Friday, February 26, 2010

Interview with gWallet CEO Gurbaksh Chahal

By Jon Matonis

The Monetary Future interviewed gWallet CEO Gurbaksh Chahal on February 18, 2010, shortly after Facebook announced the partnership with PayPal. gWallet is a virtual currency platform for social media, operating in social gaming, virtual worlds, mobile platforms, and microtransaction environments.

Jon: Welcome to The Monetary Future, Gurbaksh. In a general sense, where do you think the future of virtual currency is headed? What are the needs of developers and players as it relates to virtual currency?

Gurbaksh: I think there are two levels of direction where it's going to be headed. Right now, anyone that feels like their product is here to stay is probably going to hurt themselves in a few years, because right now what we have is a first iteration of a platform that sits in an offer wall environment. When we looked at the business last year before we launched it we looked at that as an immediate opportunity, because we basically said it's pretty ugly. It's not brand-friendly and only a small percentage of users have access to this offer wall that end up ever going there. It's basically a slapped together product rather than an in-depth product.

What we ended up innovating -- we actually launched our Brand Bar product this week -- is the closest in-game experience that a game can interact with that sits right above the game. Someone can either buy through direct payment or through a selection of brands click on specific offers that they're interested in and after they filled out a survey or watched a video or interacted with whatever they wanted to can go back into the game and it's a totally uninterrupted environment.

We're definitely excited about the future in terms of the innovation that we're bringing in to that and secondly more brands are going to be inside virtual currency. The third category is that it's going to become more and more integrated -- the advertising and virtual currency environment will be quite more immersed, because there are a lot of businesses that tried to do that with in-game advertising on console games but it wasn't scalable. I think this is the first social gaming environment that automatically has shown its scale through companies like Zynga and so forth. The sky's the limit in terms of the amount of people you can reach. Now it's all about reaching them and integrating different ways to monetize.

Jon: How does gWallet address the market sector that is different than its competitors?

Gurbaksh: We focus our business on connecting with brands and developing products that consumers can have a better user experience with. The product that I mentioned, Brand Bar, will allow someone to go ahead and see it 100% of the time. Right now, on offer walls that OfferPal, SuperRewards, Gambit all have created, only 2-4% of the users that go on there ever go to. We're creating products that don't interrupt the gaming experience but at the same time have 100% of the pie for you to monetize. It's almost like 'why force someone to go to the store -- bring the store to you'. Right? You're a lot more impulsive, you're a lot more interactive. We're creating cutting-edge products to increase the pie of virtual currency.

And secondly, the way we're bringing offers to the space is to proceed ethically. I'm sure you read the Scamville scandal that transpired a couple of months ago. We basically harped on that the most by realizing that at the end of the day, you have to do things ethically -- you can't scam the advertisers. There's a huge opportunity here, because you're dealing with people that are spending hours and hours a day on playing these games and that's ripe for brand advertisers to want to be a part of. Advertisers like Coca-Cola, Disney, BestBuy, JC Penney that we're bringing to the equation are definitely a lot more different than what our competitors have.

Jon: What is gWallet's current revenue model?

Gurbaksh: We launched in September 2009 and we raised $12.5 million. We're five months in to this and we've eaten up a lot of market share already. Our revenue model is that we receive a cut of the overall advertising revenue.

Jon: I am sure that you've seen the recent Facebook Credits initiative. In what way does that change the strategy for the virtual currency platform companies and for your company? Even with the 30% fee, preliminary statistics are that Facebook Credits provide a 20-25% sales increase for developers.

Gurbaksh: What we offer is a way for people to fund currency through advertising. While we do allow people to insert payment modules like direct payment that's not our primary business. Our primary business is how can we have brands integrated inside the environment where a brand says 'watch this video trailer and receive 15 cents of virtual currency' or 'fill out this form or become a subscriber to this product that you want and we'll fund some virtual currency'. Ours is an alternative payment method to direct payment so we're not really affected by the decrease in revenue associated with direct payment. At the same time, I think Facebook is doing a smart thing. If they can charge 30% when a credit card only charges 3% and they can increase the pie, kudos to them that they have figured out another model where they can make money.

The way to look at the entire graph of people that play games is: 1-2% of people pay cash for virtual currency, another 3-4% of people use alternative methods, such as offers to fund virtual currency, and 95% that will never pay for anything. We're solving the problem in two ways: (1) increase the pie by putting brands into the offers so consumers actually recognize the brands that are in it; and (2) monetize the 95% of people by allowing them to see the Brand Bar instead of going knee-deep into the offer wall, so at the end of the day we get the ability to monetize up to 100% of the users.

Jon: How does today's Facebook alliance with PayPal as a payment choice impact the gWallet strategy for virtual currencies? Does it change anything for your installed base?

Gurbaksh: No, we work with PayPal. So the fact that PayPal going to work with Facebook Credits is fine. For people that rely heavily on that 1-2% for direct payment, it will affect them. It doesn't really affect our business. At the end of the day, I think it's basically two 800-pound gorillas getting together and realizing that it's probably better to do business together than to compete in that area.

Jon: Does gWallet provide the platform for any of the Facebook games and what games are they?

Gurbaksh: Yes, alot of Facebook games, anywhere from Dogbook, Snowball Fight, Drinks on Me, Nitrous Racing, FooPets, and various others. We obviously work with some of the top ones as well but we're not privy to name those -- it should be pretty easy to figure out who they are.

Jon: I'd like to shift the conversation to the topic of a universal virtual currency. Does a universal currency have any appeal in the virtual goods marketplace or do you foresee isolated pockets of in-game proprietary currencies?

Gurbaksh: I think that if you're able to aggregate greater than 50% of all the social games, then a universal currency makes sense. I think Facebook is trying to solve that with Facebook Credits -- they're tring to become that default cash/currency in that category. They already have that leverage because by default if you're on the Facebook platform you probably want to put Facebook Credits in there. The way we look at the market is that the business is a lot bigger than Facebook only. There's virtual worlds out there that want to adopt virtual currency -- there's MySpace and there's all these other social networks worldwide that are not going to adopt Facebook Credits.

Jon: Well, that's exactly the point. They have probably cut themselves off from that part of the business even if they were able to get it, because now they're isolating themselves to the Facebook world for payments.

Gurbaksh: That's right.

Jon: It was phrased in some ways that they ended Facebook Wallet and went to Facebook Credits.

Gurbaksh: That's right.

Jon: Is virtual currency that is convertible to the outside world an advantage? In other words, allowing two-way exchange, easy in and out, and the things that you see with goldfarming and the MMORPG environment?

Gurbaksh: Yes, I think there is a huge opportunity there in trying to go ahead and monetize that category. Not many people have done it. They're figuring it's more slow to market -- Facebook games and MySpace games were more first-to-market, but I think that's where the learning curve is. There's the international market too. There's so many virtual worlds internationally. In China, for example, which is the largest virtual currency market, it's just a matter of time that they adopt alternative methods to fund currency as well.

Jon: Will virtual currency ever be used to purchase non-virtual goods?

Gurbaksh: Yes, if it gets far enough, it probably will go ahead and have regulation. China, where virtual currency is a multi-billion dollar industry, basically did something where they passed a law that said virtual currency can never be used for real currency. I'm sure that will just be a matter of time. America realizes it's a big enough market and they have to go ahead and deal with it.

Jon: I believe that Facebook partnering with PayPal instead of challenging them opens up the market for a universal virtual currency, because Facebook has abdicated that road for the near term. Can a universal virtual currency have an impact on the fee structure? What is the biggest driver of the fee structure?

Gurbaksh: Basically, it comes down to how much cost can you charge. If you can charge that, are you going to drive more top-line revenue? I think that Facebook's argument has been that they can go ahead and charge more and if they charge more, it's going to go ahead and increase your revenue by 20-25%. So, I think they're directly proportional.

