Virtual Worlds as Financial Laboratories

I am not a financially savvy person. I have a hard enough time spending money wisely for everyday things, such as grocery and clothing; if I was given an opportunity to invest in something, I would not know where to start, and I do not want to imagine where I would end up. Fortunately, the government has regulations to keep people from trying to run a financial scam. (18 U.S.C. §1341)  Frauds can be punished with a fine or imprisonment. But while the government goes after real life fraudulent transactions, frauds in virtual realities are going by unnoticed.

There would not be much of a problem that the government is not getting involved if the impact was strictly in the virtual world. It would not differ from stealing Monopoly money and the service provider of the world should be able to handle such cases. But what if there is a real world impact and the virtual money could be correlated to real money? This is when the Monopoly money turns into casino chips. The loss and gain is no longer limited to the game-world.

Ginko Financial was a bank in Second Life that promised an unbelievably good interest rate to its customers. Unfortunately, the bank could not support its claims, and as it went away, so did about 200 million Linden dollars (approximately $750,000) that the bank owed its customers. There has not been any government response to this.

Even if the fraud is not in person, 18 U.S.C. §1343 deals with schemes that uses any kind of contact by wire, radio, or television to defraud. The virtual world is just a medium to send information. As with 18 U.S.C. §1341, §1343 deals with “obtaining money or property by means of false or fraudulent pretenses, representations, or promises”.

But what is virtual money? Is it money, property, or neither? If it is either money or property, then it is straight forward, that any scheme to fraudulently obtain Linden dollars would still be actionable by the government but as with many legal topics relating to the virtual realm, this is still unclear. But even if Linden dollars is either money or property, that does not change the fact that the government is still not responding to frauds that occur in virtual worlds.

I think that a more appropriate question is whether the government should regulate financial transactions in the virtual world? There is a great deal of money that is going through these transactions, and the government would be foolish to  turn a blind eye to what is going on in these virtual frauds, but I believe that the government should not get involved.  I agree with Robert Bloomsfield, an accounting professor for Cornell University, who would prefer if the government stayed out of the way from Second Life’s financial sector, because “[i]f the RL authorities or Linden Lab do start meddling with business affairs, it could ruin a golden opportunity for real innovation and creativity, a chance to recreate a world in a new image.” (http://www.wired.com/gaming/virtualworlds/news/2007/08/virtual_bank).

An advantage of the virtual world is that you can create from scratch something that will do the job of something that already exists, but without the extra baggage.  Essentially, a top-down design, rather than a bottom-up design.  If we were able to re-structure the layout of roads across America from scratch, then it would be much more streamlined.  The virtual world can give us many potential systems of regulating our real world financial sector.

Caroline Bradley, a University of Miami law professor, suggests that in order to not treat virtual world security transactions as real world security transactions, “the virtual worlds should develop in-world protections for defrauded player-inhabitants.” This would open doors for “a variety of self-regulatory (and non-regulatory) mechanisms for addressing issues of fraud [that] opens up possibilities for empirical research.” (http://papers.ssrn.com/abstract=1022441)

Building these labs is not without detriment, though. Until an efficient system takes root, there will be losses through fraud, and there will not be any effective remedy for the victims. Though the loss will not be in the real world, the victim will be impacted in the real world.  Even so, I believe the cost to be the birthing pains of the possibilities that these labs will bring.

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~ by samsiky on October 19, 2009.

9 Responses to “Virtual Worlds as Financial Laboratories”

  1. I think that the government should be able to get involved in the financial dealings that go on in second life. The financial dealings that take place in second life should be treated just like the financial dealings that take place in real life. Stealing money in the virtual world would eventually lead to real world problems and consequences.

    Financial scams and fraudulent activities in the real world are regulated and therefore they should be regulated by the government in the virtual world. A person that loses money in the virtual will intern lose that money in the real world if they would have been able to exchange the virtual money for the real money. Then stealing virtual money the same as stealing real money. That is why the government should be able to regulate the financial dealings of the virtual world.

