Are virtual currencies becoming real?

Many people view virtual online currencies; the kind used in online websites such as Second Life for example, as being wholly different from their real life counterparts. Many online games have their own currencies with their own currency conversion rates but until now they have not been viewed in any real terms.

However that may change on a large scale if other countries follow the example of a ruling made by the South Korean government last January, which allows virtual currencies to be traded for real money. The previous year, the country also began taxing currency trading.

The practical ramifications of this could be that in-world transactions between players should be treated just as are the real world transactions we make every day.

Needless to say this has drawn lots of comments from gamers in particular all across the Internet. One fear is that  because such currencies are now viewed by South Korea as being on a par with real currencies, they will be taxable as such.

In the United States, virtual transactions aren’t being taxed — yet — because of questions about who actually owns the virtual property or currency, and whether the currency or property is limited in scope, said legal scholar Zachery Jones in an article for the Yale Law Journal.

However, as more people begin to find ways to convert virtual property into real world income it is becoming easier to establish an effective exchange rate and as such it seems like virtual currencies are becoming comparable to real ones.

Right now of course, this ruling only concerns South Korea. But there is every chance that other countries including Sweden and the U.S. will follow suit. It is not so much the announcement of this new ruling that is relevant, but how it will progress into the future that counts.

It is interesting to note in this instance that countries such as China are actually taking the opposite stance and attempting to suppress the commercial use of virtual currencies.

The general opinion among gamers seems to be that the ruling in South Korea is only going to open the floodgates for more countries to follow. Whether or not this happens – and how long it will take – depends on how other countries react to the ruling. Of course it will also take time to see how the fallout affects those who are living in South Korea and need to declare such earnings. This could be a story that will run and run.

One possibility is the currency trades will be taxed, but not in-game trades of virtual items, wrote Indiana University Law School professor Leandra Lederman in an article for the New York University Law Review.

“In virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out,” Lederman said.

Suffice to say, it will be interesting to see what happens and how governments decide is best to tax such an economy without killing off the very games which produce that economy.

Alex Johnson

Alex Johnson is a staff writer with CurrencyConverter, a free resource and information site dedicated to those who want to learn more about currencies and how foreign exchange markets work.

10 Responses

  1. I disagree with your assessment. Just because something is traded for real currency doesn't make it a currency. L$ can be legally traded for US$ in the US, and practically anywhere, and has been that way for years. And that ruling in South Korea doesn't imply that transactions can be monitored or taxed, either. Like the US, if I cash out virtual currency for real money, I will claim income at that time. What the ruling did establish is that any law in South Korea banning the sale of virtual goods for money is not legal.

  2. @iliveisl says:

    paying via a PayPal business account is my preference – it maintains my anonymity and has been possible in OpenSim for at least a year and delivers your item in-world instantly. my real two cents (of which i want as little to go to transaction or conversion fees)

  3. What I have noticed after reading the TOS statements of many virtual worlds is that many claim their virtual currency has no monetary value and, as such, can not be exchanged for real world money. What they say is they are selling a licence to use their tokens. I have noticed that new grids like Avination and others that allow gambling make a strong point to emphasize the no e-currency-value of their token money. I just wonder what legal minds will make of all this.

  4.' CiderJack says:

    I thought I would jump in here and give BitCoin a plug (wikipedia:… ). It has been getting a fair amount of press recently, most of it critical, but it seems to me that alot of that has stemmed from a misunderstanding of how it works.

    I don’t claim to fully understand how it works, but I’ve been following it for the past year or so and giving it alot of consideration. I confess I have my doubts about using it for RL transactions, but it strikes me as the ultimate virtual currency for MUVEs. It’s de-centralized nature would make it suitable for use across the metaverse (I hear a Beatles song in there), and it wouldn’t be subject to the whims of any corporate entity. Additionally there are already services that directly convert the BitCoins (BTC) to ‘real’ currency of any country, and vice-versa.

    I’ve mentioned before (on other blogs) that we are at a critical juncture in history in regards to the future of the online economy, and we have only one chance to get this right! Once we decide on a universal (metaversal?) virtual currency, it will be nigh-on impossible to change. I suspect that what OpenSim ends up using could very well influence what form virtual currency will take in the wider internet. As society and economics becomes more and more digitised, with ever-increasing transactions taking place online, this also potentially has implications on the direction the real-world economy will take.

