Virtual Currency, FinCEN, and T$ Buybacks

L1000012

One of the best things about There is our legal team at DLA Piper. Not only are they great partners in matters like IP (Intellectual Property and Patents), contract negotiations (when we did things like that) and dealing with various governmental organizations like the FTC and FCC, they are also, like us, well versed in matters of virtual currency.

One of the Government’s big concerns about virtual currency has been around the issue of “money laundering” (let’s leave aside the issue of the amounts involved in There, or any other virtual world for that matter). One of the ways the government controls money laundering is through what’s called the “FinCEN”, or Treasury’s Financial Crimes Enforcement Network. FinCEN uses something called the “Bank Secrecy Act” to require companies who handle money (“Money Service Businesses”) (say, like “banks”) to do alllll sorts of things (like reporting the transfer of large amounts of money).

Fortunately, we’re not a MSB, because we really don’t want to do that.

However, FinCEN just issued new guidelines for companies which use virtual currency. I’ll attach the whole guideline, but the important sentences are:

“Many online gaming companies whose platforms generate a virtual currency for use in the game have taken the position historically that the issuance of the virtual currency is essentially a license to use the game. As such, it does not trigger MSB obligations. This position may still be correct, but the guidance requires that the virtual currency have certain limiting features, including that it (i) not be redeemed for real currency; and (ii) not be transferrable to other players or parties or otherwise exchanged, in order for the gaming company to be exempt from Bank Secrecy Act requirements of an MSB.”

I emphasized (i) because it basically means we, nor anyone else, can exchange T$ for real US $ without becoming a MSB, and therefore subject to FinCEN’s attentions.

I’m not so sure about (ii), but I’m pretty sure there’s an “and” there for a reason – they don’t don’t you to give your T$ to your presumably terrorist and/or drug dealing friend so they can exchange them for T$. They certainly don’t mean to shut down the ability to transfer virtual currency between players in-game if all it can be used for is to purchase an excess of virtual fizzy burps.

In any case, I think this lays to rest the concept of T$ buybacks, or allowing 3rd party exchange of virtual currency. Unless FinCEN changes it’s mind, to conduct such exchanges would require There, or a 3rd party reseller, to become a MSB (Money Service Business). Good luck with that one.

Good thing we have “Real Money” (for Virtual Goods purchases) coming.

Now, I’m sure that some people will see this as There conspiring with the government to surveil your secret lives, control your gun purchases, and report you to the Obama Death Panels. Well, you’re right. In fact, I was there at the gun store holding the bag when Obama was buying those 1.6 trillion rounds of ammunition ordered for “Homeland Security”, which we really know is for martial law and the U.N. takeover of the United States.

And I can see Russia from my house.

Here’s the quote from DLA Piper:

Last week, Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued the attached guidance that may be of interest to certain of your clients. It is designed to “provide clarity and regulatory certainty for businesses and individuals engaged in an expanding field of financial activity … [which is the use of] convertible virtual currencies or mak[ing] a business of exchanging, accepting, and transmitting them.” This release follows the European Central Bank’s release of a working paper on Virtual Currency Schemes in October of 2012.

FinCEN generally regulates anti-money laundering requirements of financial institutions in the US under authority of the Bank Secrecy Act. Among the categories of financial institutions subject to the Bank Secrecy Act is a subset of entities referred to as money services businesses, or MSBs. MSBs must register with FinCEN and comply with certain anti-money laundering, recordkeeping and reporting obligations.

The guidance confirms that users of virtual currency are not MSBs, but those parties who issue virtual currency or put it into circulation and have the authority to redeem or withdraw it from circulation, referred to as administrators, are MSBs. Similarly, parties who engage in the business of exchanging virtual currency for real currency or other virtual currency, referred to as exchangers, are also MSBs.

Many online gaming companies whose platforms generate a virtual currency for use in the game have taken the position historically that the issuance of the virtual currency is essentially a license to use the game. As such, it does not trigger MSB obligations. This position may still be correct, but the guidance requires that the virtual currency have certain limiting features, including that it (i) not be redeemed for real currency; and (ii) not be transferrable to other players or parties or otherwise exchanged, in order for the gaming company to be exempt from Bank Secrecy Act requirements of an MSB.

