Xbox Live 360.com. Games and Games.

CNN.com put up an article (which quotes me) on the Chinese virtual currency rules mentioned earlier this week on Law of the Game. GamePolitics has also posted two pieces on the rule, with different takes on the issue. It will certainly be interesting to see how this all plays out in practice.

A few months back I posted a link to a gold farming study by Myke Sanders, a fellow Dallas IGDA board member. Well, Myke just forwarded me his new article on the use of virtual worlds for money laundering. A full PDF is available here.

When I had envisioned use of a virtual world for money laundering, I had always anticipated use of a front business in, say, Second Life such that 'dirty' money is used to buy Linden Dollars that are used to buy virtual goods, and then the front business cashes out the Linden Dollars for 'clean' money. Use of things like prepaid debit cards could even facilitate the laundering of dirty cash.

Myke has a background in credit card processing, however, and came up with an entirely different mechanism based on where the transactions couldn't be traced. While it could also use prepaid cards, it could also be used to generate cash from stolen cards.

As an interesting sidenote, Myke and I were discussing this very topic, and he suggested that the same methodology described in this paper could be used to put gold farmers out of business based on the number of chargebacks they would receive. Of course, that would be highly illegal.

In terms of solutions, I'm not sure his suggested idea of tracking transactions in virtual goods is practical, and even if it were, I don't know that it would be applied to item drops later picked up by other players. More importantly, as Myke pointed out to me, what if an organized crime group created their own MMORPG which they used for laundering, and simply didn't track transactions for that reason.

It's certainly an interesting issue to think through, and I'm not sure there's a readily available answer. I've seen other papers propose all sorts of solutions to the more traditional laundering I've mentioned in the past, but this newer methodology Myke describes is much harder to deal with.

A colleague and fellow Dallas IGDA board member, Myke Sanders, recently forwarded me a data analysis he did on the habits of players who purchase gold from gold farmers. It's a really fascinating bit of data, one that may give developers some revised perspective on how to combat the gold farming issue while continuing to avoid micro-transactions, implementing real money auctions, and/or monetizing the currency. While this isn't an overly legal issue, I still wanted to take an opportunity to comment on the findings. The full piece is available here (PDF).

Myke notes two specific spikes on each graph: There were spikes at single and highly repetitive (12) transactions within the 90 day window of the study. There was also a large spike of people making high value transactions. I would be interested to see a correlated data set of these two, but based on Myke's analysis, there were basically two groups of people: those buying a huge amount of gold once in 90 days, and those who bought almost weekly but for a much smaller sum. He reasons that the first group might be making purchases for a single, say, epic mount or piece of equipment while others might be buying to supply a weekly raid. He goes on to theorize that a loan system might satisfy the former while non-transferable buffs that are a better alternative to disposable equipment might satisfy the latter.

In general, I would tend to agree. It's almost surprising there hasn't been a 'Bank of WarCraft' to date, though I would have to say that it would need to be operated by Blizzard rather than by players (i.e. virtual loan sharks). Of course, Blizzard may need to employ an economist to at least design the system such that we don't end up with an financial meltdown in Azeroth. It would be very easy to over saturate the market with a virtual currency, which would lead to inflation and thereby throw off the balance of the game between the bank and random drops. It would also be interesting if you could actually earn interest on gold deposits. Another alternative might be a virtual credit market, but that gets even more complex. I guess the real questions is whether players want their virtual world to mimic the real world more or not.

The solution for the second group tends to be a little more complex, as it would take likely a pretty good revision to the overall mechanics of the game to get the kinds of buffs being proposed, or at least a major change to the game as it's currently available. Granted, this is not impossible, but I imagine the sudden change in strategy might not go over well with many players (a la the New Game Enhancements in Star Wars Galaxies) and may be better suited as an approach for developers of future games.

As a side note, it will be interesting to see if developers take advantage of the wide latitude granted by the Glider decision in order to go after gold farmers in a similar manner. The recent DMCA applications won't apply, but it is a similar inducement to break the EULA/TOS of most games.

