Features : Money Games


As virtual communities come of age, the corporate world is just beginning to grasp the potential opportunities they presentand the phenomenal disruptive influence they might have on global commerce.


Grand designs: Banking group INGhas invested heavily in its Second Life presence

With millions of users now involved in them, virtual communities are beginning to attract the attention of global banks and corporations, which are looking at how best to tap into this growing phenomenon. Many industry insiders believe that the future of online commerce is a combination of 3D and 2D commercebringing together the 2D online shopping experience that so many consumers now access regularly for their shopping needs and the 3D virtual communities that are increasingly being embraced by the wired world.

Many banks and companies are getting in on the ground level, building up a presence in one or more of the largest virtual communities in much the same way that they tiptoed onto the Internet in its early days. But what business model will eventually be successful in making a real-world profit from virtual ventures remains to be seen. Estimates have put revenues from the virtual gaming and virtual community industry at almost $10 billion by 2009, and this reflects only revenue by the hosting companies, not those entrepreneurs and corporations that are setting up shop and looking to eventually make a profit. All evidence suggests that figure will be just the tip of a very large iceberg.

But while most of the focus so far has been on the potential for real-world companies to promote and possibly sell real goods to members of virtual communities, another area is quietly developing that holds possibly even greater promise: virtual financial services. Even in the real world the financial services industry already has a substantial virtual component to it. It is also one of the most technologically advanced industries on the planet, and there are some who believe that the financial services industry will benefit most from the online revolution that these new 3D worlds are spearheading.

To an extent, the virtual communities are already evolving rudimentary financial services industries. Each of the biggest communities and game sites has its own virtual currencyor an online token that represents money within that world. Currency can be earned either through game play or by selling goods and services, or it can be bought at exchanges for real-world currency. For example, there are PEDs in Entropia Universe, Isk in Eve, Gold in World of Warcraft, Acorns in South Koreas Cyworld, or Linden dollars in Second Life. Hong Kong messaging firm Tencent offers the Q coin, which is not an official currency for any one site but is generally accepted in China and Hong Kong for use in various online game sites and for various online servicesincluding, significantly, the purchase of some real-world items.

There are countless exchanges, both official and unofficial, for trading between real-world and virtual currencies. MindArk, the Swedish firm behind Entropia Universe, offers an ATM card to add PEDs to an inhabitants account and has various mechanisms for users to convert back to real-world currencies.


Speed: The learning process will be painful

Particularly in the realm of currency exchange, the similarities to the real world are striking. Second Life has an official exchange, LindeX, and a number of unofficial exchanges have sprung up. The Linden dollar is a floating currency, while some others, such as the PED, offer a fixed exchange rate to the US dollar. Some sites offer currency exchange themselves while others, such as Eve, are adamantly opposed to it. These last two pointsfixed- versus floating-rate currencies and whether currency exchange is state-sponsored, as it wereare fundamental differences between sites and are driving how those economies are developing.

In order to bring some transparency to virtual economics, a New York University economics student has developed a model bank in Second Life to provide real-world-like banking services and to look at how virtual economies are developing. SL Bank offers in-world accounts for residents and has a web-based administrative panel. The bank provides transparent information on interest rate fluctuations, project goals and fund investments.

In many ways it is no different from the web-based interface that many people use to manage their money in real life. It is this apparent crossoverand the sheer volume of money changing handsthat is catching the attention of real world financial services companies.

As yet little crossover between virtual currencies has occurred, although this would seem to be a logical next step. A few sites, such as Iron Prairie, are beginning to spring up that claim to offer trading between different virtual currencies, but those few that do plan to offer inter-site trading are fledgling at best. One website, GamesUSD, was dedicated to providing exchange rate information between virtual currencies and real-world currencies, but it appears to be defunct.


Peterson: Any laws must focus on fair competition

Economic Development
The growth of virtual economies is also exemplified by the tremendous amount of infrastructure and support springing up that is geared at helping companies reach target audiences and successfully integrate real-world business models with virtual settings. For example, advertising and marketing companies are now beginning to target the virtual arena. Electric Sheep is one such company building out an ad network for virtual worlds. And many consumer research firms are beginning to look at virtual consumer behavior. What is clear is that the fusion between real and virtual worlds is occurring, says Ed Kountz, a senior analyst at Jupiter Research.

