[Dave Birch] The Joint Economic Committee of the U.S. Congress recently issued a statement saying that they have no plans to tax transactions taking place inside virtual worlds. That’s nice of them, obviously. I should have mentioned this sound policy to someone in high office when I was at the Treasury yesterday. Nevertheless, it strikes me that the fact that they are even issuing such a statement reinforces the suspicion amongst digital moneyers that something really interesting is going on here, even if the up-to-the minute Financial Action Task Force (FATF) report on new payment technologies doesn’t mention it. But if I get a tax bill from the IRS after selling my hand-crafted magic axe to a cash-rich time poor Swiss dude, just because the transaction happened to occur on a server in the U.S., then there’ll have to be another tea party. Or is that no taxation without representation stuff all history now?

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The Korean government are taking a more robust line than Congress. They have decided to ban transactions between the real and virtual worlds. (Presumably they are even now preparing a law to regulate sunshine.) According to a Korean newspaper article, if a recent proposed bill (called the “Amendment for Game Industry Promoting Law”) gets through the National Assembly then all kinds of businesses brokering between virtual money and real money could be fined. This amendment is added to a clause for prohibiting virtual world trade. Here’s their concern: you ban money laundering in the “real” world, so bad guy A buys a load of dotori and goes into Cyworld, where he gives it to bad guy B in return for a worthless non-magic sword or whatever. Oddly, or perhaps not so oddly considering that lawyers and politicians are involved, virtual persons are to be banned from exchanging “money” but not from exchanging “treasure” (so bad guy A can swap a valuable magic sword for bad guy B’s worthless non-magic sword). My head hurts.

Yet I remain fascinated. In South Korea, game-related microtransactions are already a huge, huge business generating some decidedly un-micro revenues and driving forward digital money developments. In particular, the development of mobile billing systems, capable of processing small sub-$5 payments have been instrumental in helping to monetise gameplay. Two of the most popular games played at Internet cafes in South Korea are Special Force (which last year was being played by one in five people in South Korean cybercafes) and Sudden Attack. Both are multi-player first-person shooters, and both monetise gameplay through the selling of in-game items, exactly as I put forward in a presentation many years ago (trying to persuade an computer games company to get involved with Mondex!). Just for historical fun, have a look at this graphic from a presentation I made at Online Games in 1998 trying to persuade games designers that this (micropayments) model was the way forward…

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Overall in Korea, 7 out of 10 online games used in Internet cafes are free to play, but with micropayments to advance or master the games, according to Pearl Research. What’s important in our context is the extent to which games have driven a vigorous micropayment market with very advanced mechanisms for online content purchases. There are more than a dozen payment options (including mobile phones, prepaid scratch cards and even boring old fashioned credit cards). The Pearl statistics show that 58% of South Korean online gaming payments are made through phone bills, with just 27% by credit card, significantly different from Western markets. The bottom line, though, is that game operators believe they earn more revenues by basically giving the games away (with no subscriptions) and charging for in-game items. As my old graphic shows, giving the guns away and charging for bullets is not a bad business model if you have an effective way of collecting the money.

This seems to indicate that the Microsoft points idea (mentioned a couple of weeks ago) will spread, because it’s more cost-effective for virtual world owners to handle micropayments through their own currency and use macropayments for the exchange only. Just to reinforce this point, one of the largest games companies in the world, Electronic Arts, recently added a virtual currency called “gems” to its game portal, Pogo.com (which has over a million subscribers). The currency will be sold in lots of $4.99 to $19.99.

The “cross border” exchange is a big business: remember the of the amount of trading going on is already huge. As we’ve noted before, it’s astonishing that virtual gold miners in China make more money the actual gold miners. But the market has evolved further: the Chinese domestic market for farmed gold is now booming as well. The Xinhua news agency carried a story with a lot of figures on World of Warcraft gold farming in China. An interesting point is that since half of WoW’s 6 million players are now Chinese, gold farmers are increasingly able to make a living from the domestic market in addition to f/x with North American, Korean and European markets.

Now that ABN Amro has opened its first virtual world outlet, joining Wells Fargo in Second Life (although to be fair Wells Fargo have their own island, not just a branch), surely the Joint Economic Committee of the U.S. Congress and the Financial Services Authority should be joining them!

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