Jon: How is the gWallet partner program working out that you announced.

Gurbaksh: gWallet Ventures. It has worked out phenomenally. We've actually had a ton of interest. We launched it and we got over a hundred applications on the first day. The way we look at that entire ecosystem is that we're funding the money that we have raised, that we'll never use anyway, back into the ecosystem and we're trying to find the next rising star. The crazy thing about this industry is that you don't know who will be the next number one, number two, number three, number four. You're one big hit away from being that big developer. What our focus is is to invest in a few of them so that hopefully we will capitalize on who will be that developer.

Jon: Can you mention any of those yet?

Gurbaksh: Not yet, but we're very close to announcing our first deal there.

Jon: Thank you for the interview today.

Gurbaksh: My pleasure.

For further reading:
"gWallet launches 'brand bar' platform to monetize social games", Dean Takahashi, VentureBeat, February 25, 2010
"gWallet Launches New Format For Virtual Currency Offers; Eyes International Expansion", Leena Rao, TechCrunch, February 25, 2010
"gWallet Launches Fund to Invest up to 1M per Social Game Developer", Virtual Currency Platforms, January 20, 2010
"Gurbax Chahal sees gold in virtual currency", Ajit Jain, India Abroad, January 8, 2010

Wednesday, February 24, 2010

Atlas Sound Money Project Essay Contest

By Tom Duncan
Atlas Sound Money Blog
Monday, February 22, 2010

The Atlas Sound Money Project is proud to announce the winners of its 2010 Atlas Sound Money Essay Contest.

We are grateful for the carefully crafted, well-reasoned essays that we received from undergraduate and graduate students and young scholars from the think tank and policy communities. It has been gratifying to see so many who display a solid grasp of the issues and the challenges involved in restoring principles of Sound Money. Especially outstanding are the following winning essays:

Overall Winner:
Nicolas Cachanosky, Ph.D. Student, Department of Economics, Suffolk University
“The Endogenous Stability of Free Banking; Crisis as an Exogenous Phenomenon”

Winners (Junior Faculty, Graduate Student, and Policy Writer Category):
1) Gonzalo Schwarz, M.A. Student, Department of Economics, George Mason University
“Can Money Exist Outside the State?: The Virtues of Monetary Rules and Frameworks”
2) Jesse Gastelle, Ph.D. Student, Department of Economics, George Mason University
“The Root of All Money”
3) Jered Piepenbrink, Ph.D. Student, Department of Economics, George Mason University
“Regulated vs. Free Banking Systems”

Winners (Undergraduate Student Category):
1) Michael Cohen, Cornell University
“A Monetary System for the Free Society: The Need for Sound Money Now”
2) Andrew McManimon, Winona State University
“The Ethical Implications of Monetary Manipulation”
3) Kyle Latham, Grove City College
“Concerns for the Utilitarian and Ethical Characteristics of Money”

Congratulations to the winners!

Reprinted with permission.

More Book Reviews: Good Money

The Freeman from the Foundation for Economic Education published an excellent book review of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775–1821 (2008) by George Selgin. The reviewer is George Leef, book review editor of The Freeman.

From the review (February 24, 2010):
"Good Money has an intriguing origin. While reading a book by nineteenth-century British economist William Stanley Jevons, Selgin came across a passage taking issue with Herbert Spencer’s argument that the production of money could be entrusted to the free market. Jevons wrote that in his view “there is nothing less fit to be left to the action of competition than money,” adding that the nation’s experience with privately minted coins in the late eighteenth century “amply confirmed” his opinion. Selgin wanted to know just what that experience was and investigated: 'What I discovered amazed me, not the least because, instead of confirming Jevons’s position, it did just the opposite.'"

Tuesday, February 23, 2010

Where Have All the Monetary Cranks Gone?

By Lawrence W. Reed
The Freeman
Monday, February 22, 2010

“Monetary crank” was never exactly a household phrase, but I know for certain it was much more widely used and understood a century ago than it is today. If you had nutty ideas about money (such as: “cranking out lots of it will make us wealthy”), you were a monetary crank. We don’t hear the term much these days even though the world is full of people — some in high places — whose pictures ought to be in the dictionary right next to the term.

There must have been some monetary cranks around as early as ancient Israel, at the time of the prophet Isaiah, who took his people to task for allowing the depreciation of their money. “Thy silver has become dross, thy wine mixed with water,” admonished the prophet.

John Law of Scotland ranks as one of history’s more colorful monetary cranks. When Louis XIV died in 1715, he left the French treasury flat broke and a five-year-old successor on the throne. It wasn’t hard for the snake-oil salesman Law to secure an audience with the toddler king’s regent, Philippe d’Orléans. Philippe embraced Law’s recommendation, which was to simply print the money the regime needed. The regent then appointed Law the official controller general of finances, a perch from which he orchestrated a massive hyperinflation that ruined the currency in a mere five years.

The French did it all over again during the 1790s, when Robespierre and the revolutionaries argued that the recipe for a currency of reliable value was paper and ink mixed with guns, bayonets, and confiscated Catholic Church property. That little ride took about five years too — and ended in a similar wreck.

Monetary cranks appeared in America in the nineteenth century but President Ulysses S. Grant’s treasury secretary, Benjamin Bristow, was not one of them. In his annual message of 1874, Bristow declared:

The history of irredeemable paper cur­rency repeats itself whenever and wher­ever it is used. It increases present prices, deludes the laborer with the idea that he is getting higher wages, and brings a fictitious prosperity from which follow inflation of business and credit and excess of enterprise in ever-increasing ratio, until it is discovered that trade and commerce have become fatally diseased, when confidence is de­stroyed, and then comes the shock to credit, followed by disaster and depres­sion, and a demand for relief by further issues. . . . The universal use of, and reliance on, such a currency tends to blunt the moral sense and impair the natural self-dependence of the people, and trains them to the belief that the Government must directly assist their individual fortunes and business, help them in their personal affairs, and ena­ble them to discharge their debts by partial payment. This inconvertible paper currency begets the delusion that the remedy for private pecuniary dis­tress is in legislative measures, and makes the people unmindful of the fact that the true remedy is in greater pro­duction and less spending, and that real prosperity comes only from individual effort and thrift.

Bristow’s warning was not enough to prevent Congress in the last quarter of the nineteenth century from buying into the nostrums of the monetary cranks of that era, the “silverites.” Here’s that story:

The paper greenback inflation of the Civil War era left many Americans suspicious of plans to revive a policy of deliberate paper-money ex­pansion on behalf of any special interest. In 1875 Congress passed the Specie Resumption Act, declaring that the gov­ernment would redeem the greenbacks at par in gold on January 1, 1879. To protect the redemption of the green­backs, it was thought that the Treasury would have to maintain a minimum of $100 million in gold on reserve. The most that the inflationist cranks got was a government pledge not to cancel the greenbacks once redeemed but to reissue them so that the total num­ber outstanding would remain the same.

Hi Yo Silver!

The inflationists’ attention then turned to another medium: silver. The greenbackers became “silverites,” and their rallying cry be­came “Free Silver at 16 to 1,” meaning they wanted the federal government to buy as much silver as was available and stand ready to redeem 16 ounces of it for an ounce of gold. They also wanted legal tender paper silver certificates printed as well. They had enough influence to secure passage of the Bland-Allison Act in February 1878 — the first of the acts putting the government in the busi­ness of purchasing silver for coinage.

Bland-Allison passed over President Rutherford B. Hayes’s veto. In his veto message Hayes noted that “A currency worth less than it purports to be worth will in the end defraud not only creditors, but all who are engaged in legitimate busi­ness, and none more surely than those who are dependent on their daily labor for their daily bread.”

