'Funny money' has officially entered the real worldMarch 25, 2013: 11:00 AM ET
New federal regulations make online currencies act more like traditional forms of cash.
FORTUNE – Remember those days when Monopoly money was just play cash that bought everything in the game from railroads to houses? When the game was over, the value of that colorful paper currency spiraled to zero. Now with online currencies, the game never really ends. The Internet never shuts off, so the value of money circulating through cyberspace is always worth something.
Last week, new U.S. government rules regulating online currencies affirmed the value of what was previously passed off as funny money. Now companies that issue or exchange online cash would have new bookkeeping requirements. For instance, transactions of more than $10,000 would have to be reported.
While one of the big draws of virtual currencies is that they're independent and generally sheltered from the government's watch, the new rules are unlikely to ruin their allure. If anything, they effectively pull the currencies offline and into the mainstream world of finance, making them infinitely more valuable.
These new regulations come as the popularity of virtual currencies rise, fueled by online merchants that have come up with their own tender and forms of payment -- indeed, a stark contrast from years ago when the European Union thought it was only wise to run the economy on a single currency, the Euro. Needless to say, big problems have followed, and many have wondered if the answer is having multiple competing currencies.
In 2011, Facebook (FB) launched Credits as the de facto form of currency. Though now largely defunct, it's used for purchases made inside games hosted by the social networking site. Last month, Amazon (AMZN) unveiled Amazon Coins, a virtual currency that could be used for purchasing apps, games, and in-apps items on Kindle Fire.
As The Wall Street Journal notes, it's unclear if the new regulations will impact Amazon. One thing is almost certain, though: It will regulate Bitcoin, the fastest-growing online currency. Launched in 2009, the online currency works almost like real money. It can be used to buy anything from upgrades on Reddit to pizza. And as Cyrus Sanati reported in December, it's increasingly used to conduct all sorts of shady business, making the anonymous sale and purchase of everything from drugs to guns possible.
More specifically, the new regulations come at the urging of federal authorities. In April 2011, the FBI recommended that third-party exchanges of Bitcoins be forced to follow the same anti-money laundering rules that banks are supposed to follow.
In the coming years, expect more regulations, experts say. "The government is just catching up," says Edward Castronova, a gamer and telecommunications professor at Indiana University.
The Chinese have been a step ahead of the U.S. In 2009, authorities issued new regulations aimed at restricting the trade and use of online money on worries that currencies used in online games had become so commonplace that they could impact, and possibly destabilize, the real economy.
In the U.S., future rules could either deepen the legitimacy of online currencies or destroy them entirely, depending where lawmakers go from here, Castronova says. Whereas the latest anti-money laundering regulations help their credibility by treating them similarly to traditional money-order providers, levying taxes and transaction fees obviously would hurt their value.
To be sure, the pot of virtual money is nowhere as liquid as traditional cash in the global financial system. But while they play a relatively small role, at least for now, bankers nonetheless view their rise as potentially dangerous to the health of the economy. Because virtual currencies aren't backed by a central bank or controlled by a central administrator, their values are vulnerable to wild swings.
In 2011, the American Bankers Association asked the Consumer Financial Protection Bureau to apply consumer financial protection laws uniformly, regardless of whether it's a traditional bank or nonbank payment providers. The fact that bankers are watching online money signals they have potential to help or destroy all that exists in the real world.