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Virtual Money Presents Real Legal Problems

Introducing a virtual currency in an online game or social Web site isn't simply a way to print money without paper.
"Virtual currency systems generate revenue, provide low cost alternatives to credit cards for micro-payments, offer prepaid solutions appealing to youth and other users without credit cards, and help companies build attractive loyalty programs," he explained in an e-mail. "Although virtual currency systems are often used to sell digital content, they continue to become more complex -- approximating real world currency as they allow purchase of physical goods and services from multiple merchants, offer cash redemption options, and facilitate P2P payments."

But new laws like the Credit Card Act of 2009 and existing state gift laws may provide some obstacles.

"Issuing virtual currency could subject an issuer to various state and federal regulatory regimes with wide ranging operational, financial and liability implications," said Hansen. "These implications include restrictions on an issuer's ability to expire the virtual currency or impose inactivity fees, requirements to give cash back for unused virtual currency, obligations to remit unused virtual currency balances to states, potential regulation as a financial institution, requirements to structure systems to avoid illegal lotteries, and privacy and data security issues."

Hansen points to a lawsuit filed against Skype last year that challenged the company's policy of letting paid credits expire after 180 days of inactivity, something forbidden under state laws governing gift certificates. Rather than let the case go to trial, Skype is in the process of settling the claim against it.

While this does not definitively establish that the regulatory equivalency of virtual currency and physical gift certificates, Skype's willingness to settle suggests the argument that they're distinct is a weak one.

And Hansen says that the Credit Card Act of 2009, which has just gone into effect, makes the equivalency clearer. With the new Credit Card Act from the fall last year, "federal laws now impose restrictions on expiring anything deemed to be gift certificate," he explained in a phone interview. "The new wording talks in terms of keys and codes and electronics accounts, whereas people are used to thinking of gift cards as plastic and paper."

While the practices of airlines, which let frequent flyer miles expire, may seem instructive for those issuing virtual currency, Hansen says that's actually not the case. Airlines, he explains, have an exemption from state laws that might affect their profitability, like laws governing gift cards, through the Airline Deregulation Act.

"Gaming companies and others over the past 10 years have built systems after airline model but it's the wrong model to follow because airlines have preemption," he said.

State laws governing unclaimed property, says Hansen, require that the property gets turned over to the state. While larger developers tend to have thought about how to deal with abandoned virtual assets, smaller ones often have not done so, opening up the possibility of legal liability.

And given the current pressure on state budgets, Hansen expects states to pay more attention to unclaimed virtual property as a source of revenue.

"If there's an easy source of money, the states are absolutely going to look at it," he said.

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