I certainly hope that this will be the first of many studies into actual buying habits of those who utilize the services of gold farmers and even virtual commodity salespeople. While there has been plenty of anecdotal evidence over the years, only actual data like this will provide enough information to actually combat the problem, if your game is designed to avoid such outside monetary influences, by changing certain game design elements to be more in line with the way people want to play. Similarly, if you're looking to start a game that encourages monetization of one sort or another, this is likely a good source of information for your design decisions as well.

This week's LGJ revisits the always popular topic of taxing virtual worlds.

Read on!

This week's LGJ focuses on the potential problems associated with virtual currency, and what might drive the government to regulate it.

Read on!

Let's say you have a Thunderfury, Blessed Blade of the Windseeker. And let's say you bought this item for $100 US. If Blizzard repossess this item (i.e. takes it from your inventory), does this cause you an actual financial loss? Or, in the alternative, let's say you manage to somehow get an Ashbringer (despite theoretical impossibility, it happens), do you have a monetary loss if Blizzard takes it, merely because you could have sold it for $1,000 US?

According to a story from Pacific Epoch, it would seem that is the case in China. The jist of the story is that Shanda Interactive has been forced to apologize to a gamer and pay that gamer 5000 Yuan (just under $700 US) because they removed six virtual item from his account in the MMO The World of Legend. The items were removed pursuant to an investigation in stolen good sales in the game, and after police ordered Shanda to return the items post-investigation, Shanda failed to do so.

While I wouldn't go as far as to say this sets up a virtual "search and seizure" precedent, it does present a greater case for actual value of virtual goods. And while there's no such thing as "international precedent" that would bind courts in other countries to the decision, it does provide a perspective that US judges could look to when deciding their own virtual asset cases. It also seems to paint a further picture of inevitability to the idea of virtual assets being assigned value in the US officially by either the courts or the IRS, those being the two most likely to make the first statement in the arena.

[Via PlayNoEvil, Thanks Cameron]

In an astonishingly anticlimactic ending to what could have been the landmark first case on virtual property, Bragg and Linden have entered into a confidential settlement agreement. And while I wouldn't hold my breath waiting for the agreement to be leaked online, even if it were, there would still be no precedent set on virtual property from this case. I imagine it's only a matter of time until some other case does just what many of us expected from Bragg v. Linden, but we will have to wait and see what case does just that.

Previous Law of the Game Coverage can be found here.

[Via Virtually Blind, Game Politics]

A point I brought up in my 2005 paper, which was recently touched on by Symantec according to an article, is the possibility for money laundering through MMO games. The idea is simple enough: push money through virtual transactions to lose the connection to crime. According to the report:

"... a criminal enterprise could open several thousand MMOG accounts. Each could be used to trade with other players in the purchase or sale of in-game assets, the funds from which would ultimately be withdrawn from the accounts. Since thousands of accounts may engage in millions of transactions, each with small profits or losses, it would be difficult to trace the true source of the funds when they are withdrawn. These transactions can be conducted worldwide without the oversight that typically accompanies international bank remittances. In fact, in February 2007, China's central bank and finance ministries called upon companies to stop trading QQ coins and virtual currencies, presumably to curb the unregulated exchange of currency."

I estimate that Symantec's solution to the problem is with greater security and client verification. However, a more simplistic approach would be taxation on virtual revenue, even if the concept is opposed by players. Think of it this way: Right now, income from sales in MMO games is supposed to be reported as ordinary income. Many people neglect to do this whatsoever. If, instead, there was automatic reporting to the IRS (or other country's tax agency, based on the residence of the player) of income derived from MMO sales, then the tax agency would know to expect payment from said individuals. Moreover, it ties a person to the MMO account, eliminating the possibility of spreading one person over 100 accounts and going unnoticed. Of course, this would have to be based on a cash out value, as has been suggested before by both myself and Bryan Camp. In any event, the process of losing money in the transaction generally makes different things less appealing as money laundering vehicles, and thus virtual taxation could be one answer to the problem.


