Marketing Director

Virtual Economies: Gaming and Gambling

Recent news that Second Life, the most popular virtual world, reached $160 million in user transactions for the first quarter of 2010 shows the staying power of virtual worlds; annually that's a $640 million virtual economy. If you are unfamiliar with Second Life people paid one another $160 million to buy virtual goods (1s and 0s put together to make something) between January and March of this year.

The Second Life Economy
How much money is changing hands in these digital economies? Worldwide estimates are between $4 and $16 billion. Second Life may be the leader but World of Warcraft, Ultima Online, Lord of the Rings Online and other virtual good and worlds contribute to the multi-billion dollar virtual economy. The potential to make money is huge but there is another upside to these technologies. Second Life is the second largest provider of VoIP (Voice over Internet Protocol) services in the world. These technologies offer many opportunities for learning, communications, collaboration, exploration and business, but today the talk is about the downside of these brave new worlds.

Buying Farmville cash or coins
Facebook began selling virtual goods in 2007. These transactions are taking on a new form; Facebook credits through games like Farmville and Mafia Wars. More than 11 million Facebook users are accessing Farmville daily. A new study claims that 21% of gamers aware of Farmville play it daily. In March Farmville added Facebook credits to its game. These credits, like Linden dollars in Second Life and Gold in World of Warcraft, are equal to real currency. These virtual economies have a dark side especially for children and young people.

Gambling is against the law for young people but with access to games like Farmville at their finger tips the possibility of addiction becomes quite real. One 12-year-old in the UK was able to rack up $1400 in debt through Farmville in less than two weeks. It's no wonder that Farmville's parent company Zynga Games is valued at an estimated $5 billion.

The boy's mother's credit card was billed $1000 while the child's savings account was emptied of $400. A spokesperson for the mother's credit card company indicated "that had the expenditures been on a gambling site the escalating transactions would have raised warning flags, but since the purchases were technically Facebook Credits, they didn't warrant suspicion". When do online purchases raise warning flags? How are regulators and businesses like Facebook protecting children from this? They're not.

Gambling isn't only bad for kids who do it; it's also bad for kids whose parents do. This demonstrated by the record numbers of children being left in vehicles outside of Casinos around North America (see this exhaustive list of examples from a Massachusetts site against slot machines).

Today thousands of dollars can be gone in a matter of hours through virtual transactions. A debate rages in the UK around whether or not these virtual worlds should be regulated by gambling laws that govern the winning of funds in real life. Some online worlds have entire task forces dedicated to the removal of real currency trading in their worlds. Virtual economies often result in interaction with the 'real' economy as characters, spells and items are sold on sites like eBay for real money thus getting around 'task forces' trying to remove real currency from in-game transactions.

The line between virtual economies and the 'real' economy is blurred. Governments around the world have begun working to account for and ultimately tax this kind of income. In September 2007, the Federal Court of Canada ordered eBay Canada Inc. to provide the Canada Revenue Agency (CRA) with the names of its high-volume sellers, their contact information and their sales records. Last year eBay began releasing that information to the CRA.  In Australia tax authorities have already stated it views all such income, whether from the real economy, or virtual, as taxable income. The IRS in the United States has declared that the question is a matter of when taxation will occur not if. As in any unregulated system these virtual economies are being used more and more to launder money worldwide. This is an even greater fear as illegal funds can easily pass through these virtual economies in small amounts. So how is all this wealth being created?

A gold farm in China
Gold Farming is an exploding industry particularly in Asia. Gold farmers work to acquire 'gold' in virtual worlds which they then sell to other players who want to acquire goods. Gold farming launched in 1997 when Ultima Online and eBay facilitated the exchange of virtual gold for real money. Learn more about gold farming and gold farms on Wikipedia. So is this wealth virtual or real? Who owns the actual wealth and property?

On Second Life a group of users recently filed a land claim suit against Linden labs, the game's creator, for deceiving users about their ownership of the game's virtual property. This April 2010 case uses the precedent set in the 2007 case of Bragg V. Linden which has been cited in a number of articles and research papers from "Virtual World End-User License Agreements" to "User-Generated Content and the Future of Copyright". The rights of users to the virtual property they purchase or create are being established through these precedent setting lawsuits. Are these users gambling or are they gaming?

The lines between gaming and gambling are increasingly blurring and the speed of regulatory change will not help the young people who are currently addicted to Farmville, Second Life or World of Warcraft. Playing video games casually, less than 3 hours a week, can be good for social skills, problem solving and relaxation. Problems arise when we see people, particularly young people, playing excessively in an addictive manner. If you are addicted to a virtual economy where you continually exchange money for virtual goods are you a gambler or a gamer?

The virtual goods economy (buying virtual flowers for a friend on Facebook, etc.) is emerging as a powerful force especially among dedicated users.A study published in June of 2009 estimates that 42 million Americans (12%) spent an average of $30 in the last year on virtual goods. In 2010 Americans alone are expected to spend $1.6 billion on virtual goods according to ABC News.

This convergence of virtual and real economies in our world speaks to larger questions about jurisdiction and the Internet. Who controls the online economy and the ability to tax it when physical borders are no longer part of the equation? If there is a black market for virtual goods is that virtual property taxable? Is the government right to spend millions to recover millions from these emerging economies? How can they regulate and monitor these worlds? Regulators from the UK, US and Canada are pushing to have the onus put on those who manage the virtual worlds and games to submit income statements for users. The potential tax revenue is huge estimated to be $30 billion by 2012 (up from $21 billion in 2008).

The stories lead from one to another and the amount of regulatory change we will see in the next 5 years will be enormous and bureaucratically prohibitive (it will take a long time). I have listed some related stories I found in my search for information on this story:

Original By: Hector Guerra. Remixed under Creative Commons License

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