It goes as follows:
I start a website that features two things, the KellyBank and the KellyShop.
On the KellyBank website, you can create a KellyBank account for free.
The only type of currency that you can hold in a KellyBank account is a KellyCoin. You can have anywhere between zero and an unlimited number of KellyCoins in your KellyBank account at any given time. There are two ways to obtain KellyCoins. One is to purchase them (using real currency) from the KellyBank, at some exchange rate set by the KellyBank. The other is to have them transferred in to your account from another KellyBank account. There is no transfer fee for transferring KellyCoins from one user’s KellyBank account to another.
From where do these KellyCoins get their value? Why would anyone purchase or try to obtain any KellyCoins?
Also at this site is the KellyShop. The KellyShop sells an extremely popular item that has a very consistent price across most markets. Let’s say the latest iPad meets this criteria.
The only currency accepted by the KellyShop is KellyCoins.
For argument’s sake, let’s say at the time this new service launches, the KellyBank sells KellyCoins at a fixed rate of $1 each. Eg, $US1 = KC1.
This still doesn’t mean anyone will care to obtain/purchase KellyCoins.
Let’s say the new iPad is retailing for $600. The KellyShop will list the new iPad for KC500. So, if a user wanted to obtain a $600 iPad for $500, they could set up a KellyBank account, purchase 500 KellyCoins from the KellyBank at $500, then purchase the iPad from the KellyShop for KC500.
Ok, I agree that KellyCoins would now have a real value in the minds of the consumer, but your site is going to lose money fast, you’re a taking a $100 hit on every iPad you sell. The only person getting scammed out of money so far is you, the site operator. Won’t take long before you go bankrupt selling iPads at below cost price.
Not so fast. While customers would be free to purchase as many discount iPads as they like, I control the supply of KellyCoins, and I can track where any KellyCoin is at any given time. I will ensure there are never enough KellyCoins in circulation at any given time such that a “run” on the KellyShop would bankrupt me. I do this by limiting the number of KellyCoins that can be purchased from the KellyBank.
The system continues operating for a while. Occasionally I reopen the KellyBank, then close it off again before too many KellyCoins are put back in circulation.
So I do this for a while, taking a loss on every sale, to build up “buzz”. Then comes the next crucial, and final step.
The KellyBank reopens and begins selling KellyCoins. Except this time, I don’t put a limit on the number of KellyCoins that can be sold. And in the way it would play out in my head, boy, do I sell some KellyCoins. Hundreds of thousands. Millions. I become an instant millionaire.
END GAME 1:
Let’s say the KellyShop subsequently gets a cumulative order for 10,000,000 iPads. I wait a week or two, then “refund” everyone’s KellyCoins, with an apology. Sorry - not enough iPads! Here, have your KellyCoins back.
END GAME 2:
When I reopen the KellyBank and start selling KellyCoins with no limit to the number I am willing to sell, I close the KellyShop. “Down for maintenance” or something. After I’ve made millions selling KellyCoins, I reopen the KellyShop and sell a few iPads to the first few customers who make it, then I put a notice “Sorry, sold out”. And stop selling them.
Both end game scenarios finish with me on a yacht somewhere in the Greek Isles, living the life of a rich playboy, with a bevvy of bikini-clad beauties satisfying my every desire.
So… unethical? Abso-flippin’-lutely.
Illegal? And if so, which part?