Here’s the actual FinCEN document: FinCEN Guidance on Virtual Currency

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  1. #1 by SkyMage on 2013.04.03 - 3:10 pm

    +1 for hosting in Portazones. I’m satisfied with the cost of subscriptions and paz rent. Submission fees and NH could maybe use a review.

    In light of the disappointing news about tbux buybacks, I’d appreciate you guys taking a look at the viability of paying our subscriptions via earned tbux.

  2. #2 by Hoverbiker on 2013.03.25 - 3:44 pm

    Please forgive me, Mister Wilson, for this is completely off topic.

    Seeing as how you’re a photographer, I thought you might be interested in this, if you don’t already know about it.

    These guys had what you might say, um, huge onions . . .

    http://englishrussia.com/2013/03/22/on-top-of-the-pyramide/

    Fairly nice pics, too!

  3. #3 by Reo on 2013.03.24 - 7:49 pm

    My impression was this was a panic measure meant to deal with the impending threat of bitcoin becoming a viable alternative to US dollars. Time will tell, but I really hope this doesn’t last. Unfortunately, we know from history that it’s easy for the law to stay on the wrong side of history for a long, long time. (Slavery, PATRIOT ACT, drug war, patent laws, you name it)

    Speaking of which, how about accepting bitcoin payments for There subscriptions? It sure beats Paypal.

  4. #4 by xXxLilAngelxXx on 2013.03.24 - 2:05 pm

    Hi MW I have a couple questions about submission costs and reviews. I have recently started designing and I find the submission cost is very high. It costs me approx. 8 dollars of my own money to submit a hires top and bottom into the game. I read in the developer program information this is because there employees did the reviews but that was “old” there. In new there as you know it is the users who do the reviewing so I ask… why are we still paying the high submission fees? Another thing I have noticed since I started designing is that there are only a select view people who are reviewing. I think those who take the time to review should be rewarded in some small way so submissions are not sitting on the review page as long as some are. Which in turn would have people buying more tb for new items they want to purchase and designers can get items through faster and afford the costs.

    • #5 by Michael Wilson on 2013.03.24 - 2:23 pm

      We can look at lowering the prices and it’s impact on the economy. I was always leery of the whole “Hi Res Products cost more to submit” issue – it’s not like high-res products have any impact on There’s operations. No promises though.

      As for rewarding reviewers – we have mixed feelings about that. If it’s a way to make money, then bad actors will work hard to find a way to subvert the system, and I’m sure we will immediately see issues about “Well, East Coast reviewers have an advantage because they are 3 hours ahead…”, etc, etc. I think, as in most things in life, introducing money into the equation will ultimately do more harm than good.

      • #6 by xXxLilAngelxXx on 2013.03.25 - 6:26 am

        I can see your point about the reviewing… Thanks for getting back to me about it. 🙂 I appreciate all of your hard work and effort to keep there alive and improve it for us current users!!!

  5. #7 by concerned developer on 2013.03.24 - 1:53 pm

    Mitchell can you make developers sub-contractors and pay them directly through sales and thus by-passing virtual currency regulations?

    • #8 by Michael Wilson on 2013.03.24 - 2:02 pm

      Dave Ryder,

      We don’t have to make them sub-contractors: “Real Money” will let them get paid directly in US $ via PayPal (if the member chooses to buy them that way).

      P.S. Seems odd you would be asking this, since your last comment about There read:

      “I agree with the letter writer that there.com is boring and that Mitchel Wilson only cares about is money. There.com is boring because of the lack of people and the few that are there are sad boring people. If Mitchel Wilson cared about the people in the game he would take some of the money people have generously given him to play there.com and pay for some advertising so that more people will play. I am led to believe that Mitchel Wilson prefers to keep all his money and not advertise because he likes his money more than us poor there.com players. Then again after reading some of the above comments some people do enjoy a boring game, there.com will survive on just those sad people for some time to come.”

