Making money from games: The future of virtual economies

Virtual Worlds EC-1 Part 6: The business opportunities and compliance challenges of virtual economies

Fictional portrayals of virtual worlds such as “Ready Player One” and “The Matrix” typically portray the physical and virtual worlds as distinct realms siloed from each other. Characters escape a dystopian, impoverished physical realm and enter a separate, utopian virtual realm in which they are wealthy and important.

Our non-fictional future won’t have that dichotomy. One main reason is money. Any virtual world has a virtual economy, and when that virtual economy gets really big, it integrates with our real-world economy. That is in equal parts due to market forces and government intervention.

This is part six of a seven-part series about “multiverse” virtual worlds. We will explore the dynamics of games’ virtual economies, the exchange of virtual assets for real money, challenges with money laundering and underage gambling, the compliance infrastructure needed for virtual economies, and the challenges in balancing a virtual economy’s monetary supply.

What separates virtual from “real” is the ability to make money

To many people, the idea of spending time in virtual worlds amassing in-game currency and trading goods still sounds like the geeky science fiction hobby of someone who needs to “get a real job.”

Our society gauges the worthiness of pursuits based on their social and economic productivity, and most people don’t view virtual worlds as productive places. As more people find enjoyment in virtual worlds and respect people with accomplishments in them, however, vying for accomplishment with those worlds will increasingly be viewed as socially productive. As more people start earning an income through work in virtual worlds, perception of economic productivity will quickly change, too.

Virtual worlds will be viewed as digital extensions of “the real world” and working a full-time job in a multiverse virtual world will become as normal as someone working in a social media marketing role today.

We’ve seen this pattern before, as this is the path social media platforms took. Social media influencers went from an outlandish concept to an accepted role within the entertainment and marketing industries as soon as people saw the cash rolling in and influencer marketing agencies getting acquired. Businesses and politicians who once viewed social media platforms as the terrain of flirting teenagers now focus on social media platforms as their most important place to connect with people (and spend billions of dollars on tools and consultants to help them do so).

The rapid rise of professional game streamers earning hundreds of thousands or even millions of dollars has piqued the interest of many in the virtual worlds of gaming, but it’s a professional path only feasible for a tiny number of people. What needs to be demonstrated is large numbers of everyday people using virtual worlds and earning money that covers their rent and groceries.

As soon as you can make real money from contributions to the virtual economy, then that economy merges into the real economy and will be integrated into our lives and normalized.

Even better, if people can earn an income for their participation in the economy of a virtual world — building and selling properties, selling skins for avatars, leading military campaigns — it unleashes greater opportunity for any human with an internet connection to improve their life regardless of geographic location or education credentials. Of course, this will also cause wealthy individuals and companies from the physical world to pour into the virtual economy seeking lucrative opportunities, as well.

Before this future can be realized, however, a number of critical issues must be resolved.

People are making money from virtual worlds already

Some people have been turning their virtual-world assets into hard currency for years. While most of the $100 billion that consumers will spend on games through mobile app stores this year goes toward in-app purchases, nearly all of those sales are players buying from game developers rather than each other. Buying and selling virtual goods between players for real money is widespread, but mostly not accounted for in that market size figure because it occurs over the grey or black market.

Within a virtual world, a user gains assets through the collection of in-world currency (like coins), the discovery or earning of items and the defeat of other users in some form of competition. They also can usually buy currency and goods from the game developer in exchange for real money, which is a major revenue stream for these companies. The most impressive example here is likely “Fortnite”: according to a 2018 survey, 69% of its users had spent money in-game ($85 on average, which is the same amount mobile gamers typically spend per year on all in-game purchases).

Buying and selling digital goods for real money is known as Real Money Trading, and most games prohibit their players from doing it. These closed economies aim to avoid legal liability, keep users with a sunk cost in the game and maintain control over the fluctuations of the game’s economy.

“Second Life” is not among them. It has encouraged open commerce among users since it launched, and in 2018, cashed out $65 million to users, according to Ebbe Altberg, the CEO of its creator, Linden Lab. Roblox also allows those who develop games on its platform to exchange the Robux currency they earn for real money, although players within those games cannot exchange their virtual assets in the same way.

Games like Valve’s “CS:GO” don’t have Real Money Trading built into the game, but tacitly permit third-party marketplaces to facilitate it. DMarket and its sister site skins.cash, for example, have 50,000 items traded per day, according to their CEO Vlad Panchenko. Israeli startup Zen Gaming also runs a popular marketplace, LootBear, where users can rent their digital goods to peers rather than selling them outright, expanding the market of users who can afford to access certain items while creating rental income for owners of digital goods.

