1st Article of the series published in State Bank of Pakistan Newsletter - March 2015. This article discusses the basic concepts of Money, currency, digital currency, virtual currency and Cryptocurrency.

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History of Money
Money is defined as the “medium of
exchange of values “or more specifi-
cally “An officially-issued legal tender
generally consisting of currency and
coin (Jevons, 2002). The history of
money goes back to the first trading
among humans. Money had different
forms and it evolved through different
time eras as it changed its shapes de-
pending upon the needs and demands
of the society along with constraints
of its own usages and technological
developments. Medium of exchange
was not limited to one single form, it
was dependent upon the society which
commodity was valuable enough e.g.
Even “Salt” was considered as a me-
dium of exchange of value or money.
The different forms of money included
metal, gold, silver, copper, bronze etc.
Following is the brief description of
different forms of money throughout
the ages:
a) Barter Trade
According to the historians, Bar-
ter Trade was the oldest method of
“medium of exchange” where goods
exchanged for other goods in need.
In China, Cowry Shells were used as
medium of exchange which proved
to be quite useful and were in use
throughout history up to the middle of
last century. Due to certain constraints
like “Double Coincidence of Wants” &
“want of measure of value and sub-
division” (Jevons, 2002) and delicate
nature of goods etc. the Barter Trade
ran its course of usefulness.
b) Gold Standard
With the advent of paper cur-
rency, the commodity currency was
replaced by ‘Representative Money’.
Representative Money was backed
by Government or bank’s promise to
exchange it for certain value of silver
or gold (Bellis, Mary, 2014). The prime
example of the Representative Money
was Bretton Woods Gold Standard in
which countries agreed to fix the prices
of their respective currencies in terms
of a specified amount of Gold (Bordo,
2008). However, during First World
War, the Gold Standard was abolished;
although, it was reinstated in 1925 but
few countries followed it.
c) Fiat & Paper Money
China is known to be the pioneer
in the invention of Paper Money in
Tang Dynasty (618 A.D.) which used
the paper currency for more than
500 years. In Europe, the first paper
currency was introduced in the 17th
Century (Time, 2009).
In 1971, USA obliterated Gold
Standard system completely which led
to the new form of currency known
as ‘Fiat Money’ (Bordo, 2008). Fiat
Money is a legal tender which has no
intrinsic value of its own other than
a government’s backing. The value
of the money is dependent upon the
relationship of Supply and Demand
(Investopedia, 2014). Fiat money is still
in use in the world. Fiat Money can
be exchanged among countries for the
purposes of trade.
d) Plas c Money
The technological advancement
in the fields of communication and
information technology provided a
launching pad for the exploration of
new opportunities at a global scale
based on consumers’ demands. In
early 1960s, people demanded some
innovative solutions to their payment
related problems. To address such
issues, Universal Credit Cards came
into the market. The first Universal
Credit Card was issued by Diner’s
Club in 1950 which charged annual
fee to the card holders along with
periodical billing system. American
Express launched its Universal Credit
Card in 1958 followed by Bank of
America’s first national bank planned
BankAmericard in 1959. BankAmeri-
card became Visa in 1976 (HowStuff-
Works.com, 2006).
d) Virtual Currency
Virtual Currency came into surface
in Multiplayer games or MMORPG
(Massively Multiplayer Online Role
Playing Games) where the gamers
use different virtual products to boost
their performance or clear certain
level or get special items within the
game. Virtual Currency is defined as
“non-physical store of value that can
be exchanged for goods and services at
Virtual Currency – Part 1
Introduc on of Money
& Virtual Money
By: Shoukat Bizinjo, PSD
Syed Hassan Talal, IA&CD
10 STATE BANK NEWS March, 2015
CONTENTS

2. places that accept them. “ (Monetary
Authority of Singapore, 2014). Virtual
Currency can be transferred electroni-
cally among users.
According to European Union Cen-
tral Bank’s Electronic Money Directive
2009/110/EC.41, Virtual Currency or
electronic money has a basic criteria of
three characteristics:
 electronic storage,
 issuance upon receipt of funds, and
 Acceptance as a means of payment
by a legal or natural person other
than the issuer (Directive 2009/110/
EC, 2009).
Unlike Fiat Currency which is
termed to be ‘Legal Tender’ among
governments because of its guarantee
or backing, Virtual Currency is not
backed by any Government or state. In
most of the countries like Singapore,
Argentina, Canada etc., Virtual Cur-
rency is not recognized as Legal Tender.
There are two types of Virtual Curren-
cy; Centralized and Decentralized.