    The fraudulent dealings will fall withing the scope of 18 U.S.C. §1341, §1343 as long as it deals with “obtaining money or property by means of false or fraudulent pretenses, representations, or promises”. So they should be treated the same and regulated by the government. The only issue is that before it can be regulated we will have to determine an effective remedy for the person that was wronged.

  2. While both bloggers this week did a good job of supporting their arguments, I would have to agree with the argument for the governmental regulation of virtual economies. While it would be inefficient and financially burdensome for the US government to try and regulate every virtual economy that its citizens engage in online, it is clear that the game developers themselves are simply not prepared (or are unwilling) to step in on many occasions. Second Life, for example, has been known to move exceptionally slow to respond to some of the problems of its user-residents as the Ginko Financial case illustrates.
    Also, while virtual worlds might truly be wonderful places to experiment with nascent economies, the game developers themselves are computer programmers, web designers, and graphic artists – hardly experts equipped with the knowledge and expertise to develop a set a rules and regulations covering the wide variety of possible transactions that will take place in their virtual economy. I think that the government should try to work with the game developers in crafting “laws” to govern virtual economies and provide incentives for the developers to police themselves once those “laws” are in place. Then, the government should coordinate its enforcement efforts with the developers to create harsher punishments and stronger deterrents for would-be con-men.
    The amount of money being poured into virtual economies every day is staggering and it would be unwise of the government to turn a blind eye to virtual economies altogether. Some sort of collaboration with the game developers and virtual residents would help to ensure that virtual economies run as smoothly as possible.

  3. I also agree that the government needs to step in more in regulating the online world, especially when real money is involved. I think the government hesitates mostly because of the resources it takes to track down persons responsible for internet crimes, but I also think another component is the notion that digital money is not real money because digital money can be created at any time, i.e. the assumption that if someone steals linden dollars then the service provider can simply credit lost money to your account. This ignores the fact that like real money, simply “printing” more money won’t solve the problem. Perhaps further down there will be a uniform system for digital money and that would make regulating financial crimes easier.

  4. There are certain aspects of the virtual world that the government should be involved in. However, regulating a brand new, virtual based financial industry is not one of them. This contention is based on the idea that the government should only regulate areas of our lives that we are compelled to participate in. For instance, we are all required to follow Federal and local laws. Additionally, we are required to pay into medicare and social security, taxes, etc. These are areas that the government regulates heavily. The escape from governmental intrusion and regulation is online. Although more laws are being passed that regulate online activities, such as online gambling, for most users, the internet is largely an unrestricted arena for their imaginations.

    However, people are not required to be online for any reason. As is the case, online users are not required to have SL accounts with avatars that transact Linden dollars. Because the virtual financial industry is essentially an ‘opt-in’ arena online, users should operate at their own risk, essentially leaving the industry to police itself, and let evolving market conditions take their course regardless of the outcome.

  5. In every other discussion we have had, I have been militantly anti-regulation, especially when it comes to the Internet. Right now, I am feeling a little light-headed when I write that if the financial industry is going to be regulated in real life, it is a necessity that the financial industry be regulated in online platforms.

    When I write that regulation of online finances need to be regulated, I mean that regulation is necessary only as far as regulation exists in real life. A bank that exists purely online is really no different than a bank that only exists in the physical world. The same abuses that exist in the real world, exist in the online world.

    On the other hand, I do not feel that new laws are necessary for regulating the financial industry on the Internet. Laws that currently exist for regulating the financial industry more-than-adequately regulate the financial industry everywhere.

    I do not understand the opt-in argument that has been made. Almost all areas of life are for the most part “opt-in”, yet the government regulates many areas without much resistance from the American public. Nobody is required to get a bank account or buy stock, yet these areas are heavily regulated by governments in real life. The mere fact that a financial transaction occurs online, does not and should not preclude those financial transactions to be subject to regulation.

