Last week Amazon announced a new way for customers to buy and sell goods on its massive online retail platform: a new virtual currency called Amazon Coins.

Coming in May, Amazon Coins is a new virtual currency for purchasing apps, games, and in-app items on Kindle Fire.

Amazon Coins is an easy way for Kindle Fire customers to spend money on developers’ apps in the Amazon Appstore, offering app and game developers another substantial opportunity to drive traffic, downloads and increase monetization even further.

Amazon will give customers tens of millions of dollars’ worth of Amazon Coins to use on developers’ apps in the Amazon Appstore—apps and games must be submitted and approved by April 25 to be ready when Amazon Coins arrive in customers’ accounts. (Source)

Amazon calls the Coins an important step to create the “most complete end-to-end ecosystem for building, monetizing and marketing their apps and games.”

How it Works:

Creation: Amazon will issue 10′s of millions into circulation for free.
Value: One US cent ($.01) per Coin.
Use: Purchase digital items available for sale on Kindle Fire for US customers.
Exchange: Sales in Coins will automatically convert to dollars for developers. See FAQs here

Although the rollout of Amazon Coins will be limited to US customers and Kindle Fire purchases, it has the potential to become a legitimate international alternative currency. With over $50 billion a year in sales, Amazon is by far the largest online retailer. But it’s unclear what Amazon plans to do with the Coins.

There have been several retail companies that have attempted incentive “point” systems to encourage loyalty at their platforms. There have also been a handful of virtual currencies to hit the Internet, mostly in-game currencies to buy virtual upgrades. Yet, there has never been a retailer to offer its own true currency to buy real goods, let alone one as dominant as Amazon.

They have not specified how users will “earn” Coins or how their value will be determined. For this Beta rollout Amazon has been vague, saying it’s giving away “tens of millions of dollars’ worth” of Coins to its customers, and the value of each Coin will be arbitrarily set at $.01.

Currently the most popular Internet-wide virtual currency is Bitcoin. Bitcoin’s appeal is that they’re not controlled by a central authority, they allow for anonymous transactions thus it is nearly impossible to tax, they can be exchanged for any currency, and the supply is regulated by a complex algorithm that will ultimately result in higher values. However, as popular as it has become, Bitcoin is still not accepted for many retail goods.

That’s where Amazon has the upper hand if in fact they have aspirations of making Amazon Coins a viable alternative currency. The fact that they can offer a wide range of goods in exchange for this virtual currency holds incredible power.

“Amazon stands a better chance than anyone else because its customer base uses the company regularly,” Yanis Varoufakis an in-game economist for Valve told The Verge. “When entering amazon.com, at least for some people, it is a little like going to a foreign country. If this ‘foreign country’ has its own currency and gives you discounts and various goodies provided you change some money into its currency upon entry, you may well do it.”

There has been some confusion about Amazon’s motivation for its virtual currency and just how it adds any value besides increasing customer loyalty, if it even does that.

“Anything that’s going to help Android monetize anything at all is good,” Kevin Galligan, president of Touch Lab, told The Verge. “But how do you get Coins? They don’t go into that. If you have to buy Coins, then I don’t understand what’s the difference between that and money.”

It’s clear that they’re targeting boosting their app development business, but there are many ways to inject “tens of millions” into a certain area to boost business. Therefore, it seems that Amazon has bigger plans for their Coin scheme.

Most states in America have begun to tax online sales which temporarily dampened business for Amazon. The Coins could conceivably help individual sellers avoid sales taxes if all income remains “in house” in a Coin wallet to be spent only within the Amazon community. So perhaps avoiding taxes is a small part of the motivation.

Even though many customers have grown wary of incentive schemes and it remains unclear how Amazon Coins will add value to its business, if Amazon expands the program to their broader store and establishes a straightforward currency exchange for the Coins, it’s possible for them to make a huge impact in the world of online currencies.

Amazon promises to give more details about the currency when they roll them out in May.  Stay tuned.

J.P. Hicks is an entrepreneur, pro blogger, editor of BlogTips.com and author of Secrets to Making Money with a Free Blog.