Category: Virtual Goods/Currency/Property

The first virtual currency crime: hacker jailed after $12m Zynga theft

Last week a hacker faced a substantial prison sentence after pleading guilty to stealing approxmately $12 million worth of Zynga chips, a virtual currency used in its poker game.  This is big stuff (more on that below).

I spoke with Develop about this fascinating development – here’s their article:

“An IT businessman is facing a substantial prison sentence after pleading guilty to stealing around $12 million in online game currency.

Ashley Mitchell, 29, based in the Devonshire costal town of Paignton, admitted to hacking into the accounts of social gaming giant Zynga.

He transferred around 400 billion virtual poker chips into his account and began selling the currency on the black market. He had made £53,000 before his arrest.

Mitchell stood to make around £184,000 from the chips, the court heard, though Zynga’s sale value of the currency is $12 million.

Judge Philip Wassall said Mitchell faced a substantial jail term for the offences, according to regional paper Herald Express.

Mitchell was remanded in custody after the case was adjourned for reports.

Digital economy

The actual value of Zynga’s intangible and instantly replicable online currency sparked a debate in court.

Prosecutor Gareth Evans said Zynga had not been, in essence, deprived of any goods. He claimed there may be a knock-on effect as more customers bought the poker chips on the black-market instead of paying Zynga.

Judge Wassell asked if the case was any different from stealing notes from the Royal Mint – the UK’s body that manufactures British currency.

Prosecutor Evans replied that, in theory, there was no difference because the mint can produce more currency if its goods were stolen.

He said there is, however, a difficulty in valuing the chips because they are digital. But if Zynga had sold them legitimately the value would have been around $12 million.

Jas Purewal, lawyer and author of Gamer/Law, explained to Develop that the case has set a new precedent.

“This shows that the legal regulation and protection of virtual goods and currency, which historically has been fairly uncertain, is evolving fast – driven partly by the boom in virtual goods sales in games.

“This case is particularly interesting because it involved a UK court recognising virtual currency – in this case, Zynga chips – as legal property which can be protected by existing UK criminal laws.

“The court effectively found that, even though virtual currency isn’t real and is infinite in supply, it still can deserve legal protection in the same way as real world currency”.

Purewal said the case is a “vindication” for Zynga and other virtual goods providers.

Hacker record


Judge Wassell heard that Mitchell’s offences were in breach of a previous suspended sentence he was handed in 2008.

Mitchell had previously been convicted of hacking into the Torbay Council website and changing his personal details.

Defence solicitor Ben Derby said as a plea in mitigation that Mitchell had been “wrestling with a gambling addition” at the time of the Zynga theft.”

THOUGHTS:

As I said to the Develop guys, this case really does seem to break new legal ground.  For the first time (so far as I’m aware anyway) in the West, a court has looked at virtual currency and seemingly accepted on relatively little argument that it can be classified as ‘property’ within the meaning of (UK) criminal laws (though NB I can’t state definitively the the court found virtual goods = property, because we don’t have the court transcript).

So what?  Well, as longtime readers will know, I’ve been exploring for some time the legal status of virtual goods, which I think is going to come under significant pressure from different directions in the next few years.  The key issue is whether virtual goods are ‘goods’ (i.e. property) or whether they are services or something else.  If they are property, then in principle they could be bought/sold/assigned etc – which goes way beyond the way in which virtual goods are currently dealt with.

Until now, there has been relatively little by way of official analysis of this issue – which is why this case, where a judge seemed willing to convict a man based effectively upon theft of a virtual currency – is significant.

