Virtual Currency Monetization Has Real World Effects

As technology becomes more accessible its reach continues to expand into the real world.  One area in which this expansion is becoming increasingly more apparent, not to mention profitable, is in the area of virtual currency monetization.  With such expansion, however, comes real legal issues and real legal consequences.

 

The impact of virtual currency monetization has become evident in the real world in the form of “gold farming”.[i]  Gold farming is the use of virtual currency to obtain real world currency through trades or exchanges.[ii]  Gold farming was popularized in massively multiplayer online games (MMOGs) such as World of Warcraft, Everquest, and Ultima Online as inexperienced players were enticed to purchase higher level in-game capital rather than collecting the capital themselves.[iii]  Gold farming became lucrative when players stopped using in-game currency to purchase capital and began using real money.[iv]  Players would exchange in-game capital such as weapons, spells, armor, or skills for real world money that was placed in an offline account.[v]  This new market has opened the door for deviant activity both the in-game and the real worlds.

 

Not only does gold farming jeopardize the stability of the gaming economy, but it creates a disparity between the level of the player and the skill level of the player.[vi]  In MMOGs multiple players band together to complete complex missions.[vii]  When one player has the in-game capital that suggests a high skill level but doesn’t have the gaming skills to back it up, the integrity of the game could be lost.[viii]  In light of such obstacles, as well as the uncertain legal consequences generated by the booming virtual industry, some MMOGs have explicitly banned gold farming from their platforms.[ix]  That being said, more and more of the well known game developers are finding themselves unable to resist claiming a piece of this lucrative industry.

 

Blizzard was one of the major opponents to allowing gold farming in its MMOGs.[x]  With the introduction of its newest game, Diablo 3, Blizzard is changing its tune.  Through this newest version, Blizzard is taking advantage of the benefits that virtual currency has to offer.[xi]  Now, Blizzard will allow gold farming in their newest game, but the creators will make sure that they obtain a portion of the profits.[xii]  Diablo 3 will have online trading systems where players can trade in-game currency or real world currency, contingent on the players paying various fees to Blizzard in the form of a listing fee, a transaction fee, or a percentage of the profit should the person choose to convert the virtual currency into real currency.[xiii]  Even PayPal has sought a piece of the action as it announced its plan to pair up with Blizzard to facilitate the virtual to real currency exchange on Diablo 3.[xiv]

 

As virtual currency becomes more accessible, it can no longer live by its own rules, it must now consider the possible real world repercussions caused by its use.  The use of virtual currency could have legal consequences for both the issuers of the currency and the providers of the currency.[xv]  This means dealing with the tax implications of dealing in virtual money.[xvi]   For example, virtual currency that is sold on a prepaid basis to be consumed at some future date may be subject to a gift card tax as well as gift card rules.[xvii]  Additionally, providers of virtual currency will have to differentiate between the different kinds of virtual currencies available given the different terms and conditions imposed on each of them.[xviii]  Another issue that must be considered is the reclaiming of virtual currency breakage by the state, which essentially allows the respective state to collect on unused prepaid currency after a certain amount of time has lapsed.[xix]  Money service and money transmitters laws will also come into play as virtual currency is accepted more widely, rather than just being used to purchase specific goods at specific locations.[xx]  Accepting virtual currency in the real world will require a readiness to comply with complex financial service laws as well as privacy and security issues in order to avoid both criminal and civil penalties.[xxi]

 

 

 


[i] Brian Keegan Et Al., What Can Gold Farmers Teach Us About Criminal Networks?, (2011), http://dmitriwilliams.com/XRDS.pdf.

[ii] Id. at 11.

[iii] Id. at 12.

[iv] Id.

[v] Id.

[vi] Id.

[vii] Id. at 11.

[viii] Id. at 12.

[ix] Id.

[x] Id.

[xi] Kevin Kelly, Diablo 3 Auction Houses Introduces Real Money Transactions, G4 (Aug. 01, 2011), http://www.g4tv.com/thefeed/blog/post/714952/diablo-3-auction-house-introduces-real-money-transactions/.

[xii] Id.

[xiii] Id.

[xiv] Kyle Orland, PayPal to Power Real Money Transactions in Diablo III Auction House, Gamasutra (Sept. 14, 2011), http://www.gamasutra.com/view/news/37236/PayPal_to_Power_Real_Money_Transactions_In_Diablo_III_Auction_House.php#.UGjgHo5jF8t.

[xv] J. Dax Hansen, Virtual Currencies: Real Legal Issues for Retailers,

[xvi] Id.

[xvii] Id.  Some of the gift card rules could include a limitation on the provider’s ability to impose expiration dates on the virtual currency or collect an inactivity fee.

[xviii] Id.

[xix] Id.

[xx] Id.

[xxi] Id.

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~ by kellybeanufl on September 30, 2012.

