LGJ: Regulating Virtual Currency
by Mark Methenitis 
{ Dec 12th 2008 at 12:45PM }
Each week Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:
We're seeing quite the economic turbulence in the United States as of late, and financial problems lead to two things: 1) further regulations on the issues that caused the problem; and 2) people seeking out new sources to exploit to make a quick buck. Plenty of people have written article upon article about all of the various economic tools that have been exploited to bring us to this point. I, however, would like to talk about one of those potentially exploitable areas people may move toward, that being the currencies that exist in virtual worlds and MMO games. I figure it's only a matter of time before what I'm about to describe occurs in one manner or another, which could very easily turn the tide of regulatory scorn from Wall Street to Azeroth or Second Life.
I guess the best place to start is from something I hope most people are familiar with on a basic level: insider trading. In short, insider trading is when people with non-public information trade stocks to their benefit. It's regulated as a combination of a breach of fiduciary duty to the company or a misappropriation of information. In short, it's an unethical way to profit from inside information, and generally frowned upon (though some economists disagree with regulating insider trading). But insider trading is about stocks and securities, so where am I going with this?
While current regulations focus on established stocks and securities, the concept could pretty easily be applied to any virtual economy, but on a much more complex scale. Say you work for one of the developers, and you're aware of some event that will be happening in the game that will cause currency prices to rise. If you took the opportunity to buy currency before the event and then resell currency after the event, you're doing the equivalent of insider trading. By the same token, using information to sell off currency before an event devalues it is no different. Going to a more broad level, even taking advantage of information about changing drop rates of items or new additions to the game that would make some items more or less valuable would be the same as using information about currency.
Of course, the very nature of virtual worlds and MMO games means there potential for fraud goes much, much deeper, and it's in these depths where I see the real potential to raise the ire of government regulators. Specifically, the greatest potential risk is in the manipulation of two things: asset trading values and asset volumes. In short, this goes beyond simple insider trading to the level of actual market manipulation.
Imagine, if you will, that you are in a position either within a game company and in charge of the trade between real currency and your currency, or within an outside brokerage that deals in in-game currency. From that position, it would be entirely possibly that you would have the ability to, at least to a small degree, alter the price of the asset. From there, knowing what the shift would be and when it would occur, it would be simple to orchestrate purchases and sales for profit against the market. However, I would imagine that most companies would be monitoring this closely enough to prevent it from happening altogether.
In a more convoluted means, imagine you're involved with the trade of in-game assets for in game currency. In a static pricing model (rather than an auction model), the ability to manipulate prices is roughly the same as the ability to regulate the value of the currency. Simply put, if you know that the price on a given weapon is about to go up, or rather, you are about to raise the price, it's relatively easy to orchestrate a profit. This is meaningless in in-game currency, unless that currency can be sold for real world currency. Given that currency for basically any game can be bought or sold in some manner despite the game company's intention that it not be, it seems like this is a viable possibility for profit.
What is likely the most ripe for fraud potential is, in essence, the very nature of the virtual world: the ease of changing supply of digital products. Someone with true access has the unlimited ability to, within the game universe, literally violate what would be the laws of physics in the real world: they can create and destroy 'matter.' There is no item in game that can't be duplicated, and clever duplication could be easily exploited for profit. Of course, a good plan would make sure different accounts were receiving items so that it was less obvious than one particular player re-selling a bunch of high level items or cashing out a bunch of gold.
So, how likely is any of this to happen? That depends largely on how much caution is exercised by those who run the virtual worlds. Of course, some of that comes down to perception versus practice, as we've seen with the financial sector. While we may believe that caution is being exercised, it takes a major event to show whether that perception is accurate or not. I would like to think that those in charge of virtual worlds are exercising the utmost caution, and I sincerely hope that nothing like this brings the potential problems in vitrual worlds into the aim of the Federal government.
Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.
The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or The Vernon Law Group, PLLC. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.
