The world of FinTech, that of Payments and that of digital currencies include a wide range of product propositions, of business models and of product design. The evolution of payment products has been at a pace for more than 20 years, and does not look like slowing down.
Products that enable users within games to create and exchange value in a closed environment have been around or some time, with Linden Dollars on Second Life being one of the most well known. Related but perhaps less obvious are the plethora of incentive products like air miles and loyalty points of various kinds.
As these products become more valuable, it is not unusual to see users attempt to sell or purchase the units of value outside of the confines of the environment in which they are used. Linden Dollars can be purchased on auctions, and there have been repeated attempts to create exchange platforms for loyalty products – some with the consent of the loyalty issuer and some without.
Other products seek to occupy a more traditional payment niche, with electronic money providing an online means of payment long before traditional banking products adapted to the online environment.
Digital currencies differed from electronic money on the whole by departing from a centrally issued and administered model, and in most cases by creating value based on utility, scarcity, security etc. rather than a fixed conversion rate against Fiat currency – as is the case for e-money.
As a technology however, digital currencies lend themselves to hybrid implementations where for example a distributed model is discarded in favour of a central administrator, in order to utilise the block chain architecture, which provides greater transparency, and may serve a governance or business objective.
For digital currency enthusiasts who see the distributed architecture as integral to any cryptocurrency project, this may seem like a betrayal of the cause. Technology is however neutral, and value transfer products utilise a spectrum of technology solutions.
As they also provide for a range of underlying sources of value, from fiat currency equivalence, incentive products and computational effort – described above, to precious metal backed products and those representing other assets.
This brings us to an interesting development that saw Tidex, a cryptocurrency exchange, list MSD, a cryptographic digital token (“utility token”) that derives its value from the e-commerce business Monspace.
MSD is centrally administered, but is based on the Ethereum block chain architecture. Its value is determined by the market supply and demand forces arising from the utility that members of the MonSpace community derive from it. Monspace is therefore incentivised to increase the utility of MSD within its own community, if users are to attribute value to it on an open exchange. The greater the buying power of MSD within the closed MonSpace environment, the greater the value one would expect MSD to acquire on the exchange.
By listing on an external independent exchange, the MonSpace system is introducing market discipline to its system and this is positive development. If the inherent value of MSD to MonSpace members decreases, then its open market price will fall, and conversely the greater the utility of MSD to its holders, the higher the price.
Tidex has listed what was until then a closed unit of value, but this development reflects the increased diversity of digital tokens, and has the potential of increasing scrutiny of all digital currencies, and this is positive contribution.
It is also a natural market evolution, as digital currencies seek different niches, the source of the value of currencies will be varied, some confined to specific propositions, whilst others my eventually gain wider acceptance.