6 Jun 11
Funding the virtual world
Virtual currencies: protecting yourself against the real dangers
Apple, Facebook, Google and a plethora of on-line games, are just some of those deriving tangible benefits from virtual currencies. However, what are virtual currencies, why are companies using them, what are the risks users and businesses face and how should they manage these?
Virtual currencies are used to purchase virtual goods or services in an on-line environment. Examples of this range from using pre-paid vouchers on iTunes for purchasing music through to players of Massively Multiplayer on-line games (MMOs) purchasing virtual real estate, costumes and other in-game paraphernalia.
Virtual currencies are big business with millions of dollars being exchanged each year. Businesses benefit through locking users in, thereby reducing customer churn, while also reducing costs to 3rd party payment processors, like PayPal. Users benefit through enhanced on-line experiences and convenience. At first glance, all this seems straightforward and uncontroversial. However, delve a little deeper and virtual currencies present a raft of problems that require careful thought and good risk management.
Managing virtual economies
Sadly, Quantative easing, devaluation and rogue trading are terms we have become much more familiar with over the last 18 months. Governments and financial institutions like the Federal Reserve and the Bank of England set about managing (and mismanaging) our economies.
Overseeing a virtual economy has its challenges too. For example, rouge trading occurs in virtual economies. It happens to the detriment of the company managing the virtual economy and the end users. For example, some players undertake “real world trades”, where they exchange virtual goods beyond the bounds of that virtual economy. These exchanges occur either face to face or via another medium (like eBay). Many view such trades as cheating and in extreme cases virtual currencies have been devalued by rouge activity. MMOs often discourage rogue trading by making such transactions difficult, seizing assets of those conducting these practices, and suspending or banning players.
The reality is, if a virtual economy is mismanaged, or a user is subjected to fraud by a third party, users risk losing out financially. This can lead them to seek recompense from the company running the virtual economy.
Regulation
All businesses should strive to understand fully the regulatory environment in which they operate and draft procedures accordingly. The challenge is made all the more difficult for virtual economies because of the global nature of the internet since legislation and regulation varies between jurisdictions and states. Virtual economies have several regulatory “hot potatoes” with which to contend:
- Finance is a heavily regulated environment. Some issues that need to be addressed include PCI compliance where financial transactions are involved and data protection laws concerning how and where data is processed and stored.
- Virtual economies lend themselves to gambling activity known for heavy regulation.
- Rules where minors are concerned tend to be more onerous. Children make up a significant share of users in many on-line games and communities. Some sites are designed specifically with children in mind while others will have children among their user base.
The volume of regulation means it can be daunting to know where to begin. Careful consideration needs to be given to what the company is trying to achieve. Balancing user protection with the need for an efficient and rewarding user experience is paramount for success.
Risk management
The negative financial impact of the many of these issues can be mitigated by well drafted and enforceable Terms of Service that unambiguously set out the rights and responsibilities of the users and the consequences of non compliance. Of equal importance is a clear dispute resolution procedure. So, for example, where a user commits fraud, these factors should help bring closure swiftly and cost effectively with minimal damage to a company’s reputation.
Additionally, on the advice of their insurance brokers, companies are looking to protect their balance sheets by transferring these risks to insurers. This process is greatly facilitated though being able to demonstrate a clear understanding of the exposures and what risk management is in place.
Such procedures should fill well-meaning end users with confidence while they should also bear in mind the old Roman adage – “Caveat emptor” or “Let the buyer beware”. One thing is for certain, as use of virtual economies grows, so too will the buzz they create.
Laurence Rossini
Technology Underwriter