So even if a new currency exchange costs less, will consumers trust it if it's unfamiliar to them?

"They have to break or enter the monopoly that Visa or MasterCard have," Evans said. "And that's the $64,000 question right there: Are they going to get enough support, any one of these companies, to become viable? I think that's the question that all the owners, or rather the investors, in all of these companies are asking themselves."

Whether your money is seashells or dollar bills, a significant number of things in the economy have to be measured in seashells or dollar bills for the currency to have value.

–Evans

Utah-based WingCash is a new enough player that its public rollout is still awaiting regulatory approval in many states. WingCash currency is represented by URL addresses that equate to serial numbers on paper money.

WingCash founder and president Bradley Wilkes said his business model involves selling promotional space on the Web pages represented by each piece of currency's URL. So a third party, choosing to advertise on the virtual currency, pays the costs of making the currency functional.

Dollars backing the WingCash currency resides in bank accounts, and WingCash holders only pay a fee — a flat 25 cents — if they move their money to a bank that is not a WingCash participant.

Evans describes electronic currencies like WingCash as "vehicles" for money instead of actual currency. He believes successful electronic currencies will have to accomplish an immediate transfer of funds — like when one person hands another person a $20 bill. He sees little chance for success among endeavors designed to become an actual currency — a secondary currency to the dollar.

That "secondary currency" status could describe the electronic currency Bitcoin, where its value fluctuates like stocks instead of being tied to an equivalent number of dollars in a bank account. Bitcoin also promotes itself as strictly a peer-to-peer currency that cannot be tracked or seized by government authorities.

That anonymous peer-to-peer scenario is troublesome to law enforcement, which can neither tap into illegal transactions nor help people whose virtual wallet accounts are hacked and their electronic currency stolen.

The completely anonymous peer-to-peer currency exchanges have also gotten the attention of the Internal Revenue Service and members of Congress, though the IRS would not say whether there are particular currencies it is investigating.

Some early players in electronic currency concept have already come and gone. According to Wikipedia summaries, Internet payment venture Flooz launched in 1999, near the end of the dot-com surge, with TV ad pitches by Whoopi Goldberg. It lasted until 2001. Beenz was founded in London in 1998, functioning on the concept that users accumulated currency value by visiting sponsored websites, and was shelved after 9/11.

Wilkes said his business model includes the participation of banks that "do what banks do best" by being highly regulated and secure repositories for users' funds. He also sees a greater chance for success by finding the right balance between public transactions and users' privacy.

"We're not intending to be anonymous," he said.

Email: sfidel@ksl.com