  6. I have a problem seeing the banking issue in Second Life as, well…a problem. Bank’s fail, that’s the nature of the business. And yes, banking is in fact a business, ask any CEO or CFO of Wells Fargo, Wachovia, BoA, etc. What happened in Second Life I believe goes more along the lines of a failed business investment.

    If a bank opened its doors(virtual or real), and said they gave X percent interest rates, which where astronomically higher than the interest rates given by local mom and pop banks, a consumer has one of two options. Either they can realize that there is no way a bank could survive giving that sort of rate of return and it’s foolish to sink their money into it, or, they can plead willfully ignorance(or actually ignorance) and hope for the best. People in group A do not need to worry about more government intervention since they are sound, while people in group B, to be honest, deserve to have their money taken.

    The bank in Second Life sounded like it was too good to be true, and it was. The reason the FDIC was created was not to protect risky investments, but rather the sound ones, to give informed investors insurance. That is not the case here. The bank example is a perfect reason not to have similar types of real-world regulation applied to the virtual world. In the virtual world, we see more risky investments then could ever be dreamed about in the real world. Imagine how many pop-ups, spam message, or viruses that result in you being asked to fund a Nigerian Prince in his plan to “extrapolate” his country’s funds into your bank account. That’s a crime, one that should be regulated. And, it already is.

    Creating more regulation, for things that wouldn’t be protected in either the virtual or real world, is simply going too far.

  7. It is intriguing to image a “utopian” approach to regulation in the virtual world. It does provide an opportunity to start from scratch with the hindsight of how regulations have been applied in the real world context. But excluding government regulation entirely ultimately means that the companies setting the rules will set the rules that mean the most profit. Ebay provides a loose comparison. When the company started, the feedback forums allowed buyer and sellers to leave feedback about their transactions. Sellers could actively assess strikes against non-paying bidders. The identities of bidders were not concealed unless the item they bid on was selling for more than $5,000. Now, the identity of a bidder is always concealed (allowing for shill bidding, which often results in greater profit for ebay.) Sellers cannot leave negative feedback for buyers, and non-paying bidder strikes are at ebay’s discretion. This means the bidder is likely to continue using the marketplace, resulting in more profit for ebay. Meanwhile, the seller is disadvantaged. This, in my opinion, exemplifies why the marketplace cannot be simply subject to in world limitations. It will ultimately result in unfair disadvantage to users so long as the provider company makes a profit. Doesn’t Linden Labs profit from allowing the Ginko fraud to go unprosecuted?

  8. Virtual currencies occupy a precarious position in terms of regulation. Money has come a long way from gold coins that had actual value. With the ever expanding prevalence of credit and check cards, even real money now has a distinctly virtual feel. To be effective, money just needs to fungible and inspire consumer confidence. If enough people agree to accept something as currency, then it becomes no different than your credit card. Failing to regulate Lindens to allow for social experiments seems like a dangerous proposition. Indeed, the virtual currency has become so popular that a Yale Law Review article has called for transactions using Lindens to be taxed just as a paypal account would be. If the government were to categorically refuse to regulate a system of currency merely because it only exists online would be to ignore the very real implications and impacts on individuals’ actual wealth.

  9. I’m not sure that a laissez-faire system would provide much benefit to the possibility of a new streamlined economy. It seems more likely to introduce a new virtual “gilded age” of corruption and fraud. Already, frauds such as Ginko Financial and various Ponzi schemes are perpetuated in virtual environments such as Second Life and Eve Online with few to no consequences.

    I’m not suggesting that strict government regulation within the virtual worlds would be the best solution, but the companies running these environments need to take a more active role in patrol and punishment, but mostly prevention, of these financial wrongdoings being committed in their worlds. That allows all the streamlining and freedom from federal redtape without the risks of rampant corruption and fraud.

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