[Via Kotaku]

An interesting piece was recently posted on Virtually Blind by Israeli attorney Jonathan J. Klinger. The crux of his argument was:

For example, earlier this year, Michael Carlton, CEO of online sportsbook Victor Chandler, was arrested in Israel. An Israeli court asserted jurisdiction over Carlton, a foreign citizen, and stated that as long as a portion of the illegal activity (here, gambling) occurred in Israel, there is no need for universal jurisdiction, and the website operator is subjected to the Israeli law (State v. Carlton, Hebrew decision). The court stated that it was in Victor Chandler’s responsibility to bar all communication from Israel since the activity they offer is illegal for Israeli citizens to participate in.

Using the same rationale, any employee of Blizzard or Linden Lab could be subjected to the Israeli penal code, as they are allowing illegal conduct (under Israeli law) to take place on their servers. Blizzard could face harsher liability as it distributes World of Warcraft actively in Israel, while Second Life is only available for download.

The only solution to these legal problems is to separate players according to countries, or even states (as some state laws in the US differ regarding pornography and violence). Any other solution may cause a conflict of laws, and subject the industry to liability twice: the first is the constitutional tort, where legal expression is barred though there is no local legal reason to bar it (e.g. ageplay in the U.S.) and the second is potential criminal prosecution by another state which may prosecute company leaders for user actions that are actually legal in the home country of the company.

I, however, do not agree. Moreover, I believe the precedent set by Isreal should be looked at with disdain by the legal community. Take note here that I'm departing from an actual analysis, which the above quote limits itself to, and moving into theoretical alternatives that would generally be beneficial to all those involved.

I want to begin with a meta-theoretical statement. The purpose of virtual worlds is to bring people together. As such, the solution that either people must be divided on geographical lines or game providers must be subjected to liability is a pure frustration of purpose. Of course, the concept of making a "virtual world" an actual nation is equally blasphemous. In fact, it seems at though negative consequences could easily result from creating "independent nations" within nations that exist on servers. So, what solutions are available to the problem? Clearly the social conscience of a person in Texas cannot be made to match a person in Isreal or Japan or France. That idea is equally impracticable, and in the same vein, the pipedream of creating "universal rules" to govern the internet is impracticable. Moreover, the idea that we allow complete free speech to govern our online worlds only gives rise to the most deplorable of content, as child predators would take refuge under the "free speech" of the digital world. There is also the final consideration that, ultimately, the server space is private property. The Grid belongs to Linden. Azeroth (all of the various iterations on the various servers) belongs to Blizzard.

So where does this leave possible solutions? Governing in-world conduct being left to the worlds owners, how should jurisdiction be handled? I think it is time for a paradigm shift an analyzing jurisdictional elements with virtual worlds. Put simply: Server location dictates jurisdiction. While this idea won't bode will with the "minimum contacts" proponents out there, the theory does have a logical base. Ultimately, the activity occurs on the server, not at the user end. I can click buttons all day long on my personal computer, but without the server end, there is no net effect. As such, the server is the critical component. This is the basis for a client-server model, and this is, in my opinion, how it should be treated under the law. This provides the maximum certainty for the developer.

This, of course, leaves the issue of performing an activity illegal in one country on a server located in another. Ultimately, issues like these will have to be resolved by the governments, rather than putting the developer in the line of fire or forcing the defeat of the purpose of virtual worlds. So, for example, if a 3rd world nation hosts "Child Porn: The Game," it will be up to the international community to pressure that country to abolish the game. (Moreover, with something as pernicious as child pornography, local governments could likely track subscriptions and users in order to find offenses in the local countries. I can't say I favor invasion of privacy, but I also can't say I oppose using any means necessary to remove dangerous predators from the streets.) On the other hand, with something as hotly debated as online gambling, rather than leaving the user and developer in difficult and awkward positions, it would have to be resolved between nations. Ultimately, either the moralists would win, or the simple positive economics would. In either case, the burden is on the government, or indirectly on society as a whole, rather than punishing the developer or the user based on what are largely ambiguous lines.