The silverite cranks were dissat­isfied with Bland-Allison because it did not go far enough. It did not provide for free and unlimited government purchase and coinage of silver at 16 to 1. The only silver to be coined would be the two to four mil­lion dollars’ worth that the govern­ment purchased each month, and the Treasury, while the law was on the books, rarely bought more than the minimum amount.

Silver producers in particular had a vested interest in the matter, for the market price of silver had begun a long-term decline in the 1870s. Securing a government pledge to buy silver at a higher price than could be obtained in the free market was an obviously lucrative arrangement. As the market ratio of silver to gold steadily rose above 16 to 1, the profit potential became enormous.

The silverites’ drive for favorable legislation culminated in the Sherman Silver Purchase Act of 1890, which replaced Bland-Allison. The Sherman Act stipulated that the Treasury had to purchase 4.5 million ounces of silver per month, or roughly twice the amount under Bland-Allison. The silver purchases mandated by the law represented almost the entire output of American silver mines.

An inflationary boom yielded to panic and a deflationary bust in 1893. President Grover Cleveland led the successful fight to repeal the silver legislation, an indispensable step toward restoration of a sound currency.

The monetary cranks didn’t disappear, however. Their chief intellectual supporter, William “Coin” Harvey, continued to agitate for silver and paper-based inflation. Cleveland’s own party nominated a monetary crank, William Jennings Bryan, for president in 1896. The silver issue didn’t go away until the Gold Standard Act of 1900 settled it.

Maybe we don’t hear the words “monetary crank” these days because the culprits truly have vanished and everybody has smartened up when it comes to money. But wait a minute! If that were the case, how do we explain a dollar that’s now worth about a nickel of its 1913 value, the year something called the Federal Reserve was created?

Hmm. Maybe the only people who have smartened up are the monetary cranks themselves. They’re now wearing pinstripe suits and instead of selling inflation per se, they’re hawking “stimulus” and “full employment.”

Lawrence Reed is the president of the Foundation for Economic Education. Reprinted with permission.

The Future of Money: It's Flexible, Frictionless and (Almost) Free

In the new Wired article by Daniel Roth, "The Future of Money: It's Flexible, Frictionless and (Almost) Free" (February 22, 2010), Roth writes:
"This is the kind of revolutionary fervor that PayPal was always intended to foment. Peter Thiel, PayPal’s cofounder and a die-hard libertarian, launched the company as a means of creating a stateless monetary system, making it possible for anyone to switch, instantly and easily, between global currencies. “PayPal will give citizens worldwide more direct control over their currencies than they’ve ever had before,” he told new employees in 1999, according to the book The PayPal Wars. 'It will be nearly impossible for corrupt governments to steal wealth from their people.'"

"But for most of its history, PayPal acted more as an enabler — a way of extending the credit card model of payment into the online realm — than as a bomb-thrower. Customers didn’t want to use PayPal to escape the tyranny of government currencies. They wanted to use it to spend money online without having to give out their credit card information to a million different vendors."

"Cryptographer David Chaum wanted consumers to be able to transfer money digitally, just like banks. His ecash was an anonymous form of money first issued by an American bank in 1995. The company declared bankruptcy in 1998, but the concept has since been built upon by dozens of digital and virtual currencies."

Although he doesn't discuss nonpolitical digital currencies competing with governmental units, Roth does anticipate competing virtual currencies evolving from the in-world games and virtual worlds (see valuation table below):
"In recent years, many other companies have come up with their own PayPal-like innovations, creative tweaks to further squeeze some margins out of the traditional credit card model. Apple’s iTunes and Research in Motion’s payments program reduce transaction fees by bundling a customer’s purchases before sending them to a credit card company for processing. (That’s why you don’t usually see a series of 99-cent charges on your credit card bill; they are processed as one lump sum.) Virtual currencies, from Microsoft Points to Linden Dollars, encourage “in-world” trade, incurring credit card and banking fees only when their users buy in. By reducing their exposure to traditional transaction systems, these companies are able to wring extra pennies of profit out of each sale — which can aggregate into millions of dollars, turning their payment platforms into profit generators in their own right."

"What if the company opened up its code, embraced its developers, and turned its service into a platform? What if PayPal asked its users to create the tools and functions that would make it grow?"

Rate of Exchange: One US dollar translated into various virtual currencies.*
Social Network Massively Multiplayer Role-Playing Game
Digital Marketplace

* Values are approximate. Not all currencies are pegged to the dollar, and many are not intended to be exchanged for cash.

  • 10 Facebook Credits >>>
  • 125-170 WOW Gold (World of Warcraft) >>>
  • 80 Microsoft Points >>>
  • 10 Project Entropia Dollars (Entropia Universe) >>>
  • 6 Q coins ( >>>
  • 250 Linden Dollars (Second Life) >>>
  • 1,500,000 Star Wars Galaxies Credits >>>
  • 6 Habbo Coins (Habbo Hotel) >>>
  • 10 Twollars (Twitter) >>>
  • 100 Nintendo points >>>
  • 1,000 IMVU credits >>>
  • 80 hi5 coins >>>
  • 5 Farm Cash (FarmVille) >>>
  • 5.71 WildCoins (WildTangent WildGames) >>>
  • 2,000 Therebucks >>>
  • 100 Whyville Pearls >>>
  • 25,000,000 ISK (EVE Online) >>>
  • 0.75 Mahalo Dollars >>>
  • 4 Zealies (Dogster) >>>
  • 10 Ven (Hub Culture)

Monday, February 22, 2010

Virtual Currency and Money Laundering

By Max Burns
Pixels and Policy
Tuesday, November 3, 2009

After looking at the necessity of proper policing in virtual worlds yesterday, let's take a look at just how prevalent cybercrime really is.

As the Hindu Business Line reports, cybercrime - both small-scale phishing and large-scale acts like cyberterrorism and mass account information theft - is on the rise.

The Profit Potential of Virtual Crime

Cybercrime’s prevalence in the virtual world is debatable, with different organizations expressing varying levels of concern. The Fraud Advisory Panel, a consumer protection group, called for the extension of federal laws into the virtual world as early as 2007.

There’s definitely a need, reports the the Hindu Business Line, a business policy newspaper that recently dipped into the virtual world to take a sampling of cybercrime. From the article:
"Phishing attempts to acquire sensitive consumer information such as usernames, passwords, and credit card details fraudulently. Once an account is compromised in this way, a cyber criminal can empty it or use its associated credit card information for other purchases."
"While not a threat in the usual sense, users can inadvertantly become party to money laundering. Because avatars can trade currencies and goods inside the virtual world and then sell them into secondary markets for real money, the crime is difficult to trace."
We've come a long way from trying to trade useless loot for gold in Runescape. Money laundering through Second Life's Lindex Exchange, which allows users to spend real currency for Linden Dollars and then convert them back into a real world currency, is also a potential financial fraud hub.

In fact, money laundering on the Lindex was a hot topic in early 2008, causing the company to take a strong stand in defense of its platform. However, these concerns require further investigation, as the ease with which a player can convert currencies - which requires only a computer and a Second Life account - raises serious anti-terrorism concerns.

As virtual worlds grow in scale and in the number of financial transactions conducted daily, cybercriminals are growing in tandem. With no standardization between worlds, there is no way of knowing whether one source is making and cashing out Linden Dollars, Warcraft Gold, or any other in-game currency. This makes tracking accusations of money laundering extremely difficult.

As virtual worlds grow larger and become a part of tens of millions of lives, the security of one's virtual identity will come to the fore. Trading game currency and betting real currency on in-game markets has birthed an emerging, if impromptu, stock market.