There’s a simple workaround to games with closed economies in any case. Players use general-purpose marketplaces like eBay and certain gaming-specific sites like MMOGA, Internet Gaming Entertainment and OPSkins (and its blockchain-based successor WAX) to sell the goods or currency regardless of the policies of game publishers.

The seller posts their item, the buyer pays for it, then the seller delivers it as a free trade within the game or by handing over the account that possesses it (changing the account’s email and password to that requested by the buyer).

eBay banned the trade of virtual assets (aside from those of “Second Life”) in 2007, but that didn’t last long because trade has been active for several years now and the company’s current policy prohibiting “electronically delivered items” specifically exempts “online gaming virtual items.” A simple search on eBay for items from any number of games turns up extensive results.

Gold farming is a common practice for amassing inventory to sell. Players in an emerging market work full-time for an employer playing a particular game to generate in-game currency and items that can then be sold to players who would rather pay to advance in the game more quickly rather than spending hours earning those goods on their own.

Gold farming isn’t criminal, but it typically violates games’ terms of service. It amounted to a $2 billion global market all the way back in 2009. According to the BBC, “In 2011, it was estimated that up to 100,000 people in China and Vietnam are playing online games to gather gold and other items for sale to Western players.”

One argument against closed economies that was reiterated in several of my interviews with gaming entrepreneurs: allowing for an open market around a virtual world actually gets players to spend more time and money in the game because the thriving economy adds to the excitement. The ability to cash out your virtual currency and goods makes them investments, not merely expenses, encouraging much greater spending. Dedicated gamers become more loyal, and entrepreneurial players pour themselves into developing the world further. Secondary markets to cash out of virtual assets help the primary market grow rather than cannibalizing it — it’s a classic argument of free trade over protectionism.

As noted, prohibiting Real Money Trading doesn’t stop it from happening, it just moves it to third-party marketplaces. A virtual world with an open economy can provide a framework for such trades and generate additional revenue while taking a cut of each transaction.

The dark side of virtual economies

Part of the reason most games haven’t embraced open economies is the liability created by doing so and the expense of building the necessary compliance infrastructure. Game publishers seem to be striking a balance: they formally oppose Real Money Trading, yet they remain somewhat permissive of the market that rises to solve that need.

The primary regulatory crackdown on virtual economies has been because of their use as a loophole for gambling, particularly underage gambling. Many games and third-party sites have allowed players to gamble using in-game currency, either in standard betting games or via “loot boxes” where the player buys a box of unknown contents and finds out after opening it which high-value items it does or doesn’t contain.

Loot boxes appear in popular games like “Fortnite,” “Apex Legends,” “FIFA” and “Call of Duty.” Countries like Belgium and the Netherlands have banned loot boxes, and politicians in the U.K. and U.S. have called for the same. Their defense is that they have closed economies, so any games of chance within them aren’t gambling because players can’t withdraw winnings, thus there’s certainty that they are playing just for fun and not for financial gain. But, as I noted, and as these companies are aware, there is an active market outside their games where people exchange real money for the virtual goods and virtual currencies won.

In 2018, Juniper Research estimated the market for loot boxes and virtual item gambling at $30 billion, but the writing is on the wall that governments will clamp down on gambling within virtual worlds as they become increasingly popular among young people and attract more attention.

Money laundering is a major issue with virtual economies currently. Here’s what Valve said back in October when it halted the ability to trade keys to unopened loot boxes (a.k.a. “containers”) between accounts within “Counter Strike: Global Offensive” (CS:GO):

In the past, most key trades we observed were between legitimate customers. However, worldwide fraud networks have recently shifted to using CS:GO keys to liquidate their gains. At this point, nearly all key purchases that end up being traded or sold on the marketplace are believed to be fraud-sourced. As a result we have decided that newly purchased keys will not be tradeable or marketable.

Valve’s honest disclosure that the secondary market for “CS:GO” goods is almost entirely driven by fraud was a stark reminder of the challenges that have to be addressed to nurture a healthy virtual economy. If the developers of virtual worlds aren’t willing to build the infrastructure to monitor user identities and transaction patterns, the economies around their games will almost certainly act as a channel for criminals to cover their tracks. Once money goes into the virtual economy, no one other than the developer can trace what happens to it.

A report by Israeli cyberthreat intelligence firm Sixgill highlighted how this works in the context of “Fortnite.” Using illegally gotten money, the criminal buys in-game purchases through an account, then offers to sell the goods or the whole account to others, using normal (a.k.a. “clearnet”) marketplace sites like eBay or dark net sites frequented by criminals. Bots are often used to automate this process, because it’s rare for any one transaction to top $200, so it has to be repeated many times to move a large amount of money. They accept payment through PayPal or other methods and walk away with clean cash that looks on the outside like it was derived from successful gaming.