Will this paradigm shift happen? It seems doubtful given the overwhelming analysis of jurisdiction to the contrary. However, I think that we have reached a time in which the old analysis need to be seriously re-examined based on the dramatically different world and virtual worlds that technology has created.

[Via Virtually Blind]

I thought many of the readers out there might be interested in the Metanomics 2007 programs going on in Second Life. They are hosting a number of speakers, including my former professor Bryan Camp from the Texas Tech School of Law.

Those interested in the study of Metanomics should try to attend some of their seminars. For the uninitiated, their FAQ gives the following overview:

“Metanomics” refers to the study of the business and policy aspects of the “metaverse” of virtual worlds. Metanomics can focus on issues arising within virtual worlds, such as how developers manage the economy of a game world (like World of Warcraft), or how residents of virtual worlds manage and regulate business. Metanomics also includes the study of how real-world businesses can use virtual worlds as part of their strategy, and how real-world law and regulation might apply to virtual-world activities. Finally, metanomics includes the use of virtual worlds as laboratories in which to study real-world business or policy issues.

Metanomics can take an "immersionist," "augmentationist," or "experimentalist" perspective. Immersionist metanomics attempts to understand business and policy issues from entirely within the virtual world in question, with little reference to the outside world. Augmentationist metanomics views the metaverse as simple an addition (augmentation) to the real world, and examines how its appearance affects business practice and regulatory policy. Experimentalist metanomics uses the metaverse as a laboratory in which to conduct controlled experiments that can tell us something new about the real world (such as eliminating capital gains taxes actually does increase investment and productivity).

[Thanks to Robert Bloomfield for the tip!]

An editorial on China View has some rather harsh words for the online gaming industry in China, specifically for those in the "black market" of virtual goods. The sibling to the gold farming issue in China is the theft and resale of virtual goods.

The article brings up a number of interesting points, but also seems to confuse the "virtual theft" concept with the "gold farming" one, although both issues have been met with cries for regulation, along with the already regulated "underage gaming" issue in China.

The editorial, however, leaves me with mixed feelings. On the one hand, it is always positive to see people outside the gaming establishment finally realize and accept that these virtual goods, be they land in Second Life or an Infinity Blade in World of Warcraft, do have a "value." Moreover, the idea of protecting players from theft is definitely a positive one. On the other hand, the idea of additional government regulations never seems to be the most appropriate approach. While this could be in China rather than the US, I still can't help but feel the regulations are inappropriate.

The major difficulty would be the near impossibility of government alone policing those systems, but on the flip side, the game providers lack any real enforcement tools if and when they can track virtual wrongdoings. The logical outcome would be a necessity for cooperation between government and game providers, but I think the mandates should come from the game providers, not the government. After all, the government does not seem to, on a basic level, understand these games. This would only lead to ineffective legislation that would breed resentment in the gaming community or lead to a downward trend in the games overall.

Regardless of your stance on game regulation, the wisdom of self regulation is evident in many industries, from law to medicine. In this case, where a real crime is involved, similar cooperation has worked for other industries. Of course, only time will tell if any actual regulation is attempted, but given the trend to monetize virtual worlds, some sort of "law enforcement" is almost inevitable.

[Via GamePolitics]

While the US report is due in a little over a month, South Korea has decided to impose a Value Added Tax (VAT) on real money trading in virtual worlds starting in less than a week. Specifically, those who earn between 6 and 12 million won (about $6,500 US to $13,000 US) every half year will have the VAT applied by the middle man, and those earning over 12 million won every half year must apply for a business license and apply the tax themselves.

For those readers in countries that do not use the VAT system (such as the US), here is a quick primer on the concept. Basically, at each stage of production, the value added by the producer is taxed. It is an alternative to sales tax. Here is a simple example:

I make thingamabobs. A thingamabob takes $10 in raw materials, which I can sell to a maker of thingamajigs for $15. He can then sell the completed thingamajig at wholesale for $20. Thingamajigs retail for $25.

Under a 10% sales tax:
The consumer buys the item at retail for $25 and pays an additional $2.50 in sales tax.