Speculators discontent with the ravaged real-world market will no doubt turn to virtual worlds as they become viable. Without any virtual Securities and Exchange Commission to test the legitimacy of "virtual stock" promotions, this leaves well-meaning players open to fraud.

Despite how common e-mail phishing scams may seem (and who doesn't have a fake PayPal or eBay "account verification" e-mail in their inbox from the past month?), it is vital to remember that these are crimes.

One of the major problems facing law enforcement agencies is the issue of where an attack originates. This decides the thorny issue of jurisdiction.

Internet security firms like McAfee decry the current scam-ridden landscape of virtual worlds, but substantive recommendations for improving the situation are few and far between. As Tech Target reports, the ever-expanding virtual landscape and the cleverness of cybercriminals is confounding traditional law-enforcement services.

Given the cost of cybercrime and its potential to destabilize small virtual worlds that may lack superior protections, being confounded is no longer good enough. Law enforcement agencies need to give serious consideration to the major role virtual worlds are playing in the lives of users - both as hubs for financial transactions with sensitive credit card information, and as a center for semi-anonymous gathering.

Should law enforcement agencies monitor virtual worlds for cybercrime and identity theft? Is it time for the FBI to open a virtual office in Second Life to deal with claims of large-scale cybercrime events? Let us know your thoughts.

Max Burns is the editor of Pixels and Policy. Reprinted with permission.

For further reading/viewing:
"The Failure of Anti-Money Laundering Laws" (video), Center for Freedom and Prosperity, February 22, 2010
"Runescape creator pursues 'phishing thieves'", Mark Ward, BBC News, November 30, 2009
"Virtual World Money Laundering", Mark Methenitis, June 3, 2009
"Cyber-Laundering: The Union Between New Electronic Payment Systems and Criminal Organizations", Giulio Piller and Elvis Zaccariotto, Transition Studies Review, May 2009
"E currencies and money laundering are they intertwined?", Michael Hearns, November 21, 2008
"Group Laundered $38M in Virtual Currencies in 18 Months", Virtual World News, October 27, 2008
"Virtual worlds becoming money laundries", Shaun Nichols,, August 29, 2008
"Cyber Laundering: An Analysis of Typology and Techniques", Wojciech Filipkowski, International Journal of Criminal Justice Sciences, Volume 3 Issue 1, January - June 2008
"Virtual Money Laundering and Fraud", Kevin Sullivan, April 3, 2008
"Exchanging Real Money in Virtual Worlds", Andrea Kaminski, E-Commerce Times, March 3, 2008
ATM cards tied to virtual worlds a 'money launderer's dream'", Brian Monroe,, November 20, 2007
"UK panel urges real-life treatment for virtual cash", Adam Reuters, May 14, 2007
Virtual Worlds 'Clear and Present Danger' for Money Laundering", Brian Monroe,, April 26, 2007
"Virtual money laundering now available on the world wide web", Kenneth Rijock, World-Check, January 2, 2007

Friday, February 19, 2010

Facebook Gets Out of the Way in Payments Battle

By Jon Matonis

Either lead, follow, or get out of the way. Facebook chose the third route.

I don't really understand the benefits of this latest move by Facebook to accept PayPal, but then again I wasn't present at the meetings, so it could be that I am missing part of a 'grander' strategy. It's a great deal for PayPal to acquire new subscribers. On the one hand, it paves a road for Facebook to demand Facebook Credits and 'push out' the virtual currency platform companies. But, on the other hand, it opens the door for a universal virtual currency that has the ability to move both in-and-out of the Facebook gaming environment.

Paypal is simply a VISA/Mastercard/bank account intermediary and Facebook is certainly free to develop and to extend those credit card association relationships on their own, especially with Peter Thiel on the board of Facebook. This is a layer on a layer on another layer to purchase Facebook Credits. Facebook needs revenue and their most promising path to revenue had seemed to be via exploiting the payment platform space!

With its incredible trust factor and customer brand loyalty, an international Facebook currency would be a tremendous force in the market. Any attempt now by Facebook to extend payment transactions into the non-Facebook universe would effectively nullify the non-exclusive partnership with PayPal. Instead, they chose to enrich the PayPal proprietary database with potentially millions of new subscribers. Maybe this latest move will give new juice to the freely-convertible, universal currency notion now that Facebook is out of the way.

For further reading:
"Facebook Said to Offer More Payment Options for Items in Games", Ari Levy, Brian Womack and Joseph Galante, Bloomberg, February 19, 2010
"Facebook Announces Partnership with PayPal for Ad and Credits Payments", Eric Eldon, February 18, 2010
"PayPal Integration Shows Facebook Wants to Play in Currency, Partner for Payments", Justin Smith, February 18, 2010
"Facebook’s Increasing Focus on Credits Prompts Developer Speculation", Eric Eldon, February 18, 2010
"Facebook's PayPal Killer Now Accepts PayPal", Nick Saint, February 18, 2010
"PayPal Becomes A Facebook Credits Payment Provider", Nick O'Neill, February 18, 2010
"Facebook, PayPal partner on advertising, virtual goods payments", Kim-Mai Cutler, February 18, 2010
"Facebook's New Payments System Is Increasing Virtual Goods Sales By An Impressive 25%", Rory Maher, February 9, 2010
"Facebook Cut Of Transactions Could Be High As 50%", Virtual Goods News, January 13, 2010
"'Virtual currencies' power social networks, online games", John Sutter, CNN, May 19, 2009
"Why Facebook Wants A Virtual Currency", Michael Hickins, InformationWeek's Digital Life, May 18, 2009

Sunday, February 14, 2010

Greek Saga Won't Kill the Euro But the End May Begin Here

By Liam Halligan
The Telegraph, London
Saturday, February 13, 2010

Could the endgame of this Greek tragedy be a eurozone breakup? The single currency's supporters maintain that such an outcome is mere mythology.

Greece accounts for only 3 percent of the 16 member states' combined GDP, they say, and has lower debts than some of the banks bailed-out during sub-prime. A loan of E20 billion (£17.5 billion) would do the trick, we're told. That's less than the British government injected into either Lloyds or the Royal Bank of Scotland.

Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That's because, at the heart of the eurozone project there was always a fundamental contradiction -- one that the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.

While the European Central Bank controls eurozone interest rates and the money supply, the size of each country's fiscal deficit results from the spending and taxation decisions of its own sovereign government.

How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can't -- not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.

Voters don't like that. Neither do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently "pro-European" lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That's why the eurozone will ultimately break up -- whether Greece is bailed out or not.

The eurocrats blame "speculators" for the single currency's woes. That's a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country's electorate bursts through. This current Greek saga won't end the eurozone -- but future historians will identify it, perhaps, as the beginning of the end.

Many have said it's hardly surprising that Greece -- with its history of financial profligacy and capital flight -- has emerged as the eurozone's Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they'd be mad, but it must be their choice.

If Berlin and Brussels try to impose their own view on Greece and the "cuts" come from outside, the situation will become absolutely incendiary. Protests will turn into full-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?

Read the rest of the article.

For further reading:
"The Greek Tragedy That Changed Europe", The Wall Street Journal, February 13, 2010
"A Theory of International Currency and Seigniorage Competition", Yiting Li, September 2005
"How to Cut the Seigniorage Cake into Fair Shares in an Enlarged EMU", Jørgen Drud Hansen and Roswitha M. King, December 22, 2004
"The Enlargement of the European Union and the Redistribution of Seigniorage Wealth", Holger Feist, January 2001
"Eurowinners and Eurolosers: The difference of seigniorage wealth in EMU", Hans Werner-Sinn and Holger Feist, June 1, 1997

Saturday, February 13, 2010

Legal Issues with Virtual Worlds and Social Media

On February 3rd, 2010, The George Washington University Law School Cyberlaw Students Association hosted Jim Gatto, head of Pillsbury’s Virtual Worlds and Video Games practice group, who spoke on Legal Issues with Virtual Worlds and Social Media.