Many virtual communities are now of a size to have an independently functioning economy, with all the advantages and difficulties that implies. As this develops, so too is regulatory awareness of virtual economics. Kountz says that there have been some discussions in the United States about taxing virtual profits. But how you do that is a very interesting question. There are no easy answers for that, he says.

David Johnson, visiting professor at the New York Law School, says that virtual economies are real economies and virtual commerce is real commerce. Some form of regulation is always necessary to create healthy markets and enable the formation of companies and organizations of all kinds, he says. But that regulation can be made by groups that come together online in particular places or by the hosting companies that establish rules and the people who decide to visit such hosts.

These views are reflected by Jeanette Hofmann, program leader for Internet governance at the Social Science Research Center in Berlin and a member of the Internet Governance Forum. Markets need regulation to make them workmore precisely to enable and to protect competition. Regulation should ensure a level playing fieldparticularly that market power does not prevent choice and the freedom of innovation, she says.


Simmonds: MindArk is offering banking licenses

Hilmar Peterson, CEO of CCP Games, the company behind the sci-fi universe Eve, says all legislation will have to be regionally based and ensure that it allows a competitive market landscape for companies in that country. Some regulators are indeed attempting to put in place laws to govern virtual-to-real-world currency trading and purchases. In South Korea, media reports have said that legislators plan to ban commercial trading in virtual currencies. And Chinas Internet regulators and the central bank stated that the Q coin from Tencent could become a threat to the stability of the renminbi and have disallowed the use of virtual currencies to buy real goods and services.

According to Dan Speed, senior graphics programmer for Eve, such actions are misguided. It will be a painful learning process, and many mistakes will be made in doing this. It is very easy to misunderstand the issues that are truly going on under the surface, he says.

One big concern about a virtual currency is how to ensure the solvency of the organizations that issue it: If an organization were to become insolvent, that currency could become completely devalued overnight. But as Johnson notes: The world is full of exchangeable things that could change in value depending on the activities of others. The way to protect oneself against this is to be careful about the kinds of value/things you accumulate, and to diversify. The Internet provides opportunities to create rating systems and distribute information that can help people correctly assess risks. This kind of decentralized, reputation-based control will be far more effective than regulatory intervention, he adds. Of course governments should intervene to attempt to prevent and punish fraud. But the global economy is far too complex to allow governments to attempt to prevent economic failures or fluctuations in the value of various goods and transferable tokens, he says.

Getting In Now

For those banks and companies looking to take a piece of the virtual action, the question may be whether getting in on the ground level will be the best investmentbuilding up a strong brand and growing with the communityor waiting to see how such communities will evolve and how regulators will address them. Kountz says that no one yet understands how these virtual communities can best be accessed by real-world entities. But there will be an opportunity here. Beyond that, it is a matter of ensuring that the brand is where the potential consumer is, he says.


Free trade: A store in Entropia Universe, where virtual banking licenses are up for sale

Entropia Universe is selling banking licenses to financial institutions looking to set up shop in the virtual world. David Simmonds, business development director at MindArk, says that, with the license, financial institutions will have the opportunity to offer any of the services they do in real life (IRL). There is no difference in what they will offer simply because it is virtual. If they have a license to offer loans, saving, or insurance IRL, then it is possible that they can do this virtually as well, he says.

Banks in particular are aware of the changes that are going on, notes Kountz, and it is clear that the rise of virtual communities and, associated with that, the rise of virtual currencies provides an opportunity to blur the line between virtual currency and real-world currency.

Both ABN AMRO and ING have communities within Second Life. Wichert van Engelen, director of ING Venturing, says: We believe that now in virtual realities there is something developing that is like a real economy. Any economy is serviced by one or more financial institutions, so that is why we think we can play a good role in this developing phenomenon.

The virtual banks are almost certainly not making money yet, but as Kountz says, Anywhere there is a chance to be involved in a transactionvirtual or notthere is opportunity to take a piece of that. Van Engelen goes further in his plans for virtual banking: In the long run I believe that the normal way we use payments on the Internet will be replaced partly or in total by virtual worlds. It is not a matter of if you will move real-life banking services to virtual banking services. It will happen; it is a matter of how and when.


Virtual worlds are websites that allow users to create a 3D avataror characterthat can go through the world interacting with other users, playing games, shopping, building or buying their own domiciles, businesses and so on, and creating an entire 3D online life for themselves within the context of the website itself. Some of the most popular virtual worlds are Second Life, Entropia Universe, There, World of Warcraft, Everquest and Eve.

Denise Bedell