We're seeing quite the economic turbulence in the United States as of late, and financial problems lead to two things: 1) further regulations on the issues that caused the problem; and 2) people seeking out new sources to exploit to make a quick buck. Plenty of people have written article upon article about all of the various economic tools that have been exploited to bring us to this point. I, however, would like to talk about one of those potentially exploitable areas people may move toward, that being the currencies that exist in virtual worlds and MMO games. I figure it's only a matter of time before what I'm about to describe occurs in one manner or another, which could very easily turn the tide of regulatory scorn from Wall Street to Azeroth or Second Life.
I guess the best place to start is from something I hope most people are familiar with on a basic level: insider trading. In short, insider trading is when people with non-public information trade stocks to their benefit. It's regulated as a combination of a breach of fiduciary duty to the company or a misappropriation of information. In short, it's an unethical way to profit from inside information, and generally frowned upon (though some economists disagree with regulating insider trading). But insider trading is about stocks and securities, so where am I going with this?
While current regulations focus on established stocks and securities, the concept could pretty easily be applied to any virtual economy, but on a much more complex scale. Say you work for one of the developers, and you're aware of some event that will be happening in the game that will cause currency prices to rise. If you took the opportunity to buy currency before the event and then resell currency after the event, you're doing the equivalent of insider trading. By the same token, using information to sell off currency before an event devalues it is no different. Going to a more broad level, even taking advantage of information about changing drop rates of items or new additions to the game that would make some items more or less valuable would be the same as using information about currency.
"In short, this goes beyond simple insider trading to the level of in-game market manipulation." |
Of course, the very nature of virtual worlds and MMO games means there potential for fraud goes much, much deeper, and it's in these depths where I see the real potential to raise the ire of government regulators. Specifically, the greatest potential risk is in the manipulation of two things: asset trading values and asset volumes. In short, this goes beyond simple insider trading to the level of actual market manipulation.
Imagine, if you will, that you are in a position either within a game company and in charge of the trade between real currency and your currency, or within an outside brokerage that deals in in-game currency. From that position, it would be entirely possibly that you would have the ability to, at least to a small degree, alter the price of the asset. From there, knowing what the shift would be and when it would occur, it would be simple to orchestrate purchases and sales for profit against the market. However, I would imagine that most companies would be monitoring this closely enough to prevent it from happening altogether.
In a more convoluted means, imagine you're involved with the trade of in-game assets for in game currency. In a static pricing model (rather than an auction model), the ability to manipulate prices is roughly the same as the ability to regulate the value of the currency. Simply put, if you know that the price on a given weapon is about to go up, or rather, you are about to raise the price, it's relatively easy to orchestrate a profit. This is meaningless in in-game currency, unless that currency can be sold for real world currency. Given that currency for basically any game can be bought or sold in some manner despite the game company's intention that it not be, it seems like this is a viable possibility for profit.
"There is no item in game that can't be duplicated, and clever duplication could be easily exploited for profit." |
What is likely the most ripe for fraud potential is, in essence, the very nature of the virtual world: the ease of changing supply of digital products. Someone with true access has the unlimited ability to, within the game universe, literally violate what would be the laws of physics in the real world: they can create and destroy 'matter.' There is no item in game that can't be duplicated, and clever duplication could be easily exploited for profit. Of course, a good plan would make sure different accounts were receiving items so that it was less obvious than one particular player re-selling a bunch of high level items or cashing out a bunch of gold.
So, how likely is any of this to happen? That depends largely on how much caution is exercised by those who run the virtual worlds. Of course, some of that comes down to perception versus practice, as we've seen with the financial sector. While we may believe that caution is being exercised, it takes a major event to show whether that perception is accurate or not. I would like to think that those in charge of virtual worlds are exercising the utmost caution, and I sincerely hope that nothing like this brings the potential problems in vitrual worlds into the aim of the Federal government.
Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.
The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or The Vernon Law Group, PLLC. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.
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Reader Comments (Page 1 of 1)
NOT ME @ Dec 12th 2008 12:57PM
They make some good points that i never would have thought off....I swear being a gamer these days comes with a lot of baggage.