There are lots of interesting issues around virtual goods such as: How should we value virtual currency? What about taxation, seizure, property rights, etc...? If virtual goods or avatars have real-world value can companies just up and delete them or take them away without compensation? Are they “assets” if a company goes out of business? What happens to someone’s virtual goods when they die in the real world?

Virtual currency issues and virtual goods issues are covered in pages 35-37 of the presentation. Gatto states that "many virtual currencies will be viewed as 'stored value' or 'gift card' accounts by relevant state and federal regulators."

For further reading/viewing:
"3 Reasons Pay-With-Facebook Won't Squash All The Other Payments Providers", Nicholas Carlson, Business Insider, February 8, 2010
"What Happens to Your Virtual Property When You Die?", Stephen Wu, 3D Internet Law, December 2, 2009
"Intersecting Interests: Virtual Worlds and the Law", Metanomics with Robert Bloomfield, May 20, 2009
"Monetizing the Metaverse", Metanomics with Robert Bloomfield, October 13, 2008
"Taxation of Virtual Worlds", Metanomics with Robert Bloomfield, October 22, 2007

Friday, February 12, 2010

South Carolina: "Gold and Silver Coin as Legal Tender" Act Introduced

By Bill Greene
Constitutional Tender Blog
Saturday, February 6, 2010

South Carolina has joined the growing ranks of States which have had Constitutional Tender bills introduced!

On February 2nd, 2010, SC Rep. Michael A. Pitts (District 14 - Abbeville, Greenwood & Laurens Cos.) introduced H. 4501, the "Gold and Silver Coin as Legal Tender" Act. This bill would allow "silver and gold" to once again be legal tender in South Carolina, as opposed to the paper bank notes of Federal Government debt.

The language of H. 4501 is different than our model Constitutional Tender Act bill, but the effect would be the same - making gold and silver coin the only thing allowed as payment to and from the State.

We'll take that!

Watch an interview with Rep. Pitts about his bill last year supporting States Rights in South Carolina.

The Constitutional Tender blog was originally set up to facilitate discussion of the "Constitutional Tender Act," which was being proposed in Georgia. Reprinted with permission.

For further reading:
"Bill would ban federal currency in SC"
, Adam Fogle, The Palmetto Scoop, February 17, 2010
"States Rights Bills Now Calling for Gold and Silver Money", Aurelia Masterson, AOCS Direct, February 1, 2010

Thursday, February 11, 2010

Virtual Law: Navigating the Legal Landscape of Virtual Worlds

The American Bar Association recently published an innovative virtual worlds legal book, Virtual Law: Navigating the Legal Landscape of Virtual Worlds (2008).

From the Reviews:

"The book is timely, circumspect, well written and grounded where it is supposed to be while provocative in areas that it needs to be. The author's experience in virtual world use and commentary shines as he teases out the importance of law to virtual worlds, and vice versa. Benjamin Duranske makes virtual law in concept and practice very tangible and understandable. This book is not only a book introducing Virtual Law -- it is a book of reference for lawyers, virtual world users and virtual world owners alike." -- Taran Rampersad Virtual World/Second Life®/ICT Consultant,

"Knowing 'virtually' nothing about Second Life, I finally determined to curl up with Virtual Law as continuing education this weekend. I didn't put it down until I finished it. The comprehensive outline of topics, the accessible language, and spot on exhortations of the relevance of this technological phenomenon should make this a best seller. The book gave me, a total amateur, several business development ideas on first reading, and I look forward to actually spending real dollars, not Lindens, to purchase several more copies for non-lawyers to read." -- Chris Grant , Esq. CEO InfecDetect , LLC Princeton, NJ

"Ben Duranske hits the mark again and again with this clear, straightforward overview of legal issues in virtual worlds. All of the main arguments are here, in a single source, allowing the reader to balance the claims of contract law against those of property law in regulating the toughness of the magic circle. Woven together, these arguments constitute a desperately-needed consensus, one that recognizes the inevitable influence of real-world law on the future of this critical medium, but also its limits." -- Edward Castronova Associate Professor, Indiana University, Bloomington, Indiana

"Benjamin Duranske's 'Virtual Law' is far and away the most thorough, clear-sighted, and enlightening introduction to the legal implications of virtual worlds that has been written. It is a must-read for anybody -- lawyer, plaintiff, or defendant -- with a stake in the legal system's fast-evolving relationship with this strange new realm of human affairs." -- Julian Dibbell Contributing editor, Wired magazine; co-moderator, Terra Nova collaborative blog; author, Play Money: Or, How I Quit My Day Job and Made Millions Trading Virtual Loot
From Amazon Product Description:

This book introduces readers to the emerging and exciting world of virtual law. It examines current cases and legislation impacting virtual world providers and users, and makes predictions about the future application of current law. It addresses the application of intellectual property law (copyright, trademark, and patent), criminal law, property law, contract law, securities law, tax law, and civil procedure. It also provides practical advice to lawyers who wish to create a virtual world presence for their practice or who have clients with virtual world connections. The book includes extensive appendices listing in-world and web-based resources for practitioners and legal scholars.

For further reading/viewing:
"Metanomics Revisited", Metanomics with Robert Bloomfield, September 22, 2008
"Blawg Review #156", Virtually Blind, April 21, 2008
"Virtual Banking Revisited", Metanomics with Robert Bloomfield, January 14, 2008
"Virtual Banking", Metanomics with Robert Bloomfield, January 10, 2008

Euro Trashed?

By John Browne
Euro Pacific Capital, Inc.
Wednesday, February 10, 2010

The European experiment with a trans-sovereign currency is facing its first acid test. The flashpoint today is Greece, which looks set to default on its debt barring some outside intervention. While many commentators have been squawking about the immediate crisis as if it were the end of life on Earth, I would like to zoom out and discuss the history and longer-term outlook for the euro and its parent, the European Union.

The launch of the euro was a major milestone in the sixty year process of European federalization. Economic considerations have always led the charge, from a normalization of tariffs to a free-trade area to a customs union. Still, the launch of a pan-European fiat currency and central bank without a unified political apparatus behind it was always considered a risky move.

Since its launch, the euro has outperformed expectations, establishing itself both as the world’s secondary reserve currency and the second most traded currency after the U.S. dollar. Because of this stellar introduction, the euro has been proposed as the new primary reserve currency in place of a devaluing U.S. dollar. However, its unusual foundation presents risks to which most investors are unaccustomed.

In essence, the euro was created as a lever to encourage a complete European political union rather than as a currency representing a call on an already unified economy, as with the U.S. dollar. Jean Monnet, one of the EU’s founding fathers, is reported as saying, “Europe’s nations should be guided towards the super-state without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose but which will inevitably, and irreversibly, lead to federation.”

The currency has largely succeeded in creating the will for a federal Europe among the member states’ political classes; however, the citizens have voted again and again to maintain their countries’ independence since 2005. Thus, the Union was already losing momentum when the latest financial crisis struck.

The combination of tight credit markets and high debt-to-GDP ratios caused bond yields for the EU members collectively known as PIGS (Portugal, Ireland, Greece, and Spain) to fly upward. As a result, Greece is now in acute jeopardy of officially defaulting on its debts. Because a political union was never implemented, Greece cannot be compelled to slash its budget, nor can it assume the Union will prevent its fiscal failure.

This explains why investors are making short-term trades out of the euro and into the dollar. While the Greek deficit-to-revenue ratio is roughly equal to that of California in 2009, the latter functions with an implicit (although untested) guarantee that the U.S. government will step in before they are forced to default. The EU offers no such backing to its member-states. In fact, recent questions have arisen out of Germany, the primus-inter-pares of EU members, concerning the legality of the European Central Bank (ECB) or the European Union ever giving direct aid to the Greek government.