Under a 10% VAT tax:

I pay $11.00 for the raw materials ($10 + $1 in VAT)
I charge $16.50 for the thingamabob ($11 + $5 profit + $0.50 in VAT on the profit)
Thingamajigs sell for $22 at wholesale ($16.50 + $5 profit + $0.50 in VAT on the profit)
Thingamajigs sell for $27.50 at retail ($22 + $5 profit + $0.50 in VAT on the profit)

Under both systems, the consumer pays $27.50, each level gets $5 profit, and the government gets its $2.50 in tax. It's more or less a sales tax alternative with some notable criticisms, including complexity in computation and collection compared to a straight sales tax.

To summarize, Korea will be taxing the value added to virtual goods. This could be exceedingly complex, as I can only imagine the argument that will arise over whom is adding value at what stage. More importantly, it is not clear how this will interplay with license agreements that maintain ownership of virtual goods in the game developer.

The Escapist is reporting on this suit, in which a World of Warcraft player is suing IGE. For those unfamiliar, IGE is a major seller of in game gold for a number of high profile games.

The suit essentially alleges that through their business activities, IGE is diluting the player experience. These allegations are made through a combination of consumer protection laws and interference with the contract of a third party.

The claim is in one way novel and in another way analogous to many other consumer protection claims. However, it will still stand to face the noticeable issue that Blizzard has elected not to pursue legal action in this matter. Arguably, Blizzard, as the purveyor of World of Warcraft, is in the better position to pursue IGE for selling gold as violations of the Terms of Service and License Agreement.

The outcome of this could also be critical to the virtual world, as it may clearly define who really has the power to sue over in-game activities, the game company or the player.

It's not often that a critical case can be seen coming before it is decided. However, Bragg v. Linden in federal court in Pennsylvania stands to be possible the landmark case in MMORPG law or virtual law or whatever you would like to call it.

For those who haven't been following, the basic facts are that Mr. Bragg was a Second Life real estate developer. He bought some land ("Taessot") for $300. Second Life contacted him soon after saying the land was acquired with an exploit, reclaimed the land, and banned his account.

The court has officially denied Linden's motion to dismiss and their motion to compel arbitration, negating a portion of the TOS. This means, more than likely, the issue will go to trial. What is the issue? As the court put it:

Ultimately at issue in this case are the novel questions of what rights and obligations grow out of the relationship between the owner and creator of a virtual world and its resident-customers.

So what does this mean to you?

If you are a gamer, you should be paying attention because someone may finally stand to define your rights in the game, the virtual world, or at a minimum in Second Life.

If you are a developer, there are a number of reasons to be paying attention:
1. If you make statements like Linden has about rights in game, how will those assertions operate with your EULA?
2. What rights can players assert regardless of the EULA?
3. How far can a government intervene in your virtual world?
4. If you have an arbitration clause in your TOS, will it suffer the same fate as Linden's?

I have my own theories on what the answers to these questions might and perhaps should be, but I will save that for a future post. Keep checking back with Law of the Game for more on the Bragg case as it develops.

In my previous article, I outlined the basics of the World of Warcraft and Second Life licensing models, along with a business plan that could be applied in the way Sony has implemented Station Exchange for EverQuest II. This article will take a look at the Sony model and explain an alternative model .

Sony Station Exchange

The Sony model is a basic re-sale of license model. Looking at the Station Exchange Service Agreement (which is incorporated in whole in the EverQuest II EULA), (Emphasis added)

You agree that you do not and will not own anything. You agree that, as between you and SOE, SOE owns all copyrights, trademarks and other intellectual property rights in game characters, items and coin (characters, items and coin are, collectively, "Virtual Goods"). SOE hereby grants you the limited right to transfer and receive the licensed right to use Virtual Goods, in return for real money, solely through the Station Exchange and solely in accordance with this Agreement. AS USED IN THIS EXCHANGE AGREEMENT, THE GAME AND ON THE STATION EXCHANGE SITE, TO "SELL" MEANS "TO TRANSFER TO ANOTHER PERSON THE LICENSED RIGHT TO USE VIRTUAL GOODS IN ACCORDANCE WITH THIS EXCHANGE AGREEMENT;" TO "BUY" MEANS "TO RECEIVE FROM ANOTHER PERSON THE LICENSED RIGHT TO USE VIRTUAL GOODS IN ACCORDANCE WITH THIS EXCHANGE AGREEMENT." Accordingly, regardless of SOE's shorthand use of the words "buy" and "sell," whether in this Exchange Agreement, any game, any message board, on the Station Exchange site or elsewhere, SOE has not granted, is not granting and will not grant you ownership of any Virtual Goods.