Patrick @ Dec 12th 2008 1:01PM
I remember back in the days of Ultima Online my friend would make crazy in game profits by selling items in game and trading the money for real currency. Although he didnt do anything illegal, he was just less lazy than other users. However, if something so easy can be done and exploited to gain real currency i'm sure illegal actions are taken, especially in less monitored games, in order to make profits. It makes sense and just something that needs to be looked into.
The other day they were talking about how disgruntled employees from online texas hold'em gambling sites were using admin programs to see every ones cards, and were able to make millions without any legal reaction. So its happening already.
Sharkrocket @ Dec 12th 2008 1:05PM
Brilliant write-up applying real world economic issues dealing with insider trading and market manipulation to that of online gaming microcosms of the broad global economy, with a particularly impressive perception of relevance and scale.
Individuals holding authoratative positions within these companies stand to exploit the average gamer out of hundreds of dollars.
...Literally hundreds.
T. @ Dec 12th 2008 1:07PM
This is quickly becoming one of my favorite blogs to read. It's incredibly smart and asking really fascinating questions about our "hobby". Cheers to Mr. Methenitis.
Nyxxian @ Dec 12th 2008 2:27PM
The actual worst threat in MMO money? Terrorist financing. I kid you not.
I used to work as an analyst for a very large on-line payment company. The amount of stolen funds that are laundered through MMO's (especially WoW because it has such a huge player base) is absolutely staggering. We're talking in the millions of dollars a month. Obviously, that's not all terrorist related. Probably most of it isn't.
But the big fear is when the real world currency is changed into in game currency (through whatever currency seller you're dealing with), there is no way to track it. The in-game currency can be cashed out (again, by a currency seller) and the squeaky clean money can go anywhere and it's all but impossible to trace the laundering process.
There is absolutely zero doubt that on-line payment processors have been used extensively by terrorist networks to fund attacks. For anyone who actually works in the processing industry at the ground level (ie not execs who don't want the information to be shared with the public) there's pretty much no doubt that MMO money has been used in the same way.
FSK405K @ Dec 12th 2008 5:50PM
scaremonger
Jacob @ Dec 12th 2008 2:42PM
Yo,
So there is a difference between insider trading and fraud (the poker thing). I personally have not looked into the philosophical underpinnings of why insider trading should be considered unethical or not. Personally my opinion is that transparency is more important than regulation. Quick example/hypothetical: Insider trading is allowed ... Enforcement of transparency (availability of information such as who is in power) gives consumers the ability to watch a person in power start to sell or buy large quantities of an item/commodity. Consumers should have the ability to track this. It is their prerogative to watch the markets and infer that a price evaluation is shifting. Why is it the companies responsibility to say "Hey we are about to affect the price. On your mark get set go!" I imagine the markets as more of a flow, when insider trading is allowed, the new price evaluation occurs on a ramp or smooth function. When it isnt allowed, the price change happens quickly. Efficiency of markets are determined by their ability for information to flow smoothly without delays. Banning insider trading actually delays the information from hitting the market and could perhaps cause more harm than good (delays cause oscillation in systems). I'm not down with lying, and I honestly think it is the consumers job to inform himself with available information. Lets stress the government into enforcing the kinds of information we are given (like which companies house offshore liabilities of toxic mortgages) than enforcing regulations. Open source business, based on principles not incidents. Sorry for the rant. Just a thought experiment on efficiency.
Jacob
FSK405K @ Dec 12th 2008 5:49PM
Years of playing Railroad Tycoon in the 80s and 90s makes it clear that anyone smart enough and with enough capital to make massive profits by manipulating the stock market should be proud of their work. Yes, we need a Federal Reserve, a Securities and Exchange Commission, and a Federal Trade Commission, but it sure is disappointing that such actions are nearly always deemed illegal, even if they don't harm the market.
bobartig @ Dec 12th 2008 8:30PM
Laws Of Gaming On Joystiq.
LOGOJ!
Joystiq On Gaming And the Law
JOGAL!
Technology and Gaming Law on Joystiq
TAGLOJ!
These sound like things Protoss would say.