While many assume that either Germany, an ad-hoc group of European states, or the IMF will bail out Greece, such a result would represent a temporary fix rather than a policy precedent. The move would pose more questions than it answers. If Greece were to be thrown a lifeline what would happen if Portugal, and then Spain, were to ask for equal consideration? Will Greece be spared expulsion from the eurozone if it fails to take the austerity measures necessary to restore solvency? If not, what message does that send to Ireland, which chose to slash its budget rather than wait for a bailout?

These problems did not spring from the æther. The architects of the euro, in pursuit of their political agenda, willfully disregarded the historical divide between the Nordic economies, which have practiced low inflation and fiscal discipline, and the Mediterranean, high-debt, easy-money economies. While there were strict economic, monetary, and budgetary criteria for entry into the currency, one can reasonably suspect that enforcement was lax or the numbers were fudged. After all, the southern states’ balance sheets tilted deep into the red soon after acceptance in the Union. Now, however, the ECB prevents them from monetizing the debt.

So, we are witnessing the results of this inherent contradiction.

If the EU becomes the “bailout union,” a free-ride area where entitlement spending in Greece is underwritten by German taxpayers, then the euro will stabilize in the short-term, as investors face reduced uncertainty. However, this will lock the Union on a trajectory to gradual monetary collapse – the path currently being followed by the U.S. dollar.

If Greece is left to face the consequences of its profligacy, then the integrity of the euro will be preserved. The key in this scenario is whether Greece leaves the euro, or the Union, when it defaults. If it does, we could see weaker economies cast out one-by-one until Europe returns to a system of national currencies, with perhaps a rump euro uniting the Nordic block. If Greece defaults but remains in the block, then short-term shock will give way to a renewed confidence in the euro as a lasting reserve currency.

The future of the EU is being tested severely, together with much of the wealth of investors who have diversified into its currency. Likely, this crisis will draw the EU member states into a covert political struggle over the future of Europe. As this battle ebbs and flows, both the euro and the U.S. dollar likely will suffer great volatility. Those of us parked in the safe harbor of gold may benefit greatly from this transatlantic turbulence.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Reprinted with permission.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

More importantly, don't let the great deals pass you by. Get an inside view of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years." Click here to download the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at

For further reading:
"Things Fall Apart in Eurozone", John Browne, Euro Pacific Capital, Inc., January 12, 2010

Vietnam to Devalue Dong 3.4%

By Nguyen Pham Muoi and Patrick Barta
The Wall Street Journal
Wednesday, February 10, 2010

HANOI—Vietnam said it will devalue its currency for the second time in less than three months as the Southeast Asian nation continues to struggle with a hangover from economic volatility during the past two years.

An increasingly popular destination for Western capital, Vietnam continued to post strong growth rates even through the dark days of last year's global recession. But economists say the country's strong recent performance–including growth of roughly 5.5% in 2009, according to the World Bank—masks serious underlying problems including a large trade deficit, high inflation and a shortage of U.S. dollars needed to keep the financial sector humming.

All that has put severe pressure on the Vietnamese dong as local residents lose confidence in their currency. By contrast, some other Asian countries have seen their currencies rise recently, as their economies regain their footing after the latest global financial crisis.

The State Bank of Vietnam, the country's central bank, said Wednesday it will devalue the Vietnamese dong by 3.4% effective Thursday. That comes on top of a 5% devaluation in November and two other devaluations since June 2008. Now, one U.S. dollar will buy 18,544 dong, compared to 17,941 dong earlier in the week.

The central bank on Wednesday also imposed a 1% ceiling on interest rates on dollar deposits at banks by "economic institutions," not including credit institutions, to try to flush more greenbacks into the market.

The devaluation will help make Vietnam's key exports, which include shoes, coffee and rice, cheaper than those of many other Asian countries, potentially improving its relative position in global trade. That could increase tensions with some neighbors, especially Thailand, with which it competes heavily in global markets. Thailand has already complained that some currencies in the region, including the Chinese yuan, may be undervalued.

For further reading:
"Vietnam Devalues Dong Again, This Time by More Than 3%", John Ruwitch, Reuters via Interactive Investor, February 10, 2010

Monday, February 8, 2010

Russian Banks on the Offensive to Stop E-Money Issuers

By Daniel Gusev
Retail Banking in Russia: Innovation Unfolded
Monday, February 8, 2010

The bill on national payments system was leaked to the press - where it became clear that banks want to take away the emoney issuance function away from emoney operators. What gives?

Emoney was and is pretty much the single factor developing ecommerce and motivating "web entrepreneurship" between uninstitutionalized agents. Cost effective clearing mechanism enabled new "grey merchants" to launch into business and promoted trade - since most emoney schemes, i.e. Yandex Money, in Russia are part of search engines. Emoney was a tool of content monetization. From here, how strong can the anti-emoney movement be?

According to the bill - only credit money institutions can be held liable against money issued - so emoney issuance should be their exclusive prerogative. The institution may then establish relationship with a payment agent who will on his part be able to offer operational and clearing services to the end users. In fact - the whole emoney will likely be rendered into prepaid schemes - where liabilities would be issued by banks and emoney will become agents "connecting the dots". Ability to pay without KYC principles will be kept for sums lower than RUB 15 000.

It's hard to say, whether the whole idea will work - it may kill illegitimate and illiquid emoney schemes and promote the use of major virtual currencies - since the operators would still be in control of the dots - no matter they will act more like agents than issuers. The bill still proves a major conclusion: banks see a big business in emoney.

Daniel Gusev is the publisher of Retail Banking in Russia: Innovation Unfolded. Reprinted with permission.

For further reading:
"Emoney in Russia - the Dark Side of the Moon for (most) banks", Retail Banking in Russia: Innovation Unfolded, January 18, 2010
"Emoney iPhone apps win over banking - but are not on the top 100 list", Retail Banking in Russia: Innovation Unfolded, December 27, 2009
"Banks are scared of emoney - because they will end up with loosing contact with customers", Retail Banking in Russia: Innovation Unfolded, December 24, 2009
"Non Bank Payments with Webmoney Transfer (part 1)", Mark Herpel, October 16, 2009
"Non Bank Payments: America vs. Russia (part 2)", Mark Herpel, October 16, 2009
"Non Bank Payments: Pay Pal or WebMoney (part 3)", Mark Herpel, October 19, 2009
"Webmoney Russian Non Bank Products & Services (part 4)", Mark Herpel, October 19, 2009
"Non Bank Payments: Webmoney & Plastic Cards (part 5)", Mark Herpel, October 19, 2009
"The Webmoney Purse, One Size Does Not Fit All (part 6)", Mark Herpel, October 19, 2009

Friday, February 5, 2010

Virtual Goods and Real Money Trade from the European Perspective

By Petteri Günther
Virtual Economy Research Network
Friday, February 5, 2010

Article by Petteri Günther on EU regulatory issues in connection with real-money trade on digital items in virtual worlds. Reprinted with permission.


Virtual worlds, for example various massively multiplayer online role playing games (MMORPGs) are becoming increasingly real to many people around the world. This emerging field of digital economy within virtual worlds has made us to face the interdependence of those and “real” offline worlds. This occurs e.g. in form of real-money trade (RMT) on digital items, while the question on property rights over digital items remains basically unresolved in Europe, although the US and the rest of the world are pretty much in the same situation.