    I would really like to see some serious investigation into BitCoin (or a similar system) for use in the metaverse before the universal virtual economy settles on what model to follow.

    • BitCoins might work for user-to-user transactions. From what I've seen of it, however, there could be problems for real-world businesses accepting them due to the lack of transparency and auditability.

      They seem to work much like cash does and accepting cash is always a problem for businesses. Even aside from the extra costs of handing it, if the cash transactions are too large, it sends up red flags. If there are too many cash transactions, it sends up red flags.

      Small-scale merchants can get away with claiming income only when they convert their virtual money into hard currency. But I don't think large companies will be able to — there's would be too much temptation to fiddle with earnings by keeping large amounts in virtual form in order not to have to pay taxes on the income. Corporations have to pay taxes on transactions even when no money is involved — barter transactions — and that would create an accounting nightmare.

      Companies like avoiding taxes, but they prefer to do it legally — after all, the executives making the decisions aren't making the payments out of their own pockets, and nobody likes going to jail.

      •' CiderJack says:

        Those are some good points, Maria. The overall issue I believe is much, much larger than just BTC vs. [insert local currency here].

        You mention problems regarding lack of transparancy and auditability, and that’s one of the issues with BTC that I haven’t been able to pin down. It is claimed that BTC transactions are completely anonymous while simultaneously having the ability to trace every transaction that each particular BitCoin has been used for. Sounds self-contradictory to me, but it would awesome if they have managed this. Isn’t that some sort of Holy Grail for both privacy and transparancy proponents? Which, if it has been proven to work, I’m surprised the technique hasn’t gained much wider attention/use.

        The rest of what you describe echos some of my own doubts about it’s use in larger commerce, and as you mention they sound like they’d work for user-to-user transactions. At this point in time, I would imagine that’s over 90% of transactions within virtual worlds (I’m sure you would know better than I whether that is true). So for users to go to a virtual mall and buy virtual clothing for their avatar or other virtual goods for in-world use, BTC sounds like an excellent solution.

        As far as virtual currencies and taxes, the same could be said for Linden dollars. This thing with S. Korea’s approach will be interesting to watch unfold.

        However, my larger point (which I left out of my previous comment) is not necessarily that BTC is the best solution (though IMHO it is well worth looking into), my point is actually that given this unique crossroads in history, we should not make the same mistakes we have in the past. We should not lightly dispose of this opportunity to explore more just and egalitarian economic systems.

        I think there are few who would disagree that current economic model is severly broken. We’ve long known the corruption that is the foundation on which Goldman Sachs et al. have built their empires. The current real-world economy is in a shambles because of the “economics of scarcity” model that has been used to create the largest wealth-gap in history. More people live in poverty than in any time in history. With a few wealthy corporations in control of governments (be they so-called ‘democratic’ or otherwise), the result has been the stripping of individual rights and freedoms, the stifling of creativity and the arts, the degredation of quality education, etc. The quality of life worldwide seems to have stagnated anywhere that it’s not actively declining. The reasons for this are many and I won’t even get to that. What is at the root of all of these social ills however, is the economic system we are living under.

        In short, we need a new economic paradigm! I think OpenSim (and other MUVEs) are at an exciting point in development and the decisions being made now can have a positive influence on the evolution of humanity. If we blow it now, we’ll never get a second chance.

  5. CiderJack —

    I agree that we're in the middle of a nasty swing in the wrong direction, and the US hasn't done enough to restore sanity to the financial markets. But, at the same time, the economic disparity you mention is, for the most part, paper disparity. In terms of actual lifestyle, the way I live (as a middle-class American) is much closer to the way Bill Gates lives than has ever been true in history. We get the same entertainment. We eat the same food. We get the same medical care. (Yes, he can pay for some experimental treatments that I can't — but then again, they haven't been proven to work yet.) And he still works a full-time job – as do many other rich people.

    A hundred years ago, the gap between the rich and everyone else would have been astronomical. The rich would have access to education, health care, and entertainment out of reach to anyone else. A hundred years before that, and the rest of us pretty much lived in serfdom or eked out a subsistence living somewhere, always on the brink of famine or epidemic.