We may not hear much more about this particular development (except possibly when the man is actually sentenced) but this is definitely not the last we’ve heard about the interaction between games, virtual goods and the criminal law (in fact, I might even write a piece on that next month!)  As always, watch this space…

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"The goal is to make Facebook Credits into an international virtual currency"

Here’s that quote again: “The goal is to make Facebook Credits into an international virtual currency”. 
The quote comes from a VentureBeat article summarising a talk from Facebook’s Deborah Liu at the Virtual Goods Summit in San Francisco, in which she discussed Facebook teaming up with virtual currency services provider Playspan in order to ramp up sales of Facebook Credits.  Facebook Credits are an increasingly healthy source of revenue for Facebook – consumers pay real money for Credits and use those Credits in virtual goods transactions, e.g. in games like Farmville, with Facebook deducting a 30% transaction fee.

All good so far.  But it was this bit of the article which got me:

“Liu said the goal is to make Facebook Credits into an international virtual currency. The analogy is Europe’s euro, the currency whose introduction resulted in the broadening of trade beyond country borders. Roughly 70 percent of Facebook’s users are outside the U.S.”

Imagine the future.  You go on to the web or your smartphone Facebook app and buy some Facebook Credits.  What do you do with them?  Well, remember, Facebook Credits are an “international virtual currency” now.  So, there’s lots you could do:

  • Buy some virtual goods in Farmville 2 from Zynga, or maybe buy them from another player directly, or maybe even through a second hand virtual goods market.
  • Buy some groceries from Tesco or Walmart and have them sent home.
  • Send the Facebook Credits to your friend or family abroad, or maybe have them converted into the local currency first before you send them.
  • Put them in a savings account or perhaps purchase a bond or life insurance with them.

I have no doubt that we will see something like this happen in the coming years.  Clearly, whether it is actually Facebook Credits that does it, and whether it goes as far as the above examples, is another question – but something like this is going to happen, is already happening in fact.  And I also want to emphasise that, as a gamer/techy/lawyer, this is really exciting.  BUT.  BUT, this is going to raise some really critical legal, financial and cultural issues:

  • As soon as you have a true “international virtual currency“, the banking laws of every country in which it is sold will jump on it.  There will be money-laundering, consumer protection, potentially even capital adequacy requirements and many more.  How will Facebook deal with all that very heavy compliance?
  • A true virtual currency will only gain widespread acceptance when it becomes ‘cash out’, i.e. when you can take become able to take cash out of virtual goods as well as put them in.  IF that happens it will fundamentally change how Facebook operates – and introduce a whole further tranche of legal issues.  For a start, what if you have to pay tax on your virtual currency?  I cannot emphasise how critical the ‘cash out’ issue is going to be in the future.
  • How long before regulators and politicians start taking a really hard look at Facebook Credits?  Example: what happens if the global anti-trust/competition regulators decide that they need to be cut down to size?
  • What about all the macro and micro economic implications?  How will Facebook deal with currency fluctuations, inflation and deflation and so forth?  How do you deal with consumers in the US having to pay much more or much less in real terms than Chinese or European consumers because of what’s happening in the currency markets?  What happens when there is future market chaos and investors start buying up Facebook credits as a safe haven?
  • How will Facebook get people comfortable culturally with the interaction between ‘real’ and virtual currencies?

I could go on, but there’s enough meaty issues there already.  Longtime readers will know I’ve already written previously about the legal challenges that the rise of virtual goods/currency are presenting, and I think it’s time I started thinking a little more deeply about how these kinds of issues could be resolved.  In the meantime, what do you think readers?  Let me know in the usual ways…

Image credit: Mashable/Facebook

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What happens if I delete your avatar?

I’ve thought for some time that it would be interesting to write a post about the legal implications if someone was deliberately to delete someone else’s avatar, or for that matter to steal it.

As it turns out, over at Terranova they’ve been having a similar discussion.  This from Richard Bartle:

“So, this is a video a woman made in which she deletes her boyfriend’s World of Warcraft characters. It rather upsets him.


So, if he sued her, what would the legal arguments involve?”


