LGJ: Regulating Virtual Currency

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.

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