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What Is A Virtual Currency?

The legality of certain virtual currencies can be murky.  While some currencies, like Bitcoin, can be readily traded for goods and services, however, other virtual currencies remain where regulation is more questionable. To that point, the curators of digital economies have hired economists to better model the value of these digital commodities, creating a sort of virtual currency by accident.  However, the ecosystem behind these virtual currencies has exploded and led to new questions regarding their use and potentially illicit activities. So, what are these virtual commodities? How did they gain value? What is being done to curtail the murkier aspects?

What are these virtual currencies?

A good example of these virtual currencies comes courtesy of Valve, a company that both creates and distributes video games. For the purpose of creating more income for some of their “free-to-play” games, random prizes are given out, and can be earned in-game, and later resold via its platform. These items generally have no in-game function, and merely provide an aesthetic value. For a select few Valve games, these items can then be exchanged between players, or for currency in Valve’s store. In essence, the items can function much like tickets in an arcade, or more concerning, poker chips in a casino. Other games have similarly created digital currencies that can be shifted easily from a “real” currency to something that can be used (though not necessarily benefit) the person in game.

However, these currencies have no actual value as translated into the real world. The value of virtual items is generally disclaimed in the terms of use. Yet again, as Valve has enabled a system to exchange these items, this has created complications.

What could possibly go wrong with virtual currencies?

In designing their virtual items Valve, like other gaming companies, had hired economists to better create a virtual market, where the items would have a set value, and follow the same basic rules of supply and demand to ensure that inflation in their value would not occur.

Unfortunately, in a system where an individual creates their own digital currency or a digital economy–like as part of a game–the currency can take on a life of its own. As a result, with Valve and other instances of digital items occasionally get re-purposed outside of what is intended by the creators. These digital items, as mentioned above, get used as chips in gambling activities, resulting in lawsuits against Valve. Further adding difficulties for Valve is how readily the virtual items are converted to a virtual currency through its store. By allowing the ability to sell virtual items, the virtual items can be converted to a monetary value outside of the game.

As such, for any business planning to offer a virtual item or digital currency as part of an online market should take explicit measures to prevent these complications. While others have avoided it by disclaiming the value of the digital items within the terms of use, it is important to follow that up with actions preventing the exchange of the virtual items. While allowing the exchange may be useful for a digital economy, by taking efforts to explicitly tie the digital economy to actual currencies, it can complicate liability.

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