It’s well worth having a read of the comments if you are interested in the legal arguments regarding virtual goods.  I’ve previously discussed the legal debate over virtual goods ownership and will write another post when I’ve had a chance to digest this interesting Terranova discussion, so watch this space…




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Class action lawsuit targets ownership of virtual goods

Just a quick post – Cnet reports that a group of Second Life resident have commenced a class action lawsuit against Linden Labs and its former chief executive, in which they complain that they and other residents were forced to agree to terms of service that eroded their ownership rights to virtual property and goods within Second Life.
As I’ve written about previously, there is a battle over the ownership of virtual goods which has been brewing for a while.  It has flared up from time to time, notably in the 2007 American case of Bragg v Linden Labs, but has never been definitively decided (Bragg settled, for example).  Now it looks as though it may be flaring up again.  At stake is the issue of ownership of virtual goods potentially in every corner of the games market, from social games to MMOs.
I have not yet been able to read the (65 page) Complaint – that’ll be a job for this weekend, at which point I will update this post.  But, from what I have seen so far, it goes into some detail as to the complainants’ legal ownership of virtual goods/property within Second Life.  If that argument was substantiated in court then, as I’ve said previously, it could send shockwaves through the games industry with its increasing reliance upon the monetisation of virtual goods.  As always, watch this space…
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Opinion: Vietnam and the legal battle over virtual goods

I wrote just now about the report that Vietnam’s Ministry of Information and Communications (MoIC) is working on a draft decision regarding online games in Vietnam.  You can read my views on that here.  I wanted to write a separate post about the most interesting aspect of that draft decision: its implications for the timebomb issue of virtual goods ownership.  

The report:

The MoIC draft decision, according to Vietnam.net, said this about virtual goods:

“Related to virtual assets in games, the draft said that virtual items are not assets and they can’t be converted into money or assets in any form. An MoIT official remarked that objects in online games are not recognized as assets in the world and conflicts between gamers and game providers are not civil conflicts.”

This superficially innocuous statement actually conceals a great ongoing debate as to the legal ownership of virtual goods, the resolution of which will have significant implications for any games company that sells or interacts with virtual goods.

Caveat: the following is a whirlwind tour through the issues over virtual goods and is not meant to be a detailed exposition!  If you want more information, look at sites like Terranova or tVPN.

The issues over virtual goods:

As I and many others have have been saying for some time, virtual goods ownership is a ticking timebomb of a legal issue, which has been around ever since virtual goods themselves but has been growing increasingly important with the massive growth in the sale of virtual goods over the last few years. These are the critical questions:

  • Are virtual goods ‘property’?
  • Alternatively, are they just electronic ‘services’ in which there can be no property rights?
  • If they are ‘property’, then does the player have property rights in them?
  • If they do have property rights, then which ones? The right to hold and sell the virtual goods? The right to take the virtual goods or their equivalent monetary value out of the game? The right to destroy the virtual goods?
  • Can players go to court to protect these property rights, as they could for e.g. a car or a house?
  • If virtual goods are property, should they be taxed like any other property? If so, how?
  • Most importantly, if virtual items are property, then how will games companies have to adapt legally? (more on that below)

The question as to whether virtual goods are ‘property’ in the legal sense is complex (and way too detailed to be resolved here).  Many games market virtual goods as being ‘property’ which you can buy and do anything you like with, in return for which you have to pay real currency.  There is now good academic analysis which argues that, for this and other reasons, virtual goods should be classified legally as ‘property’.  In particular, two academics called Lastowka and Hunter have argued with force that virtual goods have all the characteristics of property and therefore ought to be treated as such – in which case all of the above issues come into play.  On the other hand, in some basic sense should ‘virtual property’ – for which there is no concept of limited supply, for example – be different to ‘real property’? 

The meaning of ‘virtual goods’ has become increasingly complex as well.  Is a product which you can code from scratch in Second Life and use as you wish the same kind of ‘virtual good’ as some corn seeds or livestock which you can purchase in Farmville and only use as the game designer lets you?  As a result, should they both be considered property?  The answer to that is entirely unclear (and it’s worth keeping that in mind during the rest of this post…)

How are virtual goods dealt with currently?