In this blog post I concentrate particularly on issues that have risen from economic activity in connection with virtual worlds as well as online gaming frauds, in which other players often target other MMORPG end-users. The purpose is to provoke discussion on whether these developments should cause legislators to become more interested in what happens in cyberspace as RMT in virtual worlds is a wide-spread phenomenon and generates considerable economic values on a global scale. Many virtual world service providers are rather unwilling to recognize players’ rights to in-game assets, as they probably worry about liability issues, e.g. when it comes to online-world frauds that, nevertheless, are reality. Also European courts have addressed this matter quite recently.

Virtual Worlds and the EU regulatory Framework

The European Network and Information Security Agency (ENISA), which is an EU agency created to advance the functioning of the internal market, has estimated that the worldwide annual RMT of virtual goods amount to nearly 1,5 Billion Euro. [1] ENISA has reported in its 2008 report, Virtual Worlds - Real Money [2], that “the failure to recognize the importance of protecting real-money value locked up in this grey-zone of the economy has lead to a 'year of online-world fraud'.” A survey, which is included in the ENISA report, indicated that 30% of users have lost some form of virtual property through online gaming frauds targeting virtual world end-users. [3]

McInnes et al. divide regulation of virtual worlds regulation of the world itself and transactions of digital items. [4] A digital item can be defined as ”an image created by a service provider and tracked through a database that can be transformed and exchanged among users. Its value is decided through rarity, utility, and resulting demand.” [5] From a legal point of view the virtual world service providers purport to "legally link" the online and the real-life world by means of contract law through their end-user license agreements (“EULA”) and thus create private rules to compensate the somewhat absent regulation, and thus enable the potential development of "self-regulatory structures on the net." [6] In practice, this could mean industry self-regulation with respect to virtual worlds.

For the purposes of analogy to a property-style regime, we can take the International Corporation for Assigned Names and Numbers (”ICANN”) [7] as an example. It is an organization that acts as a global coordinator for internet addresses, domain names. With the aid of adopting this system, there are clearly defined property forms associated with domain names, which can also be termed as virtual property in the sense that they also are intangible assets but mimic certain characteristics of real-world assets, like exclusive ownership, persistence of rights and transfer of rights by agreement. Some online resources, such as digital items and powerful characters in massively-multiplayer online games, as well as domain names – just to point out a few, are almost identical to some physical goods in that sense that only one person at a time can control that particular resource.

There is a recent case [8] from the Netherlands where the defendants had used physical violence and thus forced the victim to hand over virtual goods in a MMO game RuneScape. The virtual goods, a mask and an amulet, were transferred from the victim’s account to the other defendant’s account in RuneScape. The court confirmed in its verdict that the said virtual goods qualify as goods under Dutch law. This was a prerequisite for the actions by the defendants, forced transfer of the virtual goods by using physical violence on the victim, to qualify as robbery (diefstal met geweld) under Article 312 of the Dutch Criminal Code.

In Finland a player had sold his World of Warcraft account to another player and, after two years used a master password to regain control of the account. The perpetrator was accused of criminal damage [9] and unauthorised use [10]. The parties settled the case later and the charges were thus dropped, so there was no final verdict on the merits of the case.


The concept of virtual worlds and virtual property is novel: there are precedents, neither in law nor in practice, to provide guidance. The real-money trade of virtual property is an example which shows that the real and virtual worlds are interdependent. And, while that interdependence is recognized, at the same time property rights over digital items have not yet been determined in Europe. Hence, currently it is possible to assume that there is inefficiency in allocation of rights in virtual property.

How should law treat intangible code that has been coded to resemble tangible? There are many ways to approach this question and different views are presented depending on whom you ask this question. According to Lastowka and Hunter a property system is central to the functioning of most contemporary virtual worlds. [11] But on one hand virtual world service providers assume contractual freedom by default to confirm their control over the MMORPGs and make certain their protection later on. Terms for entry to virtual worlds is regulated by EULAs, which specify the Terms of Service to declare the company’s claims regarding ownership and intellectual property rights over both game content – such as characters or items – and activity by players – the end-users. On the other hand economically efficient use of online resources would, based on Lastowka’s and Hunter’s assertions above, call for exclusive ownership, persistence of rights, transfer of rights by agreement, as well as a currency system to facilitate transactions on virtual property. [12]

Nevertheless, the volume and monetary value of RMT makes it a public policy issue of a broad impact. One solution to this situation in European context would be to apply the European mixed mode of regulation comprising industry self-regulation, such as codes of conduct for virtual worlds and establishing harmonizing regulatory instruments at the Union level to protect the rights of those within the virtual worlds as well as to support the development of virtual worlds.

A good approach, as envisioned in the Virtual Worlds - Real Money report, would be to address certain policy issues e.g. by setting up a forum for virtual world service providers to establish best practices [13]. But, if industry self-regulation finally proves inefficient to provide sufficient level of protection for users, many of whom have recently lost some form of virtual property through fraud, and where the service provider has been reluctant to address the matter and referred to their ToS banning RMT on digital items, the need for regulatory actions should be considered to clarify the issues in order to protect users.

Petteri Günther, LL.M, LL.M. (Law and IT), graduated from the University of Helsinki in 2006 and from the Stockholm University in 2007. In his master thesis (LL.M. in Law and IT) at the Stockholm University, upon which this article is based, he delved into real-money trade of virtual goods from the European perspective. The author is currently working as an associate lawyer at Lexia Ltd, a Finnish, Helsinki-based law firm, and focuses on IT and intellectual property law.


1 ENISA, Press Release (20.11.2008), Virtual Worlds - Real Money, (accessed 15.1.2010).

2 The report, Virtual Worlds - Real Money, available at (accessed 15.1.2010).

3 ENISA, Press Release (20.11.2008), Virtual Worlds - Real Money, (accessed 15.1.2010).

4 MacInnes, Ian, Park, Y.J. and Whang, Leo Sang-Min (2004). Virtual World Governance: Digital Item Trade and its Consequences in Korea. Presented at Telecommunications Policy Research Conference, Arlington, VA. Available online at:, p. 2. (accessed 15.1.2010).

5 MacInnes, Ian, Park, Y.J. and Whang, Leo Sang-Min (2004). Virtual World Governance: Digital Item Trade and its Consequences in Korea. Presented at Telecommunications Policy Research Conference, Arlington, VA. Available online at:, at 5.

6 See: David R. Johnson & David Post, Law and Borders – The Rise of Law in Cyberspace, 48 Stan. L. Rev. 1367, at 1370-76 (1996) (where the authors discuss the difficulties in real world jurisdictions).

7 Internet Corporation for Assigned Names and Numbers (ICANN): (accessed 15.1.2010).

8 RuneScape, LJN: BG0939, Rechtbank Leeuwarden , 17/676123-07 VEV: (accessed 14.1.2010).

9 Criminal Code (Act 39/1889) Chapter 35 - Section 1 - Criminal damage (vahingonteko).

10 Criminal Code (Act 39/1889) Chapter 28 - Section 7 - Unauthorised use (luvaton käyttö).

11 Lastowka, F. Gregory and Hunter, Dan (2004). The Laws of the Virtual Worlds. 92 California Law Review 1, at 37.

12 Lastowka, F. Gregory and Hunter, Dan (2004). The Laws of the Virtual Worlds. 92 California Law Review 1, at 37.

13 Cf. Safer Social Networking Principles for the EU: the Commission convened various stake holders with respect to Europe's major social networks, and as a result, guidelines for the use of social networking sites by children developed voluntarily by the European industry. (accessed 17.1.2010).