Centralized Virtual Currency is a
type in which the Virtual Currency is
issued by an organization and autho-
rized to record Virtual Currency trans-
actions. Herein, Virtual currency can
be purchased at a fixed rate which is
set by the issuing organization (Mon-
etary Authority of Singapore, 2014).
The Farmville Bucks or SteamCoins
are the examples of Centralized Virtual
Currency where the rate is specified
along with recording of the transac-
tions. Other examples include Liberty
Reserve, WebMoney etc.
On the contrary, Decentralized
Virtual Currency is not owned by
any organization and it’s usually being
maintained by the users of the respec-
tive Virtual Currency community. The
rate of Decentralized Virtual Currency
is also determined by the users and
there is no authentic or complete re-
cord of transactions. Bitcoin, Litecoin,
and 42 etc are the prime examples of
Decentralized Virtual Currency.
Virtual Products
Online games offered virtual prod-
ucts either on completing objectives
or after attaining certain levels or pur-
chase with Fiat Money. The products
once acquired can be traded among
players. One of the biggest examples
is Zynga Games’ Farmville; an online
social network based game which
hit revenue stream of $291.5 million
in second quarter of 2012 having 72
million Daily Active Users around the
globe (Wilhelm, 2012). Farmville had
a wide range of virtual products which
could be purchased through Credit/
Debit Card (real money) and even
had its own currency as well which is
known as ‘Farmville Bucks’. ‘Farmville
Bucks’ could be purchased in fixed
rates and also had holiday discount
offers. Other MMORPG like DOTA/
DOTA2 has their own virtual stores
which use ‘Steam Coins’ which can be
purchased or collected for spending
or redeeming (SteamCoins, 2014). Ac-
cording to CNET (Reisinger, 2010), the
revenue generated by virtual goods was
staggering $7.3 billion.
Virtual Economies
MMORPG not only build environ-
ments for virtual products’ commerce
but also developed virtual economies
which involve both real as well as
virtual money. Another eye opening
example is of EVE Online; an MMOR-
PG based on Galaxy simulation with
a population of over 500, 000 players
linked with virtual economy attached
with real world currency. Players
engaged in a virtual battle labelled as
“Most Expensive Battle in Gaming
History” (Associated Press, 2014).
The battle lasted for 21 hours with
4000 players involved and it cost over
$500,000 due to loss in almost 100
Titans (Megaships that take months
to build and cost $3000-$4000) along
with other spaceships (Savage, 2014).
Due to globalization, and technologi-
cal advancement in communication and
payment system, participation in these
games have increased exponentially.
World is now experiencing a signifi-
cant change in terms of e-commerce as
well. The usage of Virtual Currency is
not only limited to games and multi-
player shoot-outs anymore, its being
used as an acceptable medium of ex-
change among different types of users
around the world.
Further details on Virtual Currency/
Crypto Currencies will be contributed
in the up-coming series of publication.
SBP revises criteria
for renewal of
license of Exchange
Companies
The State Bank of Pakistan has de-
cided to amend its instructions re-
lating to renewal of license of Ex-
change Companies (ECs).
In the Circular attention of Exchange
Companies is invited to instructions
contained in FE Circular No. 02 dated
April 20, 2012 in terms of which dura-
tion of license of exchange companies
was linked with the inspection rating of
the respective exchange company.
State Bank decided that henceforth
licenses of exchange companies shall be
renewed for five years from the date of
expiry of the license. However, license
shall be renewed after giving due con-
sideration, inter alia, to SBP inspection
report, compliance status, corporate
governance and financial health of the
exchange company.
The request for renewal of the license
must reach State Bank of Pakistan
at least 60 days before expiry of the
license. All other terms and conditions
on the subject shall remain unchanged,
says FE Circular No. 01 of 2015 is-
sued to the Chief Executives of all Ex-
change Companies.
Transfer & Pos ng
Mr. Mirullah Khan, Deputy Director,
Strategic Planning Department has been
transferred and posted to Statistics &
DWH Department, State Bank of Paki-
stan with effect from February 25, 2015.
Mr. Naveed Ahmed Sethi, OG-2,
ERD, SBP has been transferred to HRD
with effect from February 25, 2015.
Mr. Shahzad Hyder, OG-2, OCS, SBP
has been transferred to ERD with effect
from February 25, 2015.
Contract Expire
On expiry of the employment con-
tract of Mr. Arshad A. Sattar, Manager
Service & Quality and Mr. Nadeem
Bhurgri, Head Marketing associated
with Pakistan Remittances Initiatives,
SBP have been relieved from their
duties with effect from the close of
business on June 30, 2014.
STATE BANK NEWSMarch, 2015 11
CONTENTS