When Is A Virtual Currency A Currency? When It’s a Prepayment In Pokemon Go?

By Tim Worstall for Forbes

One of the things that people get very confused about in economics is the definition of money. We get the insistence that banks create money (they don’t, they create credit) and thus if government did that instead of the banks we’d not have to tax anyone. A closely allied confusion is that it’s entirely true that governments do indeed create money. Even that government debt is a form of money. But this does not mean that a government must be in debt for us to have money (no, really, I’ve seen a prominent economist claim that very thing). Nor is it even true that we must have government in order to have money–money predates government by some millennia.

Finally, it’s not true that government can abolish cash money and force us all to interact using only electronic versions of it. Although some seem to think that would be possible and desirably so as a method of beating tax cheating.

None of these things are true because money is, at base, simply a means of recording transactions and debts resulting from them. A means of exchange that is. People have used odd things to do this over time, stones, cowrie shells, butter and even pig roasts. No, really, some Papua New Guinea societies operated on the basis that having been to a pig roast put you in debt to the man who had fed you. Those debts being called in over subsequent months and years and if people owe you then you’re rich. And if government decided we should all use electronic money so that all can tax then we’d simply move transactions we don’t want to have taxed off to some other form of money: buttered cowrie shells perhaps.

However, having said all of that we do also have certain rules about what is money and what isn’t. For example, if I go and paint a friend’s house and he pays me some cash money for having done so (special price for friends, obviously, to be spent on my food and beer) then that cash is part of my taxable income. If the same friend buys food and beer to feed me with as I paint then no tax system in the world is going to try and tax that as income. Any tax system that tried would end in bloody rebellion in short order.

Another example concerns Bitcoin. Some jurisdictions state that as it has value and is a means of exchange then it’s money and we’d like our tax please. China, so far at least, does not. Which is why much of the world’s speculative activity in Bitcoin emanates from China.

And then we come to the idea of in game currencies, as with that inside Pokemon Go. Is this money or not? The very question that Japan’s Financial Services Agency is pondering:

Japan’s Financial Services Agency is nearing a landmark decision on the status and securitisation of PokeCoins, the virtual currency used to breed rare monsters in the highly successful mobile game Pokémon Go.

The point being that you pay real, real world, money to buy the in game currency. And the wallet of the game currency exists within the game. The game company is thus, in one manner, acting as a bank, taking a deposit that is, of the unspent portion of the game money which has been bought. So, should such deposits come under some part of the banking rules about deposits? Or perhaps some other part of the consumer protection code?

PokeCoins can be exchanged with in-game items. They are purchased with real-world money starting at ¥120 ($1.18).

If PokeCoins fall in the same category as e-money under prepaid cards, their issuer will have to pay a deposit equivalent to half the total unused outstanding amount if the amount exceeds ¥10 million ($98,200) at the end of September in order to protect users.

That doesn’t look like a particularly onerous condition, a deposit of 50% of the unused portion of the money. It wouldn’t be a great profit hit or anything it would just delay when the revenues can be recognised. And it would be quite startlingly easy for a game developer to be able to finance such a deposit through the banking system.

But it is an interesting question, isn’t it? We have rules about money to protect consumers thus we’ve got to have rules about what is money that comes under such protection. No news so far about whether the stone money of Yap is about to come under deposit protection rules….

First appeared at Forbes