"Licensed use" and "licensed right," among other things, means that your game play, acquisition and use of Virtual Goods -- and the transactions you engage in through Station Exchange – are all governed by the provisions of this Exchange Agreement and the Underlying License Agreement and Rules. You agree, therefore, that if you violate any of the provisions of this Exchange Agreement, or any of the provisions of the Underlying License Agreement and Rules, SOE can take any action which it believes is appropriate, including but not limited to terminating your participation in Station Exchange, deleting Virtual Goods associated with any of your accounts, and/or suspending or terminating your accounts entirely.

In short, you still own nothing, but you are allowed to transfer your license in the item for money. You are more or less an intellectual property broker with an odd way of acquiring what you're "selling."

Station Exchange and Income Tax

The only other peculiarity of the Sony system is income tax. If you are selling on Station Exchange, this should be the part you pay attention to. As eBayers have discovered, money from auctions is income, and a PayPal account is a real bank account. The difficulty is determining a starting value for the items being sold. I would contend that the correct base value on all items is $0, and as such all money made from them is reportable, taxable income to the IRS. Under this model, you would only have taxable income if and when you sold an item, but selling any item (or character) would generate taxable income, and taxable income must be reported to the IRS.

Alternatives

Solving the Tax Problem

The whole taxable income problem has two solutions a developer could implement, one which seems more likely than the other. The unlikely solution would be automatic withholding on transactions. This, however, puts quite a burden on the developer, not to mention potential liability for tax fraud. The alternative would be to generate quarterly and annual sales reports for each user. This would help the user file correctly without unduly entangling the developer with the IRS.

Alternative License Structuring

The alternative license structure is one I mentioned in my last article. Basically, rather than allowing the player to re-sell licenses, it is to designate the items, characters, etc. as representations of player effort. The player is then re-selling their "time" and "effort" rather than the license to the object. It operates almost like contract labor. Rather than buying the item, I'm retroactively paying you for the time it took you to get the item, as if I hired you to find it to begin with. The only difficulty would be structuring around the general contract principle that you cannot contract for past performance. If this could be solved, then an alternative to the license resale model can exist.

Conclusion

There's an old saying about there being more than one way to skin a cat. While I'm not a fan of animal cruelty, I do agree that there are usually multiple solutions to any given problem. Here, there may even be more than the two I've suggested, these just happen to be the two that most readily came to my mind. As the MMO genre moves more to this economy, more models are always likely to emerge.

Out in the grand expanses of the world wide web, there are really two competing models of IP licensing in the MMO world. The first is followed by the vast majority of games, including the ever-popular World of Warcraft. The other is a more recent development employed by Second Life. After explaining these two in brief, I would like to propose an alternative "middle ground" which could significantly alter the MMO landscape. This IP model is accompanied by a brief discussion of a relevant business model which is closely related.

The World of Warcraft Model

I term this the "World of Warcraft" model, but it historically begins more in the Ultima Online age. The model is basically as follows: The developer provides all content, which is licensed to the user. The user has, basically, no rights under this model. In short, no matter what it took for you to get that Blackfury, the item is merely "on loan" to you from the developer. You can never truly own it. This model is the most popular because it protects the assets of the developer, specifically all the intellectual property that went into the game you're playing. After years of development, most developers don't want to chance anyone walking away with even part of their intellectual property.

The Second Life Model

The Second Life model is much different. In short, the developer provides the basics of the world, but it is up to the user to fill in the rest. The upshot to this model is the user owns their IP. The downside, on the other hand, is that to get a truly enveloping storyline like WoW, it takes a user developing one, not to mention the play mechanics to accompany it. For those seeking profit, this model is ideal. For those looking for an adventure, elsewhere would probably be a better choice.