For further reading:
"The rise of goldfarming", Greedy Goblin, February 5, 2010
"Developers Should Open Virtual Goods Markets", Pixels and Policy, January 24, 2010
"How Can Developers Combat Secondary Loot Markets?", Pixels and Policy, January 20, 2010
"Keeping the gold farmers at bay: An interview with Fallen Earth's Colin Dwan", Shawn Schuster, Massively, January 4, 2010
"Real Money, Real Problems", Scott Jennings,, November 18, 2009
"Digital Goods getting aisle attention", CIOL, October 30, 2009
"The fight against RMT in EVE Online", James Egan, Massively, August 11, 2009
"Debate Over the Justification and Legality of RMT", Gamerates, July 21, 2008

Tuesday, February 2, 2010

Central Banking Doesn't Work - Just Ask the Fed!

By Tom Mullen
Tom Mullen's Blog
Tuesday, January 26, 2010

It is still a tiny minority who understand that central banking is a collectivist institution that is completely hostile to liberty. It is, by definition, an instrument of theft that purports to stabilize economic conditions for the collective by controlling the supply of money and credit. The fact that its only means to do so is to steal from savers to finance well-connected borrowers is a seldom-mentioned detail. That people only use the central bank’s currency because they are forced to do so by legal tender laws is spoken of even less. In this late stage of the Age of Government, the rights to liberty and property are expendable as our rulers “get the work of the American people done.”

Hopefully, the question of whether there should be a Federal Reserve will be on the table soon. However, once one concedes the existence of the Fed, there is a further question to ask: Can it do what it purports to do?

According to the Federal Reserve’s website, its mission is as follows:

Today, the Federal Reserve's duties fall into four general areas:

• conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

• supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers

• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system[1]

Of these four stated goals, the first is the most expansive in its scope. Let us leave it until last. The second, to ensure the soundness of the banking system, seems to have been answered by history. Since the Fed’s launch in 1914, the nation has suffered banking crises in every generation that have dwarfed the Panic of 1907 or any of its predecessors. In addressing the Great Depression, the Savings and Loan Crisis, and the 2008 Meltdown, the Federal Reserve’s only answer has been, “Without the Fed, it would have been much worse.” History is not on the Fed’s side. Only a general ignorance of the facts allows the Fed to keep fooling most of the people most of the time.

Refuting the third stated goal is so easy it’s almost embarrassing. For those not trying to regain their seats after falling on the floor laughing, I need only to point out 30-1 leveraging, $60 trillion (or more?) in derivatives [2], or the subprime mortgage disaster. I believe that to go any farther would be, to borrow a football analogy, "piling on."

In fact, Alan Greesnpan's now famous (or infamous) mea culpa on the "flaw" in his beliefs about the self-regulating nature of financial markets effectively amounts to the Fed admitting that it has failed in goals two and three. If the "Maestro" himself doesn't speak for the Federal Reserve, then who does?

Regarding that fourth goal, one is tempted to give this one to the Fed. The important objection would be of the "should they" rather than of the "can they" variety. The fact that the Fed provides these services with an exclusive monopoly and claims only that it will play a “major role," rather than a positive one, makes this the least significant of the four.

That leaves the first goal, which is stable prices, full employment, and moderate long term interest rates. There can be no doubt that the promises of stable prices and full employment in particular are now the principle justifications for the existence of the Federal Reserve. Almost exclusively, when the subject of the Fed comes up, these two goals are discussed. Even the Fed chairmen themselves, when testifying before Congress, often state these two goals exclusively in describing the Fed's overall mission.

It should not be forgotten that until the late 1970's, full employment was not part of the Fed's mandate. Even using the logic of central banking proponents, these two goals are mutually exclusive of one another. Since the only means the Fed has at its disposal to try to achieve full employment is expansion of the supply of money and credit, which puts upward pressure on prices, the Fed must balance these two goals to try to find the optimum level of money and credit where everyone is employed but prices remain stable.

Ironically, the best source of information on the Fed's performance in terms of its principle goal for the first sixty years of its existence (price stability) is the Fed itself. Among the collections of historical data on the Federal Reserve of Minneapolis website, there can be found a table documenting price inflation rates for every year since 1800 (Appendix A of this article). There, one can see for oneself whether or not the Fed provided price stability during any period in its existence.

The first fact that jumps off of the page is the stark difference in the trends before and after the creation of the Fed. For the period from 1800-1913, the general price level (a statistic that Austrian economists object to) was cut almost in half. In other words, products that on average cost $100.00 in 1800 would only cost $58.10 in 1913 (Appendix A). While there were some years where prices rose, prices generally fell overall during the entire 19th century.

This would probably be a startling revelation to most modern Americans. There isn't an American alive whose parents or grandparents haven't remarked at current price levels and gone on to say, "When I was your age, I only paid a dime for that." As unbelievable as it might seem, that conversation would have been exactly the opposite in 1890. Grandpa would instead be saying, "When I was your age, I had to pay a lot more for that." Today, Americans resign themselves to constantly rising prices as a fact of life. However, that is a phenomenon that has only occurred since the creation of the Fed.

In contrast to the century preceding the Fed, the century following has seen exactly the opposite result. Those same products whose average price had fallen from $100.00 in 1800 to $58.10 in 1913 rose to $1,265.14 in 2008. That is an increase of over 2,000%!

Without addressing the subject of which result is "better for society," inflation or deflation, the data speak directly to the question of "price stability." From 1800-1913, the average annual fluctuation in price was 3.4%. From 1914-2008, the average annual fluctuation in price was 4.5%, a 33% increase over the previous period. In fact, the numbers for the Fed would be far worse if the same methods used to calculate the price inflation rate were used for the entire period from 1914-2008. In the 1990’s, several changes were made to the methodology used to calculate the Consumer Price Index. They all have the effect of lowering the price inflation rate given a particular set of price data.

Regarding the goal of "full employment," the Fed's results are also poor. Similar to that of the CPI, the methodology for calculating the unemployment rate was also changed in the 1990's. These changes in methodology, which include no longer counting "discouraged workers," lower the unemployment rate from what it would be for the same data if calculated using the old methodology. Despite this handicap, the Fed still fails to achieve positive results. The average annual unemployment rate in the U.S. between 1948 and 1978 was 5.1% (see Appendix B). Even without compensating for the changes in methodology during the 1990’s, the average annual unemployment rate in the U.S. between 1979 and 2009 was 6.1%. So, unemployment was almost 20% higher during the period that the Fed actively tried to manage it than it was during the prior 30 years.

Once you undo the methodological changes in calculating price inflation and unemployment that were put in place in the 1990’s, the Fed’s results on price stability and unemployment get much uglier. Nevertheless, even after the Fed fudges its own numbers it still comes out a failure. Everyone can remember the ne’er-do-well from school that cheated on tests and still couldn’t pass. Would we want that kid managing the entire economy?

The arguments that the Fed makes to justify its existence are fraught with false assumptions. One is that “stable prices” are a good thing. Remember, the industrial revolution occurred amidst steadily falling prices. It was this period of steady deflation (gasp!) that saw the common people become the prime market for society’s output - for the first time in human history. It was this period that saw the United States transform itself in a matter of decades from an indebted hodgepodge of former colonies to a world economic power. The natural result of economic progress and increased productivity is falling prices. That is what raises the standard of living for the great majority of society.

However, the most absurd assumption underlying the arguments for the Fed is one common to all collectivist arguments: that there is some strange entity called “society” whose needs outweigh the rights of every individual that comprises it. Every citizen surrenders his right to liberty to legal tender laws because being forced to use the Fed’s worthless notes as currency supposedly benefits “society.” He surrenders his right to property in letting the Fed steal his savings through inflation for the same reason. In the end, however, the Fed fails to achieve its “societal” goals of full employment and stable prices, so he gives up his rights for nothing. Isn’t time he took them back? There is a way: End the Fed.

Appendix A - Price Inflation Rates 1800-2008 (Federal Reserve Bank of Minneapolis)

Appendix B - Unemployment Rate (Monthly) 1948-2009 (Bureau of Labor Statistics)



Reprinted with permission.