What makes MMOs with real-money economies legal?

Question

I beieve most MMOs with an in-game currency tied to a real-world currency (e.g. Guild Wars 2's gems or Eve's PLEX) do not allow in-game items to be traded back into real cash for a bunch of reasons—partly because they may be subject to changes to the game's "normal" economy but generally because this would open up a bunch of legal issues with money laundering, gaming/gambling laws and so on.

However, Entropia Universe (wikipedia link) has an in-game economy which is tied directly to US dollars, allowing players to "cash out" of the game and back into real money. They have even gone so far as to produce bank cards which withdraw from the game and have now formed an actual bank to regulate trades.

Why are there not more games which take this approach of a game economy tied directly to real money?

I understand that the economy needs to be carefully designed and balanced to avoid in-game over-inflation or other exploits leading to in-game currency being "created" from nothing, but the bigger concern seems to me to be the legal issues this would create. Given the amount of random chance involved in the game, is this not effectively gambling? If so, how does Entropia Universe allow worldwide users without kicking up a storm of trouble from different regional authorities and governments? Surely this is exactly the kind of thing which is banned in certain US states or other countries. Is it because the game is based in Sweden and their more permissive laws allow it?

Answer 1

In my experience, the reason you don't see this very often (at least in the US) is "it's very complicated, we as game developers lack the expertise, and there isn't much profit in it."

Online gambling laws are really complicated. I'm not even going to pretend my limited comprehension of legalese is up to the task of parsing them. It's not necessarily very clear how MMO games fit into that law:

During an interview with Virtual World News, Alex Chapman of the British law firm Campbell Hooper stated: "Now we’ve spoken with the gambling commission, and they’ve said that MMOGs aren’t the reason for the [Gambling Act 2005], but they won’t say outright, and we’ve asked directly, that they won’t be covered. You can see how these would be ignored at first, but very soon they could be in trouble. It’s a risk, but a very easy risk to avoid."

But I know of no cases where a game operating in the US (at least) has tried to go up against this law and get it sorted it out in the courts. Consequently, everybody seems to feel like the safer thing to do is simply avoid the possibility by preventing cash-outs and prohibiting secondary markets, rather than deal with having every aspect of the game scrutinized constantly and possibly repeatedly by gambling lawyers.

But the legal specifics are just one aspect of the problem. Another major part of the issue is that when you start allowing cash-outs, you're building more than just a game. You're building a game with a pseudo-bank attached to it.

The logistical implications are many. Primarily though, this means you need to be able to keep sufficient liquidity of assets in order to serve all your potential cash-outs. Game studios aren't really banks (and even then, banks are only required to keep 10% of their outstanding liability in the US at least), so they're not FDIC-insured. If everybody tried to withdraw what they're owed from the game at once, the studio would probably fold unless they kept all of that money readily on-hand. And since nothing like the FDIC backs game studios, most of those players would get nothing.

Even having that money is a problem. If a game allowed you to generate real money from in-game currency or items that did not at one point originate from putting real money into the system, you'd have to produce that money from somewhere (your profits or savings from elsewhere).

Even if you do restrict the system so at any given point, only cash that has been put in (by somebody) can be taken out (possibly by somebody else), backing 100% of cash-out severely curtails your ability to make any profit off that money... and micro-transactions are an appealing and reliably form of generating profit for a studio. This means the studio can't funnel that profit back to shareholders or employees (in the case of a profit sharing plan).

The studio could invest the funds, certainly, but you wouldn't want it invested into anything high-risk because of the chance of dropping below the balance required to back 100% cash-out. The potential earnings on a very stable investment are much less attractive because of the typical lifetime of a game studio (short), to the point where that investment capital (that money players are putting in to your game) seems like a far better place to take profit from than a piddling amount of interest on said capital.

So games just stay away from it. It's less stressful.

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As for Entropia Universe in particular, you're right that being based out of Sweden is probably the key factor in allowing it to operate the way it does. Swedish law regarding online gambling appears to be far more amenable to the scenario than US or UK law.

Answer 2

My question is why are there not more games which take this approach of a game economy tied directly to real money?

I think the answer lies in what a game is. To most people, a game is something where you relax and can have carefree fun.

Some people will have more fun if game money is real money, but others will have less fun. So inherently it seems unlikely that linking game money to real money will make a better or more lucrative game. That doesn't have to be the case - it's sufficient that game developers and publishers think that's the case.

The other issue is risk, complexity, and cost. Linking real money and game money brings much larger risks in regards to legal, public perception, and hacker attacks. It brings legal and technical complexity, especially if you want to operate in more than a single jurisdiction. These create cost, which has to be offset somehow, or it's not worth linking real money and game money.

Answer 3

When you allow players to not just pay you money but also get out money, your game can easily fulfill the definitions of both banking and gambling which are both heavily regulated in many jurisdictions. While some game companies might feel comfortable with managing a gambling business, very few possess the know-how which is necessary for operating a bank in accordance with all the banking regulations which apply. For details about how far you can go and what you need to do to get a banking and/or gambling license in your jurisdiction, consult a lawyer, not a game developer.

But there is also another problem of a more economical nature: When you allow players to "cash out" at any time, you might end up in a situation where a large number of players cash out at once and the amount of money you need to pay to them is higher than your current liquidity and you won't be able to do so immediately. As soon as there are rumors around that you might not be able to pay out the money you promised, there will be a panic among your players who will then try to secure their money ASAP by also withdrawing it. This might quickly lead to you going bankrupt within just a few days.

