Two weeks ago, we reported from the front line of the of sustainable business investing world, reviewing how trends in local, slow, and open money were converging with angel- and VC- fueled tech innovation, and how those two communities are not as far apart as each camp might think.

Similarly, concepts around virtual, complementary and community currencies that were once reserved for the then-fringy universe including BALLE and LOHAS, as well as the then-fringy world of hardcore online gamers, are now (finally) being discussed within the world of the disturbingly mainstream Facebook.

Geekdom has reacted somewhat cautiously to the widely leaked rumor and related sightings of  Facebook’s toe dip into the complex world of virtual currencies, which is revealed in the connection between Facebook’s credits and internal transactions.

While Facebook and the other cool kids are just getting up to speed on this topic, a small band of entrepreneurs has been working on it for a much longer time.  Having met most of the respected alt.currency designers  in the world, I’ve found that Art Brock’s work — the technical evolution of which can most easily be found at MetaCurrency.org these days — is the point of the evolutionary spear, and credit him with many of the nuances in my thinking about currencies, currents and flows of value within communities.  Those of you who know Art will see echoes of his many ideas here.

Another veteran of this space is Lisa Rutherfort.  In a guest column at Venture Beat, Lisa Rutherford reports on the beginning of what she sees as a “currency war” about to break out among a handful of key tier one web and web commerce brands.  Rutherford is the President of Twofish, which provides white-label tools for virutal currencies in massively multiplayer online games (MMOG) like World of Warcraft and Everquest.

Her analysis — steeped in years of managing and assessing these gaming currencies — is largely on target, as we’ll highlight below, but still misses some key concepts that we think will figure heavily in the deployment of major virtual currencies across large vertical markets.

To start with our common ground — and recommending that you all read her piece top to bottom — Rutherford thoughtfully discusses the benefits of virtual in-world / online currencies:

Virtual currencies have gained popularity because they reduce two major points of friction – consumer inconvenience and merchant cost. A user enjoying a social or gaming experience doesn’t want to be pulled away to enter payment info, and the seller doesn’t want to pay transaction processing fees that were scaled for more expensive purchases.

Rutherford points out:

A universal virtual currency extends across a host of applications. Instead of each application having its own micro-economy, they puddle up onto a shared currency system. Vertical examples include Microsoft Points, SparkCash, and Hi5 Coins.

She starts getting to the heart of her argument here:

… it’s just unrealistic to think that mass consumers will be willing to entrust a significant portion of their income to a startup tech company (note that I do not consider the people who invested in Second Life’s Ginko Financial to be representatives of the mass market)…

When virtual currencies were just a fanciful piece of game play, the need for that brand promise was low. But now that we’ve started thinking about universal virtual currencies that carry real world value across the Internet…well, they’ve become tangibly important, and a new level of care is expected. The brand needs to be trusted and recognized.

Rutherford argues that much is at stake in this commercial evolution, and that new “v-wallets,” as she calls these universal currencies that connect independent niche currencies, could replace the “e-wallets” exemplified by PayPal and Google Checkout.  Beyond these two natural players — and, of course, Facebook — Rutherford suggests that Amazon and Apple are likely candidates to present a new universal currency to the world.  Her suggestion that Facebook’s alpha test is the signal of the beginning of the great virtual currency wars brings to mind a quote from Gandalf the Wizard — the hero of the progenitors of today’s MMOG geeks — “the battle for Helm’s Deep is over; the battle for Middle Earth has begun.”

Where I’d like to dig into a deeper discussion with Ms. Rutherford is around the idea that one (or several) universal currencies will naturally solve the online micro transaction problem.  In seven or so years of discussing and designing social purpose currencies, it’s become clear that replacing one lumbering system (credit card payments and related fees, denominated in US dollars) is not wisely replaced by another lumbering system.  Rutherford points out in her piece that PayPal risks losing a formidable lead in the online payment space for its lack of agility, and that the folks at Facebook are probably not considering the impact of the nuances of currency design.

When considering the scope of online communities and the breadth of values that each encompasses, one will ultimately see the connections between reputation and incentives, two of the key levers in a virtual currency system.  And the same person’s reputation varies widely from one community to another.  While someone may be a highly respected uber-Drupalista by profession, and an active member of a spiritual community, he could still be a newbie dork at PokerStars who mucks up a good game of Hold ‘Em.  In other words, reputation and value are not always logically transferable between communities.  This will make it much harder for these universal currencies to exchange anything other than relatively similar credits, limiting their scope.

Beyond the issue of relative reputation, consider that social capital is not best utilized as a medium of exchange.  Generally, social capital is a qualitative measure of one’s contribution to their community, and cannot be spent like dollars, barter units or hours in a local exchange trading systems (LETS).  Think about your credit score — it’s not spendable per se, but it affords you cheaper access to money. No matter how hungry you are, you can’t spend 50 points of credit score on dinner. Such is the nature of social capital within the online social neworks.  Although giving out points for contributing in some way to a community (posting photos, commenting on a blog post) seems obvious, upon further investigation, it turns out, we actually care much more about the quality than the quantity.  In fact, quantity without quality can pretty quickly earn someone negative reputation in many communities.

This is probably my biggest problem with Twollars, a nascent twitter-based currency that’s little more than a tip of the hat, and lacks any meaningful commercial marketplace to make it relevant.  While there is a natural and robust in-world commerce in MMOG games where you acquire *things* based on your in-world activity — and those things are tradeable and more or less easily valued in a new denomination — the currency of social networks has more nuance, and ought to be treated with the care it deserves. Rather than the flat-land Twollars concept, I prefer the early work at Tuggl, who has a more creative way of closing the loop among business, charity and individuals, without using a currency.

Rutherford is right — the stakes of this game are big, and a misstep here could send a revenue-light platform like Facebook into a death spiral if horribly misplayed.  You think Beacon was bad?  Wait until the WSJ piece on the correlation between the fall of the dollar, the GM bankruptcy and our nation’s threadbare social fabric, as evidenced by a de novo deficit caused by the overspending of a social currency that was poorly designed.

What seems more interesting is a world where a dynamic tapestry of different currencies exist, and, ultimately, where an exchange is possible, but more nuanced and certainly not universal.  There are a few teams around the globe working on this problem today.  The European-based Open Money project and Cyclos platform are both building web-based tools that support local and regional currencies which replace traditional currency with more community-friendly choices that largely work to complement the national currencies.  Working with a small team of currency geeks, Brock has built up his own platform at Metacurrency.

It seems that the folks at Facebook and the other big web brands Rutherford references ought to take a bit more time to think through the entirety of their plan before deploying something on the ‘quick and dirty’ plan that ignores some of these more complex rules of social capital.

ADDENDUM on 7/6: This discussion continues on the web, with some very thoughtful articles worthy of review:

• MMOG perspective: http://www.mmotradevault.com/wordpress/?p=102
• Currencies perspective (note: this is an unsigned blog): http://www.sworddance.com/blog/2009/07/03/open-letter-to-virtual-currency-companies-universal-is-not-a-feature/