10 Responses to “Virtual Currency Monetization Has Real World Effects”

  1. In WOW gold farmers have impacts ranging from slightly to severely annoying. The least annoying is the scam messages from accounts like “@jggwa;nv” offering thousands of gold for ‘only’ $20. Public messages from gold farmers get drowned out by inane political debate, Chuck Norris jokes, and attempts to generate the newest internet meme.

    One bigger problem with farming is gold inflation. Prices for both commodities for making items and rare items skyrocket if farmers dump a lot of gold into the market.

    I haven’t seen the impact of gold farming on PvP (player vs player) play, mostly because I’m on a PvE (player vs environment) server and get killed too fast in PvP. In PvE group settings a person who paid for gold to get super items will reveal his or her incompetence. A group can now vote to kick them out.

    In Diablo 3 the most powerful virtual weapons and armor go for as much as $250. (Though better common gear will spawn after the next expansion) Unlike WOW, Diablo 3 is mostly single player. There is PvE multiplayer where enemy strength and drops are not affected by the players’ gear level (unless they are loaded with “Magic Find +). As a result, paying a couple hundred dollars to upgrade your character has less of an adverse impact on other people. At least it won’t until Blizzard patches in PvP.

  2. I wonder how difficult it would be to simply build protocols into the game that deal directly with preventing farming? For one, in-game items (gold, fur, flowers, belt, etc.) that a player finds, creates, or buys could be tagged with a unique identifier that attaches it to the user or character. Basically, like the bitcoin “block-chain” characteristic that prevents double spending and creates a historical record of the various owners of the bitcoin, gold tagged to an individual character could be regulated by not allowing transfers without sufficient in-game “consideration”. For example, a player could not give gold over to another player without the other player passing along an item of sufficient worth. It seems algorithms may be able to rise to the task, though it would probably be very processor heavy to keep track of all that data.

    On another note, I am sorry my blog has not been posted. I am unable to log into the dashboard and create a new post. As soon as Professor Jacobs is able to authorize me I will post my blog on the Bitcoin currency.

    James

  3. Kelly is right that most of the virtual currencies out there are susceptible to a basic constraint: they are products which are owned by individual companies subject to national and international laws. To the extent that those currencies transition into the real world by being traded for real money, they will be subject to banking laws, various formulations of the Patriot Act, taxes and other implications. Enforcement and compliance with those laws is exercised by direct or indirect jurisdiction over the company or the servers that host its offerings.

    However, it is not clear how a virtual, distributed currency like Bitcoin (http://bitcoin.org/) can be regulated. Sure, laws such as Dodd-Frank which regulate the international payment system can regulate companies which run those systems in a traditional way. But Bitcoin is a decentralized, peer-to-peer system. The exchange of funds is not overseen by any traditional company and the “servers” are just thousands or millions of client nodes. How does the traditional method of enforcement work then?

    Answer: it really doesn’t; there are no current means of enforcement that truly break the network. Authorities have penalized law-breaking in other types of P2P networks by attacking the indexing sites (the sites which allow downloaders to find copyrighted material in BitTorrent, for example), which are, again, controlled by individual entities with servers. Theoretically, governments could attack the many “exchanges” which allow Bitcoin to Realcurrency interoperability. But, ultimately, this does not affect the system’s ability to exchange the Bitcoin commodity or to trade real-world goods and services using Bitcoin as the medium of exchange.

  4. The use of virtual currency in the gaming industry is fascinating. I can see how a non-gamer, like myself, would become tempted to just give up and buy what it is that you need in order to move on and do something different. My first thought would be that this only hurts yourself, by skipping the basics, because you would not have the skills to complete harder tasks and thus become stuck. However, the problem seems much different when multiple people are depending on you to assist them in performing tasks because now you are affecting other people. It is easy to see how frustrating that would be to your group, but it is interesting that Zack pointed out that groups now have the ability to vote to kick someone out.

    The (future) use of virtual currency in the advertising industry is also fascinating. The ability to receive rewards for watching advertisements seems to be a real win-win-win. The user receives rewards and gets to watch advertising that is actually applicable to them, the media can insure that there is higher engagement rates because of the opt-in option and thus charge more to advertisers, and the advertisers will receive more bang for their buck because people might actually watch ads. When I watch TV live, I use advertising breaks to go get a snack, use the restroom, check my email etc. Or I just fast forward through them because I DVRed the show. But when I watch TV on the internet (for example, ABC.com allows you to watch shows you might have missed as soon as the next day), the commercials are so short (and sometimes interactive) that its not even worth getting up. This also reminds me of the WestLaw/Lexis incentives. By using WestLaw or Lexis you can earn points. A few searches won’t earn you many points, but by the end of law school you could trade those points in for an Amazon gift card or a new iPod. It will be very interesting to see how the advertising rewards would work, and if the incentives are as good as what we find on the WestLaw/Lexis “stores” then I would be more than willing to sit through them.

