Of Bitcoins and e-bullion: The sad history of virtual currency

A Bitcoin for your thoughts? With bankers and lawmakers playing the fiddle while the Roman (and Greek and Cypriot) economy burns, the peer-to-peer currency is exploding in popularity, driving the cost of a single GPU-mined “coin” to $200 on Tuesday—a huge leap from the $15 that a single Bitcoin commanded in January.

Yup, digital dollars are worth more than actual ones in these wacky times. But are Bitcoins a bastion of noncentralized strength or just the latest soon-to-fizzle fad in the short, sad history of virtual economies? Keep a hand on your Bitcoin wallet during this stroll down memory lane, folks. Past forays into the computerization of cash have often been amusing, but they’ve never ended well.

At its peak, Second Life was hailed as the virtual complement to reality, where everybody who was anybody could be found in avatar form. Companies like Dell and American Apparel set up shop, Reuters established a Second Life bureau with a dedicated reporter, articles like “Starting a Second Life Business” popped up in publications like Entrepreneur, and virtual land tracts sold for multiple thousands of all-too-real dollars.

Now it’s all gone. The companies, the reporters, the usage levels, the land prices, and 30 percent of Linden Labs’ workforce. Linden Dollars still trade for roughly the same number of U.S. dollars as before, but a lot fewer people are buying.

Image credit: SecondLife.com

E-gold was a digital currency backed by honest-to-goodness gold bullion. Swapping e-gold was basically the same as swapping gold ownership, and at its peak, more than 5 million accounts were registered for the service. Sounds like Ron Paul’s dream, doesn’t it?

Unfortunately, e-gold turned into a nightmare. The mixture of anonymity and irreversible transactions made the service a haven for crime syndicates looking to convert dirty dollars into clean cash. In 2008, the company’s founder and senior directors pleaded guilty to money laundering and operating an unlicensed money transfer business. The U.S. government froze all account holder funds.

Now, the e-gold blog is home to nothing more than sporadic updates informing once-users of the legal hoops they need to jump through to get their money back.

Image credit: Gizmopie.com

EVE Online’s hands-off economy is trumpeted as a paragon of the Invisible Hand theory. Developer CCP created an incredibly robust backbone for the monetary system, and then stepped back to let players do what they would. Today legions of users continue to buy and sell ISK (the name of EVE Online’s currency) for real-world money in countless exchanges online.

But being so laissez faire has its downside. In 2010, a once-respected player completed a complex long con that resulted in his stealing $45,000 worth of ISK from his wards. Last year, one notorious individual led a monumental mass attack designed to devastate the game’s economy.

The ploy failed, but the most interesting part was CCP’s response upon hearing the plan: “It’s going to be f***ing brilliant,” senior producer Jon Lander told Eurogamer. “Absolutely brilliant.”

Only in EVE.

Say, whatever happened to those?

Image credit: Wikipedia/Wikimedia Commons

While many games ban gold farming, it strikes many people at a cursory glance to be a victimless crime. You spend a little dough to get the computerized coin for that +7 Bastard Sword of Swinging you’ve been admiring, and a dude in a Chinese cybercafé thereby ekes out a basic (albeit boring) living. What’s the harm in that?

Plenty, as it turns out.

On a strictly fiscal level, the IRS worries that gold farming could skirt tax laws—but that’s just the tip of the iceberg. In 2011, it reports circulated that Chinese prison guards were forcing inmates to gold farm for 12 hour shifts, day-in and day-out, and then appropriating the accumulated gold to sell for personal gain. Prisoners who failed to meet their gold quota, the reports said, were beaten with plastic pipes. Enjoy the Bastard Sword!

Virtual currency isn’t a new concept. Sites such as Beenz.com and Flooz.com clued investors into the tantalizing promise of e-dollars in the days when e-everything was all the rage. You could earn Beenz or Flooz by performing simple tasks or you could buy them outright—and then you could use the e-currency to buy items or services at participating websites.

Lawmakers were as interested in Beenz.com and Flooz.com as investors were. Both struggled to stay on the good side of various countries’ financial oversight agencies, but Flooz.com—like e-gold—became a popular service among money launderers.

Consumers, on the other hand, didn’t fall for the silly concept. Beenz.com and Flooz.com were two prominent casualties when the dotcom bubble burst. (It looks like someone’s bringing back the Beenz name, though!)

Image credit: BBC

Dunder Mifflin’s Schrute bucks sounded like a good idea: Employees earned the in-office currency whenever they impressed their boss, and they could redeem 1000 Schrute bucks to tack an extra 5 minutes onto their lunch break. What could go wrong?

Greed, that’s what. Or more precisely, Creed.

Creed Bratton photocopied 2.1 million Schrute bucks and attempted to cash them in for their face value of 0.01 cent apiece. When then-manager Dwight Schrute denounced the notes as counterfeit, Creed threatened to flood the market with them and render the currency worthless if Schrute refused to pay him the $200 he demanded.

Note: Schrute bucks were a poor investment opportunity even at their zenith, when the currency traded against Stanley Nickels at “the same as the ratio of unicorns to leprechauns.”

Image credit: The Office wiki

Similar to e-gold, E-Bullion was backed by real-world gold and silver deposits, complete with an in-house currency exchange. The service managed to survive for eight years before shutting down without warning when owner James Fayed was arrested on double-barrel charges of running an illegal money transfer business and of orchestrating the murder of Pamela Fayed, his wife and business partner.

Fayed was eventually found guilty of paying three hitman to stab his wife to death and is currently sitting in death row. All of E-Bullion’s assets were seized by the government and users wound up empty-pocketed.

Image credit: Wikipedia/Wikimedia Commons

Digicash. Dexit. InternetCash. Pecunix. ECache. Webmoney. The list of dead or just plain unpopular (read: basically dead) virtual currencies goes on and on—and sooner or later it will no doubt be elongated with the names of Bitcoin bandwagon-jumpers like Ripple, TerraCoin, NovaCoin, PPCoin, Ixcoin, and Microcash.

All I’m saying is that this particular bumpy road has been exceedingly well traveled, and its potholes have left a plethora of wrecks abandoned by the curbside.

Bitcoins are en vogue. I get it. The way the centralized banks have behaved over the past few years, a decentralized currency seems mighty enticing.

But are Bitcoins the answer? The heightened scrutiny in recent months is revealing cracks in the Bitcoin setup—cracks that have brought other would-be digital currencies to their knees. Hundreds of thousands of dollars worth of Bitcoins have been pilfered. Trojan horse malware now targets Bitcoins specifically. U.S. senators want to shut Bitcoin down—they’re worried about money laundering, of course. In the past week, three major Bitcoin exchanges have been phished, compromised, and blasted by DDoS attacks.

Time will tell whether Bitcoins can overcome the cornucopia of threats. In the meantime, we can only hope that the e-currency remembers and learns from the past, rather than repeating it.