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Financial Journalist Lynn: Virtual Currencies a Growing Threat for Central Banks

By Michelle Smith   |   Thursday, 14 Feb 2013 10:18 AM

As the popularity of online currency grows, governments should be concerned about losing their monopoly on issuing money. And investors should recognize how much it matters, author and financial journalist Matt Lynn warns.

There is a flurry of new currencies, Lynn writes in a MarketWatch article. Soon to be added to the list are Amazon coins, recently announced by the web's mightiest retailer.

This new currency is designed to allow consumers to purchase items such as apps for Kindle tablets. When the coins launch in May, Amazon plans a giveaway worth tens of millions of dollars. Slate, an online daily magazine, called the coin giveaway “clever monetary stimulus” for Kindle content.

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That sounds a bit as if we are discussing real money in a real economy. And that is exactly Lynn's point.

The web is a vast and popular marketplace and virtual currencies, though still a relatively new concept, are gaining wider acceptance.

BitCoin is one good example. Lynn says after its crash last year, the currency is seeing both its value and circulation escalate.

The virtual currency is also now the centerpiece of Pizza for Coins, BBC reports. Developed by two programmers, this service allow individuals to use bitcoins to order pizzas and charges a fee for converting the virtual money into paper currency. This service is expected to expand from Dominos to other major retailers such as Pizza Hut and Papa John. It is an effort meant to make digital cash more popular, according to the BBC.

“We might be reaching the point where virtual currencies start to pose a real challenge to the existing ones,” Lynn writes.

Some may be blowing this off as a fad or mere Internet folly, but Lynn notes the European Central Bank released a paper last year that warned that alternative currencies could be competition for national currencies and may even undermine them.

There is valid reason for governments to be concerned. As Lynn points out, the use of virtual currency is growing at a time when the value of national currencies is eroding and peoples' confidence in them is declining. Not only have individuals increasingly sought safety in alternatives, such as gold and silver, but many central banks have also decided it best to hold a greater portion of wealth in hard assets.

Investors should be paying attention to these developments, Lynn urges, noting there is something more important than selecting the right stocks and bonds and that is selecting the right currency.

Currency affects returns. And Lynn believes investments in new currencies will outperform traditional ones.

“As they emerge, they are almost certainly worth a minor hedge — and who knows, perhaps even a major one,” he writes.

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