I was going to write a short article on some of the challenges that face virtual currencies in order to obtain main street acceptance, along with some possible solutions. Some of the possible solutions turned out to be interesting, and highly “disruptive” business models, and its a bit premature to discuss them in an open forum.

I recently read on Slashdot that a BitCoin miner (somebody who runs a number of servers in order to – hopefully – generate sufficient new BitCoins to pay for the electricity costs) had the police come to his door. The electricity company, seeing a massive spike in his consumption, thought that he was running an illegal grow-op.

It occurred to me that the fundamental nature of a BitCoin – its value is derived from the difficulty in creating the hard encryption that underlies it – is actually a strong incentive for people to do a number of possibly counterproductive things – waste electricity, use computers solely for the purpose of creating BitCoins etc. Its only a matter of time before somebody creates malware that uses other people’s computers for this purpose. This is really no different from any other form of currency, fiat currencies included. Its just slightly more encapsulated in specific areas.

So why not create some other virtual currencies that incentivate other things. One example that occurred to me – probably not original, and definitely not scalable – would be a currency that has its value derive from live music. The medium of exchange would be some type of concert tickets, and there would be some kind of market mechanism to address the relative “value” of different musicians.

The idea would be to create a large number of different currencies of this kind, with exchanges to provide liquidity. Another extension would be to create index currencies, that derive their value from a basket of other virtual currencies. This could be used to create all kinds of interesting social incentives.