Friday, February 8, 2013

Amazon coining money, sorta

So, Warren over at Coyote Blog linked to this story in MIT Technology Review about Amazon's Virtual Currency. The idea is really interesting, but I want to find out a few more things:

1: I am going to be able to spend these in Amazon's store on anything, not just apps for the Kindle Fire, right? It seems almost metaphysically certain that will be the case sooner or later. Presumably media downloads like movies and e-books will come first, but, yea being able to drop virtual coins for a toaster would be nice.

2: If I write an app and get paid in virtual coins, am I going to have to pay taxes on the coins in dollars? What would that mean for online games if I do? That's a little odd to think about, considering that I can now spend in game currency for little gamey content things in say SWtoR without paying taxes; how is that going to be distinct from buying a little gamey thing from the app store? Is buying a new desktop theme for my Kindle with virtual coins earned selling some other gamey thing all that different from buying a new hat for my Sith with coins earned from slaughtering Jedi? Am I going to have to to pay taxes for credits earned expanding the Sith Empire?

3: The coins are currently pegged to the US dollar at 1 coin = 1 penny. (Well, ok "currently" Amazon plans on just giving away 10 million or so to Kindle Fire users to try out, but from what I understand the plan is to peg them.) Is there a plan in the future to de-peg them from the dollar?

The last question is what makes the first question important, and the second go from "sort of silly" to "extremely relevant." If I am able to keep my services and transactions denominated only in Amazon coins, how is that different from some in game currency? For example, it is not unheard of for players to offer services in say running instances to help lower powered players in exchange for in game currency. Is that different from lending programming or artistic skills to those with less of them in exchange for a virtual currency? There is an exchange rate of SWtoR credits to dollars currently that is every bit as relevant as any other exchange rate, just traded on different markets, so the exchange rate isn't the key to making a transaction "valid." In fact, if Amazon de-pegs the exchange rate, they would have a lot to offer by way of a stable currency. If they promise that the total number of Amazon Coins only will increase by 5% a year say, they most likely will become a much better store of value than the US dollar, even if only in a limited marketplace. If their use expands to ALL parts of Amazon's store, you could conceivably run most of your life's transactions only using the coins, and even just trade them in at market prices for dollars to pay for whatever else you need.

That is going to raise some interesting legal questions... and maybe some serious improvements in our current monetary regime.


  1. So, Mengerian convergence demands that the A-coin be redeemable at par with the other currency in order to reduce transaction costs and maximize demand for issuer money. The issuer of A-coins will similarly enjoy the seigniorage at the USD inflation rate - purchasing things at the rate of A-coin expansion. OR!!! They could pay interest on A-coin denominated accounts and effectively pass on the USD seignorage rate to the A-coin account holders.

    Observing only monetary effects, the USG would not be able to inflation-tax these interest paying accounts so long as the interest is equal to the inflation rate of USD. And the issuer of A-coins can afford to do this, even at par redemption, because the nominal demand for currency will increase as the nominal prices increase. The demand on A-coin issuer reserves will fall along with the increase of the price level.

    I wrote a poorly written paper about this. Larry White offers the foundational logic in "The Theory of Monetary Institutions" (which you may borrow if you like).

  2. Yea, that first option, of just letting the A-coins inflate with the USD would strike me as being the most likely. Unlike physical currency, Amazon is going to have to spend money to keep track of who exactly has how many coins, which is an increasing function of how many people use them (see cell phone companies' structure of charging for data and talk time, and why they went unlimited until bandwidth bit them.)
    I could, however, see Amazon passing some or all of the profits from this over to the users as a method of keeping people in the loop. The costs of administration (which are easily overlooked, but pretty sizable) might be worth encouraging a nearly captive audience currency wise.

    The trouble is that those are both very long term gambits, and not obviously built into the design as currently explained. The seigniorage might be sufficient to be worth it in the short term, but I rather suspect there is either an unseen short term benefit (such as buying coins free of state sales tax, then spending them on games etc tax free) or a bigger long term plan. Normally I don't expect long term, world domination gambits from corporations, but Jeff Bezos seems to be willing to spend a lot on long run pay offs.