To date, games companies have dealt with virtual goods in their legal paperwork (typically a EULA) by stating that all aspects of a games whatsoever belong to the game company, to which player can have access on a strictly defined licence basis and which the games company can revoke at any time for stated reasons.

This works fine for the player’s access to the game itself, but does that argument work when you encourage a player to ‘buy’ an item from you?  Again, there is good academic analysis suggesting that it isn’t enough.  In a very short nutshell, it is said that the problem with the current EULA model of dealing with virtual goods is that they are a contractual attempt to deal with a property issue.  Terms and conditions etc can impose limits on the use of purchased virtual goods, but they do not resolve the question of whether those virtual goods are property or something else instead. 

Take a real world example: if Alan and Bob sign a contract in which Alan says that a particular car is his property and can be used by Bob on certain conditions in return for a monthly payment, that contract does not of itself mean that Alan (or Bob, for that matter) owns the car.  You have to look at real world property questions (like ‘did Alan pay money for the car?’) to establish ownership.  The same applies with virtual goods (or so the argument runs).

So, there is a decent argument that the current model doesn’t deal with the property issue very well: they simply amount to an assertion that virtual goods are not property, or alternatively are the property of the games company notwithstanding everything to the contrary which is said to the player at the time of the purchase.  (This is pretty much exactly what the Vietnamese official said: “virtual items are not assets and they can’t be converted into money or assets in any form“.) 

But, there are more sophisticated alternatives that could be deployed to deal with this thorny problem of virtual goods and property:

Alternative #1: virtual goods are a service, not property

One alternative approach is to argue that virtual goods aren’t property but they are services: i.e. ‘you pay us money and we will generate an item for you which we will host on our servers and you can use in our game until such time as we decide to discontinue it or you cease paying us a subscription etc’.  If virtual goods are services, then essentially the EULA model could be modified into a services model and none of the above property issues would apply (although there would then be separate issues about what constitutes a ‘service’ and when a games company can/cannot terminate that service).

But is that enough?  Does that satisfy the very basic problem that the player is being encouraged to think he is ‘buying’ an item which then becomes ‘his’?  What if he spends very significant sums on that ‘service’

Alternative #2: recognise that virtual goods are property, and adapt accordingly

Another option is to recognise that virtual goods are property and to treat them with property law solutions rather than contractual terms and conditions.  For example, using some form of lease arrangement (‘this virtual cow is a piece of virtual property, I will lease it to you on these terms’) rather than a EULA/licence model.

Alternatives #1 and #2 are interesting, but diametrically opposed: virtual goods can either be property or services, but not both.  Different people have different views on that one, which it would take too long to rehearse here (I realise that’s partly a cop-out, but my purpose is to show the virtual goods issue exists, not to answer it in a short blog post!)  In any event, I think the only way this could be resolved definitively is through either a judicial or legislative decision (more on that below).

Does this really matter?

Definitely.  If you have players paying millions of $1 or $5 to social games companies per annum, or even individual players paying huge amounts of money for virtual goods (like the guy who spent $330,000 for a space station in Entropia Universe, sooner or later someone is going to turn around and start asking questions about what they ‘own’ in return for their money.  What happens if a whole bunch of people start asking for property rights in their virtual goods, perhaps even to the extent of class action lawsuits to force the issue?  If successful, it could change the way in which the games industry has approached virtual goods – which to date has effectively been to treat them as the holy grail of games monetisation with relatively little regard to the accompanying legal issues.

In fact, in the past there have been people who’ve asked questions exactly like that.  For example, back in 2006 a Second Life player called Mark Bragg brought a case against Linden Labs over their closure of his account, which he said deprived him of access to substantial amounts of virtual goods that were his property.  The case settled and as a result there was no detailed analysis of the property issues, but clearly they were there (and the court didn’t dismiss Bragg’s arguments, either).

