Communications - April 2011

China, an instant messaging and game publisher, Tencent Inc., introduced a virtual currency called Q coins, which wound up being used in the physical world, as well as in Tencent games and other virtual sites. In some cases, Q coins were reportedly used for gambling and pornography.

These virtual currencies—created by
game publishers primarily for the pur-
pose of making micro-transactions fea-
sible and controlling the environments
within their games—are growing in use
and stature. With Q coins being increas-
ingly exchanged for real yuan, the basic
money unit in China, Chinese banking
officials and government agencies have
become concerned about virtual money
challenging the renminbi’s legitimacy.
“It’s a gray area that governments and
regulatory bodies are taking a hard look
at,” says Andrew Schneider, president
and cofounder of Live Gamers, a com-
pany that develops and manages virtual
currencies for gaming companies. “The
last thing a sovereign government wants
is a shadow currency that could have re-
al-world economic implications.”
Government officials, along with
scholars and legal experts, are attempt-
ing to sort through a tangle of issues,
including what constitutes revenue,
what happens to unclaimed property,
whether it’s possible to pass items on to
next of kin, and what tax implications
exist. “Although a framework for how
to deal with these issues already exists
in the physical world,” Schneider says,
“how they are applied to the virtual
world remains somewhat murky.”
It’s hardly an abstract point. A num-
ber of people playing Second Life have
earned hundreds of thousands of U.S.
dollars selling real estate or providing
services within the game. One German
couple, operating as the avatar known
as Anshe Chung, became real-world
millionaires in 2006 and has since
opened a virtual studio with 80 employ-
ees to develop virtual environments
within games such as Second Life. Oth-
ers have bought and sold virtual goods
on eBay and other sites—sometimes
for thousands of dollars. Meanwhile,
businesses have sprung up—mostly in
China—around developing characters
and building environments for those
who prefer to pay rather than play.

Theodore Seto, professor of law at Loyola Law School, says any virtual

“the last thing
a sovereign
government wants
is a shadow currency
that could have
real-world economic
implications,” notes
andrew schneider.

transaction is potentially taxable in most countries. “Whenever you receive value in exchange for other value, you have a taxable exchange,” he says. However, like frequent flyer miles, hotel points, and other closed currencies, tax authorities haven’t figured out what to do about virtual earnings. In certain instances, when an individual withdraws funds from a game (some games allow this, some don’t) or pays someone to develop a character, the transaction is typically subject to taxation.

These virtual economies are spilling over into the business world. Not only have gaming companies popped up, many of them thriving off virtual economies, but conventional businesses increasingly view environments, such as Gaia Online, Habbo, and Facebook games, as ideal places to market their products and services. Among the brick and mortar companies advertising online are Coca-Cola, Wells Fargo, and Starwood Hotels. What’s more, charity is becoming part of the picture. Zynga’s Sweet Seeds initiative, for example, recently raised more than $1 million for Haitian children.

One interesting matter is how virtual
goods and virtual currencies will evolve
and adapt. Facebook, which boasts
more than 500 million users, offers
Facebook Credits that span more than
200 games and applications. Other
companies are also introducing mega-
currencies that span several games.
This approach boosts spending and
creates greater “stickiness.” A person
who becomes bored with one game can
sell the virtual goods and take her or his
loot to another game. A few companies,
including Tapjoy, Gambit, and Trial-
Pay, have introduced exchanges that
enable consumers to convert Amazon
Mechanical Turk jobs into virtual cur-
rencies.

Further Reading

Guo, Y. and Barnes, S. Why people buy virtual items in virtual worlds with real money, ACM SIGMIS Database 38, 4, nov. 2007. Hamari, J. and Lehdonvirta, V. Game design as marketing: how game mechanics create demand for virtual goods, International Journal of Business Science and Applied Management 5, 1, 2010.

Nojima, M. Pricing models and motivations for MMO play, Proceedings of DiGRA 2007, Tokyo, Japan, Sept. 24–28, 2007. Wang, Y. and Mainwaring, S.D. human-currency interaction: learning from virtual currency use in China, Proceedings of the 26th Annual SIGCHI Conference on Human factors in Computing Systems, Florence, Italy, April 5–10, 2008.

Yamabe, T., Lehdonvirta, V., Ito, H., Soma, H., Kimura, H., and Nakajima, T. Applying pervasive technologies to create economic incentives that alter consumer behavior, Proceedings of the 11th International Conference on Ubiquitous Computing, Orlando, FL, Sept. 30–Oct. 3, 2009.