Real legal issues with virtual currencies

The long view of security strategies for your network.

Attorney J. Dax Hansen is a partner at Perkins Coie LLP in Seattle. With contributions from his colleagues Andrew H. Grant and Kirk Soderquist, he has written 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 and the following are entirely their work with minor edits.

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"Points," "coins," "bucks" and other forms of virtual currency are becoming standard offerings for online game sites, social media sites, retailers and other businesses. Virtual currency systems generate revenue, provide low cost alternatives to credit cards for micropayments, offer prepaid solutions appealing to youth and other users without credit cards, and help companies build attractive loyalty programs. Although virtual currency systems are often used to sell digital content, they continue to become more complex - approximating real world currency as they allow purchase of physical goods and services from multiple merchants, offer cash redemption options, and facilitate peer-to-peer payments.

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Attorney J. Dax Hansen is a partner at Perkins Coie LLP in Seattle. With contributions from his colleagues Andrew H. Grant and Kirk Soderquist, he has written 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 and the following are entirely their work with minor edits.

* * *

"Points," "coins," "bucks" and other forms of virtual currency are becoming standard offerings for online game sites, social media sites, retailers and other businesses. Virtual currency systems generate revenue, provide low cost alternatives to credit cards for micropayments, offer prepaid solutions appealing to youth and other users without credit cards, and help companies build attractive loyalty programs. Although virtual currency systems are often used to sell digital content, they continue to become more complex - approximating real world currency as they allow purchase of physical goods and services from multiple merchants, offer cash redemption options, and facilitate peer-to-peer payments.

Even though the currency may be virtual, these systems pose real legal issues - both for issuers of the virtual currency and potentially for other network service providers and partners. Issuing virtual currency could subject an issuer to various state and federal regulatory regimes with wide ranging operational, financial and liability implications. These implications include restrictions on an issuer's ability to expire the virtual currency or impose inactivity fees, requirements to give cash back for unused virtual currency, obligations to remit unused virtual currency balances to states, potential regulation as a financial institution, requirements to structure systems to avoid illegal lotteries, and privacy and data security issues.

This pair of articles highlights several key legal considerations and offers practical tips for companies that operate - or are considering developing - virtual currency systems.

The legal considerations and practical tips are illustrated in the context of an online game site run by the "Issuer," which implements a virtual currency system. U.S. revenues for virtual in-game goods alone are expected to grow approximately 50% from $1 billion in 2009 to $1.6 billion in 2010.

Gift Certificate Laws: In order to increase revenue, the Issuer decides to sell virtual currency on a prepaid basis that can be used to purchase in-game virtual goods. Although virtual currency may seem different from paper gift certificates and plastic gift cards, virtual currency sold on a prepaid basis for later use or redemption by a user may be subject to state and federal gift certificate laws, including gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009. 

Broadly speaking, state and federal gift certificate laws apply when consideration is paid for a record evidencing a promise to provide goods or services of a certain value to the bearer of the record. State and federal definitions vary, but can apply to virtual currency digital records and account balances. Gift certificate laws could restrict an Issuer's ability to expire virtual currency, impose inactivity or service fees on virtual currency accounts, require conspicuous disclosure of key terms, and require an issuer to provide cash refunds of unused virtual currency. Certain exemptions apply, however, for gift certificates provided on a promotional basis without payment of money or other consideration from users.

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.