[Dave Birch] I happened to be speaking to someone from a developing economy recently, and they said that (and I quote) “it would be a dream to be regulated by the FSA”. What they meant was that however much people might complain about regulation, having some regulation is better than having none, because with no regulation it’s actually more difficult to get a new payment system off of the ground. Customers and business want to see that their payment system is regulated properly (the person from the developing economy said) and that they are dealing with reputable people and not fraudsters. This applies to developing markets in cyberspace as well, which is why the regulation of the virtual payments and banking space is not only inevitable but also not in itself bad (provided, I would argue, that a thousand flowers are blooming, since it’s too early to know what the “best” regime is). This shift to regulation is already happening in Second Life:

In a blog Linden Labs says it will be prohibited to offer interest or any direct return on an investment from any object, such as an ATM, located in Second Life, “without proof of an applicable government registration statement or financial institution charter”.

[From Finextra: Second Life cracks down on unregulated banks]

Now, having regulation does not, in itself, stop bad things from happening, as we in the U.K. know only too well: people can still make bad decisions that jeopardise other people’s money…

Gordon Brown defended the temporary nationalisation of Northern Rock on Monday morning amid widespread questions over the government’s handling of the collapse of the mortgage lender.

[From FT.com / In depth – Brown defends Northern Rock nationalisation]

Chris Skinner pointed out the chain of events that led to the banking problems and also notes that their particular virtual environment has stagnated

The former point relates to Second Life losing credibility when they outlawed gambling with the knock-on effect that their banking system crumbled. The latter is indicated by the fact that Second Life grew from virtually no users in 2006 to 12 million in 2008 … but only 1.2 million people use the service regularly (in the past 60 days) and this number is declining.

[From The FinanSer: ING closes down Our Virtual Holland in Second Life]

The number of people in virtual worlds overall continues to rise, though, and those of us in the payment business who have time to look at them continue to find new trends, new learning and new ideas. Look, for example, at what MindArk is doing with Entropia, where they hope to get 150 million users from around the world. Marco Behrmann, their CEO, says that

Entropia Universe utilizes a “real cash economy”, which means that the internal Entropia Universe economy is linked to the real world economy. This is achieved using a virtual currency called the Project Entropia Dollar (PED), which has a fixed exchange rate, guaranteed by MindArk, to the US Dollar, where 10 PED equals 1 USD. By enabling this kind of currency exchange, both to and from Entropia Universe, a participant has the opportunity to earn real money while in essence partaking in an online computer game.

Real currency is entered into Entropia Universe using mainly credit cards and pre-paid cards. The virtual PED currency may then be exchanged back into real world currency using either a direct bank transfer, or the Entropia Universe Cash Card, which essentially is an ATM card that can be loaded with PED from inside the Entropia Universe and used to instantaneously withdraw real funds according to the exchange rate mentioned above, from over 1 million ATM machines worldwide.

As for the numbers, he’s a little less forthcoming. Entropia has some 595,000 registered accountd. he says that “almost everyone” takes part in the economy as many activities have some cost associated. The number of people depositing compared to the non-depositors is a “business secret”. However, some 110,000,000 PEDs (ie, more than a million of that other virtual currency, the U.S. dollar) were deposited last year into Entropia Universe.

One particular area interests me greatly and that is that there are issues around identity and authentication in virtual worlds that have direct relevance to our customers future businesses. At a seminar I gave recently I talked about the difference between phishing for bank details and phishing for WoW accounts, pointing out the peverse nature of the situation whereby as a customer I’m not that bothered about phishing because if my bank account is hacked by Eastern European fraudsters then Barclays will give me the money back whereas if my WoW account is hacked by Eastern European fraudsters then Blizzard won’t give me my magic sword back. So therefore I might be prepared to pay for 2FA in WoW but not in WoB (World of Barclays). It’s actually in everyone’s interest to come up with a better solution that, I would argue, works for both. It’s an immediate win-win because of the size of the problem. John Smedley, the Sony Station Exchange CEO, talked about the overlap with payments. He said

They use a credit card –sometimes stolen, sometimes not – to buy an account key. They use the account for a month, and then they call the credit card company and charge it back. We have suffered nearly a million dollars just in fines over the past six months; it’s getting extremely expensive for us. What’s happening is that when they do this all the time, the credit card companies come back to us and say “You have a higher than normal chargeback rate, therefore we’ll charge you fines on top of that.”

This is true for World of Warcraft payments too. What this seems to indicate to me is that entrepreneurs might be better advised to find a workable 2FA solution for WoW and then take that same solution into banking where it can then be tied to payments. As an aside, if you have nothing better to do you might find it diverting to listen to Episode Five of The Banking 2.0 Podcast, brought to you by the nice people from Voices in Business, which features yours truly talking about virtual worlds and virtual banking.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. It is for this reason that I invented the five parties model (5PM) for issuers of value outside of regulated support. In the absence of regulation, an issuer of value must use self-governance, and the best form of that is open governance.
    It works. The suppliers that committed to it in the gold market mostly survived and are doing OK (goldmoney as a particular example). The ones that rejected it are dead. e-gold did 5PM halfways, but also rolled a lot of their open governance back, so they are an interesting challenge to the model. Does half the model mean a half life or a half death? Or is the model wrong?

  2. It is worth noting that this is normal in the banking world. In banks, they are so heavily regulated that there is no possibility of innovation. Solving a security problem requires innovation not best practices required by regulation.
    So unregulated markets such as games which issue monies will have to rise up to the job. As they are directly keen on preserving their revenues, and can innovate, they will try lots of things until one of them cracks the problem. Then they will go back to making money.
    Later on, the innovation will filter across to the banks. As it has proven itself in the open market, that should be enough to crack the barrier of “best practices.”

  3. It could be my words about FSA. I’m sure I said something like this on last DMF 🙂
    Anyway, I totally agree. Here in Russia we don’t have industry-specific regulation for emoney and it causes much more trivial and stupid problems than lack of trust. For exaple, we need to have all our transactions on paper (!) signed by merchant (!) You can imagine what said us Skype when we’ve asked them to sign and send to Russia 81 sheets of paper!
    When our UK colleagues showed us their daily email for FSA, we were ready to burst into tears…

  4. You did say that Jane and thank you for the memorable phrase. I have heard the same from people in Africa and Latin America recently, so clearly there is a balance between regulation and innovation that no-one has got quite right yet.

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