Sixgill product manager Benjamin Preminger told me that virtual worlds are not a common channel for large criminal groups to launder money — they remain a niche in the scheme of global capital markets. Game economies are still so small and so centered on small transactions that it’s tough to liquidate $1 million without drawing a lot of attention and taking a long time. Criminal activity is widespread in virtual economies, but it remains the turf of smaller criminal operations trying to clean tens of thousands of dollars per month in money stolen from credit cards.

As a result, law enforcement organizations don’t seem to be spending much time on money laundering within virtual economies. They have bigger targets to pursue. But as these economies grow, we can expect governments to pay more attention and to press companies behind virtual worlds to implement safeguards.

Financial compliance for virtual worlds

Companies that control virtual worlds have all the data on users and transactions, and therefore third parties can’t gain much insight. But large gaming companies haven’t wanted to use their data to aggressively track down bad actors. It would be a large internal investment to do so, and it is against their financial interests, given all the purchasing of virtual currency and goods it entails. If they do build better tools, it creates the expectation they use them and could potentially draw government interest.

It is inevitable that the companies behind popular virtual worlds will have to step up and build compliance infrastructure. The more popular their worlds become, the more active Real Money Trading in their economies will be — even if they officially prohibit it. It’s better for user experience and monetization to keep secondary markets within the virtual world, and it hinders criminals if most transactions are monitored.

There are a number of approaches virtual world developers can take to handle compliance and thwart bad actors from their ecosystem. The challenge is balancing compliance with the data privacy of users and the need for a streamlined onboarding process that doesn’t turn away new users.

Know Your Customer (KYC) is the process of verifying the identity of clients in order to deter financial crimes. Financial institutions are required by law to collect KYC information. Anti-Money Laundering (AML) processes then use that customer information and transaction data to identify suspicious activity. These will have to be implemented in multiverse virtual worlds in order for them to have an open economy.

Virtual world developers could identify unique users for this purpose through their logs (device serial number, IP address, etc.), from user behavior (pattern matching to identify bots and individuals using multiple accounts), from user-submitted information (verified phone number or email) or — in the most extreme — from a government ID. The latter of those is quite unlikely, though, in the U.S., given the friction in the user experience, although it’s common today in countries like China and South Korea.

KYC is why people in virtual worlds may use avatars to hide their real identity from other users, but the platform owner still knows their real identities. A plausible solution in the future is a virtual passport of sorts, a Plaid for identity verification in virtual worlds that users can use to create an account in any virtual world and confirm their unique identity without directly sharing personally identifiable information. If government law enforcement officials suspect a specific account of criminal activity, they could formally submit a user data request letter to the company providing that virtual passport.

On that point, much of the infrastructure needed for an open economy will likely be built by third-party vendors offering it to all virtual worlds. There’s a whole category of middleware that will need to rise up to empower this coming era of virtual worlds. For example, Linden Lab has created a new company called Tilia to handle compliance across all American states for transmitting payments out of virtual economies so that each virtual world company doesn’t have to recreate those payment rails from scratch.

Compliance brings us to another barrier that needs to be addressed: legal ownership of digital goods. Who actually owns a digital good, the user possessing it in their account or the company that created the virtual world in the first place? Aside from “Second Life,” most companies have thus far taken the stance that all digital goods from their worlds are their own intellectual property.

This will become an important issue to address, but it is not critical that users gain ownership to take their virtual goods outside of the virtual world where they originated. Much of the science fiction predicting the future Metaverse envisions avatars and digital goods being moved between different virtual worlds. This is unlikely to happen — except when the different worlds were developed by the same company — given the technical, economic and aesthetic problems it entails. If items and skins from anywhere can pour into a virtual world without limits, then it will lose its distinct aesthetic and culture.

Managing the virtual world economy

Beyond the compliance challenges of black and grey market transactions by individual users, virtual world companies must manage the macroeconomics of their virtual economy.

The biggest challenge is managing inflation and deflation of virtual currency to avoid economic collapse and unhappy users. The virtual world developer needs to act as a central bank, balancing the flow of money in (“faucets”) and out (“sinks”) of circulation. Faucets include currency and goods with value taken from defeated AI characters, discovered within the world and bought from the game developer with real money. Sinks include currency and goods in abandoned accounts, taxes, assets lost to AI characters in competitions and the game developer’s sale of services/features that can’t be resold. This problem is extremely challenging, just as it is in the real world.