  6. #9 by dlmckenzie2004 on 2013.03.24 - 9:46 am

    Wow, they do make it sound like the two terms are two separate terms. It really sounds like they are saying that any game that has a in world economy ran by virtual currency controlled and transferable by members need to be a msb. If that is what they are saying it could stifle innovation in virtual worlds and/or close existing ones. Could your legal team hawk eye the wording and give a definite definition to this. It would be worth it to know we are good vs it cause an issue. However I’d imagine the goverment would go after SL first due to pure vokume. If they really cared.

    • #10 by Michael Wilson on 2013.03.24 - 11:51 am

      I agree. I’m weighing the wisdom of even asking that question :-).

  7. #11 by rrtt93 on 2013.03.24 - 9:05 am

    That revenue that dropped 15k / month over this time last year, let’s just go ahead and watch it drop more, and do next to nothing about it. Nice work Mike

    • #12 by Michael Wilson on 2013.03.24 - 11:51 am

      What, exactly, do you want us to do?

      Keep in mind you have to operate in the same constraints we do – you know, pay people, pay for benefits, pay for servers, provide C/S (albiet not the same amount we did before), do accounting, and make that all work within the revenue coming in.

      Let’s review:

      . We rebuilt the world “in the cloud”
      . We re-opened it.
      . We gave everyone back just about all their stuff.
      . We created a self-running developer program
      . We created a trial program (which, amazingly enough, is STILL running at a 20+% conversion rate)
      . The Community run their OWN There Games, without help from the Staff, and, from what I can see, a lot less agnst.
      . The Community runs it’s own events, some regularly
      . And we’re still open, and still running cash flow positive.

      Of course we’d like to see more revenue, and we’re doing the things we’ve all agreed on (remember, the Members had us build the trial program at this time) to get there.

      If I compare There to where it was even in it’s “Hey Day” I’d take today’s There any day. You know why? Because I don’t have to write a check every month to keep today’s There Open. And we can talk openly about things like pricing, and people can see that, yes, you need to pay to support the services you want, and here’s where the money goes (it actually hasn’t changed much since we re-opened).

      But if you have suggestions for revenue (like “Charge me $10 for publishing my snarky remarks”) then you should post them and we can discuss them.

      • #13 by rrtt93 on 2013.03.24 - 4:57 pm

        First of all, I happily pay a subscription for the service, and feel the price of the subscription itself is low.

        Now personally I feel rental prices for real estate are a bit extravagant, but again, I have little information of the monthly server costs to operate say, a neighborhood. Maybe those prices could be reviewed, as it may provide incentive for more and more people to construct a virtual home. I for one owned a hood for a couple months, but had to drop it because I couldn’t pay $105 / month for it. I could have paid, i dunno, $65 / month. Maybe you rent out 20 more hoods at that rate. The costs to operate those hoods are unclear, so if the profit margin is not all that large for the 189k rent, then I suppose the discussion of the topic can end there. Maybe you could comment on how you think it would affect revenue if rental prices for hoods, hood lots and pazes were dropped by 30%.

        Point being the motivation for my comment was not directed at the concept of subscriptions at all, just more the seemingly minimal response to the decline in player interest. I realize that close to everything that you guys announced as your goals were attained and are still being attained in a timely manner, but while those goals were being attained and accomplishments being made, monthly revenue has declined significantly – people’s interest in the service declined, and no adjustments were made to the goals set to try to discourage that. The loss of interest for me has certainly been the decline in overall interest, coupled with not being able to pay high prices to rent a cool lot or zone.

        I apologize for my comment being a bit “snarky” but it’s unclear whether you guys have thought about stuff like this. You post the revenue numbers at 30-33k, and make no comment on why they are so much lower than last year’s numbers, or about how you plan to bring them back to last year’s numbers. I realize that every business has fluctuations in revenue, but to fluctuate 10-15K when your revenues are less than 50k a month seems extreme. Not many businesses monthly revenues fluctuate 30% in one direction.