  5. I agree with Kevin. Although most virtual currencies, like the ones in MMOGs, are subject to existing regulatory laws, it seems that bitcoin has the potential to escape the same liability and limitations. Even in the P2P environment, where there are specific entities to penalize, the law is continually struggling to maintain control over online activity, whether it deals with virtual currency or not. The sheer vastness of the internet makes regulating online activity difficult because there are numerous options and methods (places and transactions) to reach the same objective. More concerning is the fact that the law is so slow to adapt to these new technological evolutions that it seems like regulation will be a chronic problem.

    What concerns me the most here is that many people, especially lawmakers, are ill-equipped to create laws and regulatory provisions that would help stabilize some of the concerning activity we see happening on the internet. Many lawmakers have no idea how to use technology, let alone understand the complexity of the internet well enough to create laws and regulatory provisions that could adequately handle new technology and a constantly-evolving internet system. How could decentralized operations like bitcoin be regulated and kept in check when most lawmakers do not know what it even is?

  6. I can why gamers would be upset with the ability of some players to purchase accomplishments or in-game items that others have earned through skill and devotion to a game. Another concern that I would think gamers would have with the introduction of virtual currency, the switch from games designed to entrain players to games designed to entrap players into purchasing more and more virtual currency. I can understand how game developers would be tempted to increase the difficulty of achieving goals or acquiring in game items in order to encourage players to purchase virtual currency.
    Another issue that I think virtual currency may raise is that game developers now have the increased ability to profit off of players with gaming addictions. During our first class meeting, I recall Professor Jacobs warning us that people with addictive personalities can become hooked on SecondLife. Adding virtual currency to games or virtual worlds to which people are easily addicted means that players can now waste their paychecks along with significant hours of their life in order to feed their addiction. To me, the addictive nature of these games and virtual worlds adds a moral component to the debate about the use of virtual currency.

  7. As I read the post I found myself asking a similar question to K. Miller: how can virtual currency actually be taxed and regulated? I found his explanation of the issues facing the law and regulators to be very interesting. However, the fact that these currencies presently cannot be effectively regulated is somewhat troubling. When you tie this in to the moral dilemma that Kristen highlighted, where these highly addictive games are finding more ways to profit through virtual currency, it becomes even more alarming.

    I’m not sure if this is completely related, but this reminds me of when the online poker sites were shut down and the money people had earned and stored on the sites was effectively lost. Does anyone know if those users had any recourse to recover the money that had put in to the site or won through online poker games?

  8. I understand that gamers may be disgruntled by their co-players ineptness, however, it doesn’t matter, because it is a game. What does matter are the taxation issues raised by these transactions. Is virtual currency a market that experiences inflation and deflation? Does it do so to a degree that it warrants regulations and capital gains taxation? All sorts of industries make profits of off individuals with addictions and other issues so I see no difference here. I would compare the market of gamer gold to the market of fine wine. If individuals are profiting so much from trading in the market that the taxation accrues sufficient funds to warrant the regulation, then by all means legislature…GO FOR IT.

  9. It is understandable that gold farming is popular. People have and will always try and gain an advantage any way that they can. It is also not a surprise that the gaming industry, in an attempt to profit, has been ahead of lawmakers in dealing with virtual currency markets.

    The fact that many lawmakers are unfamiliar with the gaming industry in general, and especially virtual currency, means that they are not well equipped to regulate virtual currency markets. There are current regulations that could be used to regulate gold farming but they are not widely used, due in some part to the difficulty in applying them to virtual currency markets. In addition to the ineffective use of current regulations it seems unlikely that any regulations geared specifically to virtual currency trading will be enacted any time soon without a monetary (tax) incentive to lawmakers.

    I have no personal experience with games that virtual currency plays a large role in. I can understand the frustration of gamers who have built their characters without participating in gold farming. It seems, with my limited experience, that developing a game where player skill is more important than avatar wealth or rating would help combat gold farming. The problem it seems, is that the games that put a premium on avatar rating and wealth are more profitable for the game designers.

  10. First of all I like the idea of being able to use real world currency to buy virtual currency because it’s free market economics at its best. I understand the gamers’ viewpoint that it’s unfair and a player shouldn’t be able to pay his way to the top. However, it’s easy for the developers of a game to limit the effect an infusion of additional in game currency has on hardcore players. All a developer has to do is require some additional non-transferable action or item to access the highest levels content.
    The implementation of digital currency exchange market to online games results in a Pareto improvement as long as the developers restrict the level of content that can be accessed b the purchase of digital currency. In a situation such as this, hardcore games are still the only ones who can access the highest level of content and therefore game stability is maintained leaving hardcore gamers no worse off. Casual gamers who would rather pay then do the work themselves are able to make a more efficient use of their time improving their situation. Additionally, you have the positive externalities in the form of income generated by “farmers” and middle men.
    Since it is efficient have a digital currency exchange market the only question is how to regulate and tax it to prevent abuse.

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