Saturday, October 3, 2009

Zynga Under Investigation By Department Of Justice

Recently, I was discussing the online gambling business with a former online gaming colleague of mine and he brought to my attention that Zynga was under investigation by federal and state authorities suspecting that Zynga's Facebook poker room was engaged in online gambling. I thought this was a bit serendipitous considering the fact that I had recently published a blog, Virtual Currency And Gambling, about the danger of virtual goods purchases and sale being considered gambling. I specifically mentioned Zynga being at risk during a series of exchanges I had with individuals responding to my blog.

The Tech Crunch summary is exactly as I described the risk in my blog. The circular nature of virtual goods purchases, a game of chance and winning virtual goods could be considered gambling.

I have been writing a number of blogs about the online game virtual currency trade and how the Chinese governments gets the connection between this trade and gambling. Virtual currency trade is big business in China and it is obviously now becoming big business in the US.

What has surprised me is the lack of understanding of the relationship of virtual currency to gambling outside of China. A number of my blog viewers adamantly disagreed with me arguing that virtual goods purchases were not subject to gambling law. Clearly this is not the case.

To further complicate matters Zynga has been engaged in selling leads to European online gambling operators. This started well before Zynga began dabbling in virtual currency purchases. Much of their revenue growth prior to virtual currency purchases had been attributed to this exchange. This practice has been discouraged by the DOJ and state attorneys for years. Zynga may not be in violation of any US law if the leads sold to gambling operators do not result in US citizens gambling from the US. However, Zynga's affiliation with online gambling operators does not bode well for them. The authorities may come down hard on the company to set an example for other online game companies.

10 comments:

Dave888 said...

In 2008 we investigated the use of loyalty points for gambling, and opinion was that this is not illegal. However, the plethora of virtual currencies and the fact that these can now be purchased with real currency may have changed the legal position.

Governments outside the US may well try and regulate these activities to raise revenue, while in the USA, with the ban on online gambling, it may be illegal.

damijin said...

It's not gambling if you can't "cash out". Plain and simple.

Online currencies are currencies in name only. They are not actual currency and not subject to laws like this.

Imagine a game that lets you buy tree seeds with USD. You could plant a tree and there is a 50% chance it will drop more seeds and a 50% chance that it won't. That would not be looked at as gambling.

However, that is the exact same mathematical process as buying a virtual "dollar" and putting it into a slot machine with a 50% payout rate for more virtual "dollars". The difference is only in the perception of the virtual items. The code and database entries, the physical values, are not currency.

The point is, virtual currency is NOT currency, and as long as the game operator is not allowing the users to cash out their currency, there should be no problems. If you want to let your players cash out, then follow the protocol Linden Labs has set forth to try and be as observant of the law as possible.

A bad decision here could screw up the industry for a lot of us. Suddenly trees that can make new trees (based on chance) could be illegal because it's gambling? Hrm :-\

Justin said...

danjin, I don't believe your logic is in any way correct. Take a look at Zygna's poker game on the iPhone. While there is a free version, you can also pay $2,$5,$10... all the way up to $100 for virtual online currency just for iPhone poker... While you are correct in saying that there is no way to cash out on those chips, it still is gambling. And in this case the worst sort as addictive gamblers would still buy chips even knowing they won't get anything out of them.

The whole fact they're putting a price on something they know has no real world connection is atrocious. It also allows the company to operate in a real gray area.

Zynga is a cancer. REAL gambling websites with real money have far more integrity then they ever could.

Anonymous said...

"The whole fact they're putting a price on something they know has no real world connection is atrocious"

Complete bullshit. Who gets to decide what has "real world connection"? You?

I don't think that movie released in theaters that millions are rushing to has "real world connection". Should it be deemed illegal?

There is such a thing as entertainment. Some people like it. Others don't. Regulating Zynga would be regulating entertainment. You might as well ban that whole industry because it's just a big money suck with--as you state--little "real world connection".

Andy said...

"It's not gambling if you can't "cash out". Plain and simple."

That is incorrect. The definition of gambling, as per the UIGEA is roughly: 'when a person stakes (deposits) monetray instruments, other than their own time and money, on a game of chance, our outcome of sports game, for a possible chance to win'

It's not that they can win cash - but that they can deposit. If winning cash would be illegal, then Publishers Clearinghouse would be illegal. Winning without deposit is sweepstakes and hence legal. Deposits, even with nominal winnings - illegal gambling.

I ran across this blog just today, even though I did talk to Kevin Flood about social gaming even before it was known back in 2005.

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