The line between "virtual" money and "real" money is very fuzzy, especially in an age where even real money is earned and spent mostly electronically. I get my paycheck directly deposited to my bank account, I manage that account through a website, I spend the money with a credit card, and I pay off the credit card through another website. I rarely handle cash, even for very small transactions. So what's the difference between a Chinese yuan and a QQ coin?

HONG KONG -- China's fastest-rising currency isn't the yuan. It's the QQ coin -- online play money created by marketers to sell such things as virtual flowers for instant-message buddies, cellphone ringtones and magical swords for online games. ...

Then last year something happened that Tencent hadn't originally planned. Online game sites beyond Tencent started accepting QQ coins as payment. The coins appeal as a safer, more practical way to conduct small online purchases, because credit cards aren't yet commonplace in China.

At informal online currency marketplaces, thousands of users helped turn the QQ coins back into cash by selling them at a discount that varies based on the laws of supply and demand. Traders began jumping into the QQ coin market as an opportunity to make a quick yuan off of currency speculation.

State-run media reported that some online shoppers began using QQ coins to buy real-world items such as CDs and makeup. So-called QQ Girls started accepting the coins as payment for intimate private chats online. Gamblers caught wind, too, and started using the currency to get around China's anti-gambling laws, converting wins in online mahjong and card games back into cash. Dozens of third-party trading posts sprouted up to ease transactions, turning the QQ coin into a kind of parallel currency.

The only thing that separates QQ coins from yuans is that the former isn't issued by a government... but then that's never been a requirement in the definition of "money". Wikipedia offers a pretty standard set of criteria that I remember from my economics classes:

Money is generally considered to have the following characteristics, which are summed up in a rhyme found in many economics textbooks and primers: "Money is a matter of functions four, a medium, a measure, a standard, a store".

1. It is a medium of exchange: A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.

2. It is a unit of account (also called a "measure" or, alternatively, a "standard" of relative worth and deferred payment): A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. A unit of account is a necessary pre-requisite for the formulation of commercial agreements that involve debt.

3. It is a store of value: To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved.

Electronic currencies like frequent flier miles or QQ coins have all these characteristics, and in many cases are far more stable than currencies issued by smaller governments.

What's particularly interesting is that QQ coins are undermining the Chinese government's control over their monetary supply.

The rapid rise of the QQ coin has caused angst for the government in China, where circulation and trade of the real currency is strictly controlled. Last month, 14 Chinese ministries and China's central bank together waged a QQ coin crackdown of sorts, calling on companies to stop trading them in order to prevent money laundering. ...

Despite the Chinese government warnings, people continue to trade QQ coins. The new capital controls, in fact, have given them new scarcity value, driving up the price by 70% in recent weeks, says Milly Chen, who trades QQ coins.

"Over the past months, the system has been getting more complicated to transfer credit, and there is less supply" she says.

It's very difficult for governments to restrict free/"black" markets except through political oppression... which is one of the communists' strengths.

(HT: My brother Nick.)

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