And then is the question: Why would you? Many games are very successful with far simpler and far more reliable business models: Players pay for enjoying the game, no refunds unless you have to. Why would you willingly give money back to the players when you can keep it for yourself? Remember the Ferengi Rule of Acquisition number 1:

Once you have their money, you never give it back.

Answer 4

Note that Diablo 3 had the real-money auction house. (before it was removed)

How it worked: Players could purchase in-game digital items from other players using real money. There was a similar, but separate, auction house doing the same thing using in-game gold. The items are sold similar to how many MMOs have some version of an "auction house". A small cut of the action went to Blizzard.

The auction house was removed from Diablo 3, because it ruined the actual game. Loot and getting more powerful is the "reward" for playing in that game (and in many dungeon crawlers.. and in most MMOs to some extent). Players kept some amount, say the top 5%, of the Loot they collected. The stockpile of Loot grows and grows. Now you suddenly could afford an item which you normally would have taken days, if not weeks, to find. Your character's capabilities jumps immensely, to a level which would take an extremely long amount of time to get higher. As people continued to play, their character's capabilities felt like it was going nowhere, because they almost immediately reached a point where the effort was not worth the reward for them, and they quit playing.

Why it works for Eve Online: Eve has a massive amount of destruction happening. Ships, items, and isk(money) are destroyed at a rate nearly as fast as they are created. Since Eve is not a game "all about" items (It's a stressful game if you try to play that way and aren't good at it), they can get away with this massive destruction where many MMOs cannot. This helps prevent the incredible amount of inflation and stockpiling which happened to Diablo 3. From my understanding, stockpiling was a worry to Eve online some time ago - players were stockpiling massive amounts of resources in null sec (player-owned areas, which were supposed to have a lot of pvp), which is part of the reason they rebalanced the distribution of resources and pushed players to once again engage in more war. I cannot speak for Entropia Universe, but I hope they also have some strategy in place to prevent inflation.

The problem with "cashing out": Outside of actual gambling games(where everyone puts in "real money" to begin with), a "cashing out" means that you have generated a bunch of in-game stuff and are giving them to the economy in exchange for something that is not within that economy. Things are going in, nothing is coming out. Most people would probably prefer real money like that - compared to how most games have some "destruction" mechanism whereby you would instead destroy the item for (possibly) some other item. "Cashing out" inherently starts generating a stockpile of "good" items that people believe they can get real money for, and few games have the innate amount of destruction involved to help mitigate this innate tendency for the items to be generated or resold more than they are discarded or destroyed.

The legalities: I only briefly scanned through it, but you may be interested in reading the old Terms of Service for the Diablo 3 auction house.

You were really buying or selling "Loot Licenses" in Diablo ("Loot" is a legal term according to the TOS). Agreeing to the TOS means you accept that all "Loot" is still owned by Blizzard. Blizzard is a big company, and presumably had a lot of legal people working out the kinks to make it available to as many countries as possible, but still could not make the auction house available to every country - as said by some of the legalese. They did manage to be available in most consumer countries though.

Answer 5

When the game currency is nonconvertible, the company can freely give it away. If "game$ 1" costs US$ 1 and a in-game competition gives a player game$ 100, that player will think "Wow, I just earned US$ 100", even if they cannot actually get the money out of the system.

Of course, the game money shouldn't be TOO freely given away or nobody spend real money for it.

And they can do deals like "TODAY ONLY: Get game$ 200 for only US $100! That is one hundred FREE game$!!!" without thinking too hard about it.

Still, this gives the impression of a game company that is gladly giving gifts to its players. Getting gifts makes players happy and makes them come back.

Answer 6

With regards to this sub-question:

My question is why are there not more games which take this approach of a game economy tied directly to real money?

An aspect that not many people have covered is the psychological barrier of an intermediate currency that in-game scrips provide. Spending gems or credits or gold doubloons is an artificial action, in game a player can justify spending 30 gems on an item and be convinced of its fictionness.

Whereas, to get more gems they can either earn them in-game or buy them in bulk as a shortcut. They aren't buying the item, they are buying some gems instead.

As the linked article states all up this buy making it

difficult to assess the value of unfamiliar items, so the price obscuring makes it easy to forget how much "actual" money they've spent.

So why don't MMO games use real currency - because its bad business.

Answer 7

Seeing as how fantasy football is still considered a skill game (not gambling) and as such allowed to reign free and seeing as how it is by many orders of magnitude more popular than MMOs, I don't think the reason MMOs don't allow cashing out in game currency for real cash has anything to do gambling laws.

There are essentially two reasons that I believe you don't see this.

1. There is nothing in it for them. The game creators can make as much in game cash as they want. Why would they want to promise to exchange in game currency for real money?

2. Even if you assume away #1 (or allow in game currency transactions on ebay, etc), there's a perception that it can only hurt the game. Instead of playing the game to have fun, you'd have a cottage industry of people "playing" the game as a job. These people would probably not be players themselves but would operate out of places with low wages and have people on accounts 24x7 taking up more in game resources and actual server resources. This would/could crowd out players that don't play as often and ruin (or at least hurt) the game for casual and even serious players.