That said, (so far as I’m aware) no Western court has had to consider the issue in detail yet, nor has any Western government/regulatory authority set out its position firmly on the matter. But, with the sheer amount of money coming in through virtual goods, virtual currency and micro-transactions of all kinds, I think it’s just a matter of time before that changes.  There have already been suggestions for some time that the IRS in the States and HMRC in the UK intend to look more closely at the taxation of virtual goods, which inevitably will focus a spotlight on virtual goods more generally.

In the meantime change is already coming in the Far East, as this Vietnamese report suggests.  For example, what if the Vietnamese government were to pass a law stating quite clearly that virtual goods are not property?  Together with other changes happening over there (such as a recent Korean case on the legality of RMT), this could well have a significant impact on the legal status of virtual goods. 

So, if that legal battle over virtual goods isn’t already here, it’s coming.  Watch this space…

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FarmViller player runs up £900 debt, could be sued by mother?

The Guardian reports “a mother has warned of the risk of children spending hundreds of pounds on ‘free’ online games available through Facebook after her 12-year-old son ran up bills of more than £900 without her knowledge“.  This raises interesting issues about the extent to which she could recover her losses: in a nutshell, only if she sues her son.  (Which she won’t, obviously, but it let me write a slightly more interesting headline than usual.)

But seriously – the issue of recovering loss suffered through inadvertant spending on a social game is an interesting one and I think this case is just a taste of things to come.  The facts according to the Guardian are that “last month [the mother’s] son…spent more than £900 on FarmVille. He had emptied his own savings account of £288 and had used her credit card to the tune of £625 to pay the bills“.  She apparently tried to obtain redress from Zynga, who refused.  Facebook has disabled her son’s account.  She tried to call HSBC to ask for a refund, but she was “told she would only qualify for a refund if she reported her son to the police and obtained a crime number“.

Sounds rather sensationalist, I know, but HSBC were right: under consumer credit legislation, a credit card company is only obliged to offer a refund to a consumer if the card has been used fraudulently/for criminal purposes, so the mother would have to report her son to the police in order to be able to claim that refund.  Which, obviously, she didn’t want to do as it would involve her son being given a criminal caution!

There might be a bit more of an argument over Zynga’s receipt of the money, but I imagine they may argue that they’re right to have refused a refund on the basis that, while in fact they may have received the money without the authorisation of the owner of the money, they accepted that money in good faith without knowledge that the son did not have his mother’s authorisation to use her credit card.  Is that sufficient?  Hmm. One to think about…

Anyway.  The Guardian article goes on to say:

“She does not blame Facebook, Zynga or HSBC, saying that her son was the one using the card and is entirely at fault. But she added: “I do think they need to shoulder some responsibility in this business and put systems in place to stop this happening again. The fact that he was using a card in a different name should bring up some sort of security and the online secure payment filter seems to be bypassed for Facebook payments.”

A spokeswoman for HSBC said that had the credit card been used on a gambling site it would have started alarm bells ringing for “unusual usage”. But because the card had been used to buy Facebook credits HSBC did not consider the transactions to be suspicious, even though £625 was spent in just two weeks“

The idea that Facebook’s social games platform did not put adequate safeguards in place to ensure that a child cannot use a card in another person’s name is an entirely valid parental consideration, but is that really Facebook’s responsibility?  Perhaps the mother is right that there should have been some additional security involved which the son could not breach but ultimately, no matter how many levels of security you impose, if a child obtains all the relevant details from his/her parent then it it’s difficult to see why the games company/web site should be at fault.

This incident also may have implications for banks and other consumer finance providers – is it right that spending substantial and unusual amounts of money on social games in a short period of time should not qualify as “unusual usage“?  Looking at it another way, if your card is used to spend a lot of money on social games currncy in a short period with no prior record of such purchases, should your bank give you a friendly call to make sure you authorised the payments?  Answers on a postcard please…


Bottom line: money is pouring into social games companies, but it’s just a matter of time before they have to deal with real issues of consumer credit liability and fraud.  Best for everyone to get the proper safeguards in place now.


[Image credit: Zynga]

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