    So, overall, I'd say our economic system, especially in the last 50-100 years, has been responsible for bringing more people out of subsidence living than any other system (most recently, look at China). And it has reduced the birth rate in every country that's adopted it, allowed us to have money to spend on cleaning up the environment, and have universal education and (most places) universal healthcare.

    That fact that the US briefly swung to the far right isn't necessarily an indictment of the system as a whole, and economic crashes happen with any system — with ours, they're less severe, and last a shorter time.

    I'm not sure that an untraceable, uncontrollable peer-to-peer financial system will help alleviate the problems we have with the current one — insufficient oversight of financial institutions, widespread, legal tax evasion by corporations playing governments against one another, and too much military spending in which we are, in effect, funding both sides of the arms race against our (potential) enemies.

    — Maria

  6.' CiderJack says:

    You claim you live close to the way the second richest person in the world lives, and

    you call yourself middle class. Awesome!

    I live closer to the way the nine-hundred thousandth richest person lives, and I

    consider myself lucky, in addition to being ‘middle class’ whatever that means.

    Are you an Ayn Rand fan by any chance?

  7. CiderJack —

    I said that I'm in favor of more regulation, and higher taxes for corporations (and for the wealthy, while I'm at it). I am also unhappy about the economic inequities we're seeing today.

    What I'm saying is that from a practical perspective, the inequties are smaller than they've been in other historical periods — I mean, until about 150 years ago we had the institution slavery in most places in the world. Not good times for most people.

    About 15 years ago, I reported from Afghanistan and a few of the ex-Soviet republics that saw their economies collapse. Those are pure Ayn Randian states — no government, every man for himself. You get diseases sweeping through, famine, no education for anyone, life expectancy drops radically. We are shocked by this kind of thing today, but that's how most of the world lived all the time.

    Our economic system isn't perfect. But it can deliver cell phones and anti-malaria medications to anywhere on the planet (anywhere that's stable enough, that is). We can win a war (Japan, Germany, Russia) and then step back instead of occupying the country and enslaving its inhabitants because in today's economic system countries are more valuable to us if they are stable, successful, and productive. A wealthy Germany, Japan, Russia, or China makes all of us better off — they buy our stuff, they don't want to go to war with us.

    Our modern economy is a miracle. It's a miracle it's able to function as well as it does given how horrible everyday life has been for all the preceding millenia.

    It's not perfect. It has a lot of loopholes that need to be plugged. But the other alternatives that are out there — communism, fascism, dictatorships, command economies — are totally lousy. And the lack of an organized economy is the worst alternative at all.

    If you look at our current economy and only see its flaws (which, right now, is very easy to do) then its tempting to think that any change will be for the better. But there are lots of potential changes out there that are much, much worse.

    I don't think BitCoins are necessarily in that category. Chances are, nothing much will come of them, or they'll become another niche alternative currency used mostly for porn and gambling.

    But the idea of having an alternative unregulated, untaxable, unmonitored financial system isn't necessarily good for our economy.

  8.' CiderJack says:

    First off, Maria, I owe you an apology for my snarky remark. It was late, I was tired, and well I know that’s no excuse either. I’m very sorry for that comment.

    Back on topic, I totally agree with you regarding corporations needing more regulation & taxation. Most of the rest I wholeheartedly disagree with, but then I suppose we will just have to agree to disagree! I want to avoid politics for now, because this thread has already wandered way off track from the original point I was trying to make.

    One thing I love about about the OpenSim community is that we are a group of pioneers, we are willing to tinker and experiment. We enjoy entertaining new ideas and have a strong willingness, even a desire, to look for solutions outside the box. We are quite literally creating a whole new world!

    So, the basic point I am presenting is that before the metaverse blindly appropriates and clones an inherently flawed centralised economic model, I would like to see OpenSim and the wider metaverse think a bit about alternatives. As I have stated previously, we are at a juncture in history that provides us with opportunities that we have never had before and will never see again. It would be a tragedy to see this opportunity escape us unexamined.

    BitCoin may or may not be the best (or even any) solution, but it does represent a step in the right direction. Even if nothing comes of it, at the very least I hope it will have planted a seed for reevaluating our unquestioning acceptance of the status quo. I continue to believe that a better, more humane economic system than the current paradigm is possible!