An Alternative?

So, where does that leave the player? If they want an adventure, the WoW model is the choice, but they never truly have any interest in what they've accomplished. On the flip side, the SL model gives unlimited ownership, but no pre-written storyline to speak of. The alternative rests in an argument eBayers made for years while selling vitrual goods they did not truly own.

The alternative boils down to drafting a license in such a manner that the player does not own the item he has acquired, rather his effort to acquire it salable. In terms of drafting, there are two likely ways to create this system:
1. Establish a license that acknowledges player effort and allows the sale of player "effort" vis a vis the sale of items.
2. Draft the license in such a way that each individual game property is granted based on a license that is transferable only between players.

Of course, to continue to exert proper intellectual property controls over these licenses, the developer would have to implement something else. Specifically, an integrated real money auction system. Let's be perfectly honest: People are willing to pay money for characters and items in MMORPGs. Moreover, while the eBay ban has slowed the market, it has by no means shut it down. So, what is a developer to do? Police the market at a high cost?

The alternative here, of course, is to create your own auction. The business model is simple enough: Allow players to list, buy and sell items and characters. Provide for integrated exchange tools in the game. Use an online payment system to automate the process. Put in feedback. Then charge a transaction fee and you're making an even bigger profit off your MMO monster than your were before. While the coding may be difficult, the reward could be enormous. And such a system would not further entangle your development company with the IRS, in case that was a concern. (Players would be on their own to report MMO profits to Uncle Sam, unless a regulatory change moves all MMO income from ordinary income to gambling winnings.)

Conclusion

In short, it is not beyond the realm of possibility for a developer to legitimize real money trades in games where they wish to retain the majority of the rights to the IP. It would take a concerted effort and more work than the creation of a typical MMO, but the potential profit from such a system seems limitless. Of course, a new, carefully drafted license as noted above would be an absolute must to be sure that the developer's rights are protected.

[Update: It would seem Joystiq is reading my mind today. In fact, Sony's StationExchange operates on a similar model to what I've suggested here. Check back in the near future for a more in-depth analysis of the Sony model.]

In Response to:
Uk gov't urged to act on 'virtual goods': Anti-fraud laws should apply to Second Life

I have dealt with a wide variety of consumer protection issues in my career, primarily ones dealing with franchising. Consumer protection, in general, is a double edged sword: on the one hand, naive consumers should be protected from frauds; on the other, government regulations do not always work as planned and always inevitably lag behind real world progress. With the evolution rate involved with online commodities and virtual goods, the gap between the world the regulations are designed for and the present reality will always be vast. I, however, will grant that some sort of consumer protection needs to exist. I would propose, rather than allowing government regulators to handle the situation, the creation of a multi-national regulatory body to handle issues in virtual goods. The body would basically parallel a licensing board (much like doctors and lawyers deal with) that can adapt its rules at a much faster pace to conform to the reality of the business, but at the same time have the ability to censure members.

The first step would be the creation of the body with some recognition by governments. The only real restriction that the governments need to authorize is that in order to be a virtual commodity supplier and/or broker, you must be licensed by the board. This would mean that games that wish to have real world currency transactions, such as Second Life, must be registered. Additionally, if someone wanted to act as an independent virtual goods broker (a profession which will undoubtedly appear in the not too distant future), they must be registered as well. The exact details of license requirements would have to be detailed by the board. More than likely, games without real-world transactions (i.e. Word of Warcraft) would be exempt from registration and licensing.

Ultimately, then, the board has the responsibility to field complaints issued about their members. Upon review, the board would be free to fine members or suspend licenses, just like bar associations and medical boards. Assuming the policing is adequate, the consumer protection desired would exist without bogging the entire system down in government action. Moreover, the board would be able to address new technological issues as they emerge, whereas a government would be horribly behind and lack the experts to completely understand the problem (not to mention the partisan political element and typical inter-nation bickering).