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Legal risks with virtual currencies in online games

Security Strategies Alert By M. E. Kabay, Network World
May 17, 2010 12:04 AM ET
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This first in this pair of articles by Attorney J. Dax Hansen with contributions from colleagues Andrew H. Grant and Kirk Soderquist began an interesting legal perspective on the growing use of synthetic or virtual currencies in massively multiplayer online role-playing games (MMPORG) and virtual worlds such as Second Life. The remainder of this column is entirely their work with minor edits.

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Financial Services Laws: As the popularity of the Issuer's virtual currency increases, the Issuer considers allowing users to redeem the virtual currency with third-party vendors, building peer-to-peer transfer capability, and offering full cash redemption. As virtual currency shifts from being a prepayment for goods or services redeemable with one company to a widely accepted proxy for real currency or a means of transmitting money between various participants, Issuers need to consider state and federal services laws such as money transmitter laws and money service business laws. Financial services laws involve significant compliance obligations, costly and time-consuming licensing requirements, and civil and criminal penalties for non-compliance.

Practical Tip: Limit the scope of your virtual currency system to resemble a "closed loop" gift card redeemable for goods or services of one company, unless you fully understand the implications of broadening the system and you are prepared to comply with complex financial services laws.

Illegal Lottery: Instead of allowing users to purchase virtual currency, the Issuer allows users to earn virtual currency through game play. Allowing users to earn virtual currency through game play that can then be redeemed for valuable virtual or real-world property presents a risk that the Issuer is engaging in an illegal lottery or gambling under applicable state and federal laws. In general, it is illegal to require a person to pay money or expend significant effort (in legal terms, "consideration") in order to enter a promotion or participate in a game in which the participant may win a prize if there is a significant degree of chance involved (for example, a random drawing to determine winners). Any game play that involves these three elements (consideration, valuable prize and chance), is generally an illegal lottery or constitutes gambling, and therefore must be re-structured to eliminate one or more of these elements. 

There are two main ways that game play can be structured to avoid being an illegal lottery or constitute gambling: (1) by eliminating the element of consideration (this kind of game play is called a sweepstakes), and (2) by eliminating the element of chance (this kind of game play is called a contest).

Practical Tip: If you allow users to earn virtual currency through game play that can be exchanged for a valuable prize, you can reduce the risk participation in the game constitutes an illegal lottery by eliminating the element of chance by awarding virtual currency based on some objective measure of the user's skill and ensuring that game play does not involve randomized elements or decisions (for example, basing it on the number of levels passed, the completion of certain in-game tasks that require skill or awarding virtual currency based on frequency of play).

M. E. Kabay, PhD, CISSP-ISSMP, specializes in security and operations management consulting services and teaching. He is Chief Technical Officer of Adaptive Cyber Security Instruments, Inc. and Associate Professor of Information Assurance in the School of Business and Management at Norwich University. Visit his Web site for white papers and course materials.

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