If a new virtual world launches with widespread fanfare that draws users away from an existing virtual world, there would be a rush of users selling their goods and currency in that existing world. That surge of supply over demand would cause the value of goods to drop. Seeing the value of their hard-won assets decline, many users who hadn’t planned to leave could decide they might as well, leading to a downward deflationary spiral.

The economies of virtual worlds are like the real-world economy. If virtual real estate has value in the virtual world, then expanding the map to provide more space for development will reduce the scarcity of space and cause the value of users’ real estate holdings to drop. The same goes for materials or goods discovered within the virtual world and traded between users. Every small change or addition to the virtual world by its developer has a ripple effect.

Eve Online is one of the most studied virtual worlds from this perspective. Internal and external researchers have been using it as a laboratory for economics research for over a decade. The economic impact of implementing new taxes, introducing new weapons or “nerfing” (weakening the abilities of) a weapon or vehicle that’s so strong it makes competition unfair are tracked in detail by CCP Games (the studio behind Eve Online). CCP Senior Strategist Tryggvi Hjaltason says he sees the same behavior response from users as would be expected in economics of the physical world, but on “a fifty times faster timeline.” To keep its market participants informed, CCP publishes monthly economic reports on the state of Eve Online’s economy and its ISK currency.

The larger virtual economies get, the more directly they impact the real-world economy and thus the more attention they will receive from governments. A massively popular virtual world with millions of dollars per day in trading activity between users creates another way for people in a country to pay for things — at least things within the growing portion of their life that happen online. The more expansive virtual worlds get, the more there is to do with virtual currencies, the more investment there will be into virtual businesses and the more people will earn an income through work in the virtual world.

Imagine if a small country appeared out of nowhere bordering the West Coast of the United States and Californians started commuting every business day to invest and work there. And because these Californians spend so much time there, they use this country’s currency to pay each other for some things. The U.S. government would get concerned about reduced demand for U.S. dollars, lost sales tax revenue, declining income taxes and more. A large virtual economy has that effect, albeit bordering everywhere and nowhere, given its lack of physical existence.

This isn’t that crazy. In the early 2000s, the messaging app QQ (by Tencent) exploded in popularity in China. Each user had an avatar and the company introduced Q-coins that could be purchased for 1 yuan each and spent on digital goods. Because China’s infrastructure for credit cards and mobile payments was not well-developed at the time, and because Q-coins were pegged to the yuan, people started using Q-coins for all sorts of transactions, and local shops in the physical world started accepting it. Concerned that the rise of this new currency would create economic instability, the Chinese government intervened to prohibit use of virtual currencies by businesses in the physical world.

This all raises the prospect of eliminating a separate virtual currency within a virtual world and just using a pre-existing, stable reserve currency like the U.S. dollar. While a good idea and one that we may see adopted in certain instances, using dollars would carry with it greater regulation of payments between users within the world and make it tougher for users from certain countries to equally participate.

What this means for the future of virtual worlds

Popular virtual worlds can’t avoid the outflow of money forever. As the grey and black markets around their goods expand, the companies building these worlds will need to create the infrastructure to allow bidirectional flow of money and to monitor the economy for bad actors.

Certain virtual world companies will determine that, given consumer demand, the reward of trying to enable this within their world before competitors do outweighs the risks. Governments will eventually apply pressure to create such infrastructure anyway as the virtual economies grow — first to demand that the virtual worlds more seriously address money laundering, then later due to concerns over monetary policy and excitement over possible taxation opportunities.

The result of this will be that the virtual economy will just be part of the normal global economy. Because money can flow in and out of that world, it’s much like there just being a different country. There will be investment opportunities and job opportunities, and money earned in both the physical or virtual world will contribute to a person’s pursuit of entertainment and social stature across both.

A multiverse virtual world is vast in scope and driven by UGC content not just because that’s an appealing experience for users, but also because one game studio can’t possibly create all the items and functions within a complex world. No-code frameworks within the virtual world will allow users to create new actions that can be done to various goods and then define the impact of that action.

Popular virtual worlds will grow in economic complexity. People will rent virtual goods they can’t afford to buy outright (this already happens on LootBear) and will pay for insurance on expensive virtual goods that they can’t afford to lose (this already happens in Eve Online). Major banks and investment firms in the physical world will create teams who manage pools of money dedicated to investments within virtual worlds, backing entrepreneurs within the world and identifying arbitrage opportunities where the same virtual good is trading at different prices in different places. It’s literally a whole new world of business opportunity.


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