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Virtual currency in gaming – could regulatory law change the rules?

The precise placement of the boundary line between gaming and gambling is a matter that inevitably provokes strong reactions from operators, lawyers and legislators. The classification of an activity as falling into either camp carries not only social connotations, but also very real legal and regulatory implications.

What can be said with certainty is that wherever the line is drawn, operators will innovate to avoid regulatory control. In recent years this has been especially true in the ‘social gaming’ sphere, with an incredible number of businesses springing up to take advantage of the rise of social networks (most notably Facebook) and the proliferation of handheld computing devices (i.e. Smartphones and tablet PCs) to offer gaming products to consumers in ways entirely unforeseen by existing UK regulation.

Inevitably, the increasing prominence of these ventures has led to calls for regulation and supervision of the market. The move in May of this year by Japan’s Consumer Affairs Agency to ban so-called ‘Kompu Gacha’ gaming practices within online social games (in which users pay for the opportunity to win randomised rare items, in the hope of collecting a complete set that can be exchanged for a rarer item), is a sign of the direction in which other national regulators are likely to move.

For the time being, operators offering social gaming products in the UK tend to avoid regulation by virtue of the fact that they do not offer prizes that are considered to be ‘of value’ by UK regulators, with ‘prizes’ (in whatever guise) consisting entirely of intangible virtual items that have no practical application outside of the game in which they are created.

In light of international developments and the increasing value of the social gaming market this may well change.

Online Games and Real-World Legalities

Readers will probably already be aware that gamers are willing to sink serious time and money into acquiring rare in-game items, especially where a network of like-minded enthusiasts exists. For example Diablo 2, released by Blizzard Entertainment in 2000, famously generated whole communities of online grey-market traders, whose trafficking of rare in-game objects saw individuals bidding upwards of $100 for single items.

Nowadays, trading is more sophisticated and the sums involved even higher; the rise of ‘Massively Multiplayer Online’ games (“MMO’s”) such as World of Warcraft, means that exchanges of items can take place directly between players in-game (often arranged in advance via auction sites, as cash sales are usually forbidden by game operators). Indeed, so active is the market for in-game intangibles, that developers such as Blizzard are now seeking to harness it as a revenue stream in its own right. The company’s recently released Diablo 3 features a ‘Real Money Auction House’ (“RMAH”) system in which players can bid real currency for intangible in-game items, with a small commission paid to Blizzard on each sale.

Risks and Rewards

This demonstrates the significant value and consequent monetary consideration attributed by gamers to in-game items.

As in-game assets are increasingly monetised, it becomes ever likelier that they will draw the attention of regulators; especially given the low average age of online-game players and the habit-forming effect that social gaming has been shown to have. In the UK for example, the Gambling Act is specifically aimed at ‘protecting children and other vulnerable persons from being harmed or exploited by gambling’. It is likely that future legislation will increase its control over the sector.

The RMAH is a fascinating case in point. As it stands, Diablo 3 is free to play once the user purchases it; but how would the UK’s Gambling Commission view a similar game if a monthly fee were payable? It might well be concerned by the fact that young users could effectively gamble on winning back their monthly payments by selling-on their randomly acquired in-game items to other users at the end of each month, with the operator profiting heavily from their addiction.

Whereas previous games with subscription fees have avoided falling within the ambit of gambling regulations by allowing players to purchase intangible items using only fictional in-game currencies (e.g. ‘gold’) that have no direct cash value; the RMAH explicitly acknowledges that randomly generated in-game items do have a real world value that can be ‘cashed out’. From there, it’s not too difficult to view a monthly subscription fee as an entry fee, with randomly dropped items as financially valuable prizes.

Operators ought to be aware of the potential direction that UK and/or European legislation could take. The experience of Japanese operators serves as a stark example of the kind of features that national regulators may seek to control in the future. Gaming operators should pause to consider whether their offerings might fall on the wrong side of the gaming/gambling boundary.

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