        What do you think about reviewing the rental prices for real estate? Do you think it would have any positive increase on community interest and overall revenue?

      • #14 by Michael Wilson on 2013.03.24 - 6:17 pm

        Well, first of all, I thought 50K a month, while nice, was unrealistic given what I knew about the population – remember the original proposition was to re-open There for existing members – we knew we wouldn’t have the bandwidth to address new member recruitment, at least at first.

        To be honest, we haven’t thought about lowering prices, for the obvious reason that lowering prices would mean less revenue. But, perhaps we should consider running a promotional special to see if it improves uptake, or take a survey. I will point out that in the last months of There, we tried slashing housing prices (which admittedly isn’t the same as hoods and lots) to get occupancy up, and it didn’t bring up occupancy enough to make up for the price cuts.

        We haven’t thought about declining revenue because (1) we knew it would decline from that initial pulse, and (2) given what we knew we had to do, there wasn’t much point in wondering about it – we weren’t going to stop implementing trials, or the developer program to do something else (we were very guilty of that sort of thing in the old There).

        Now that the trials are done, we have been thinking about ways to improve retention so advertising will be effective. As someone – I think it was you – pointed out, it’s not fair to just say “Advertising doesn’t work”, it was that “Advertising failed to attract members who stayed around and spent money”. This has been the battle for There (and every other virtual world) since time began. It’s what brought us all kinds of changes such as the Welcome Walkway, Greeters, Landing areas, etc, etc.

        Our current thinking is about ways to get members to where other members are, or at least give them an easy way to find that out. One idea is that of a Global Chat (like Glitch had) where everyone in world could be, and have the ability to enter not only text, but clickable links to locations, etc.

        (Of course, we would make it easy to ignore people in Global Chat, and we would ban people from it, because we all KNOW that someone’s going to feel compelled to go into global and shout obscenities, etc).

        Global Chat would mean that there would always be a way to find people in world – even if you weren’t in the same place – and let people find each other. Ask anyone who played Glitch (or old style WOW) how things like that worked.

        Anyway, that’s what we’re thinking about. I’m sure there are other ideas.

      • #15 by PlAiNHaVoC on 2013.03.24 - 8:53 pm

        Commenting on Michael’s #10 reply.

        That is a great idea about the Global chat. It is currently being used in Nuvera Online, and though the community is much smaller, it has worked well so far. More people are respectful of the rules there for some reason; probably also due to the manageable size of population.

        About the advertising. I have no experience or knowledge in the area, however as someone who spends several hours per day doing various online activities, I would HUMBLY REQUEST that you not do an advertisement campaign similar to what IMVU did. I have utterly refused to even VISIT that world because I was so annoyed by their ads popping up on nearly EVERY site I visited. Those types of ads are a turn off if you ask me. I understand that webmasters benefit from the ads, but some sites overdo it. Jay at Thumdar has a great balance, and I thoroughly enjoy his fan site.

        Okay, rant over. Thanks for reading, and have a great week everyone!

        Rp

        plainhavoc.com

      • #16 by Andrew Almeida on 2013.03.25 - 3:54 am

        I have never played Glitch, but I must say that’s a very good idea. The global chat box would be perfect. Also maybe a “click to join” button in our profiles that we have the ability to toggle on or off. That 20% conversion rate, how many people so far have actually started a trial? As for prices, I understand the lack of enthusiasm in lowering prices at a time like this. The idea is to make There work this time, so the prices should probably stay the same. At least until there’s enough actual members to make up for it. I wish you would consider allowing us to host events from our PAZ though. I heard they started out that way. Cause I’m more into having a PAZ out than being in a hood.

  8. #17 by Phil Reinsmith on 2013.03.24 - 8:22 am

    As long as it is only the UN takeover of the US, I’m going to let it slide, for now. BUT The UN had better not attempt to take over THERE.com. We’ll be rioting at ZONA and PHOENIX.

  9. #18 by Arbata on 2013.03.24 - 7:35 am

    That’s why I think virtual currency should stay in game only.

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