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Wednesday, March 17, 2010

Are Silicon Valley Investors and Businesses Taking Virtual Currency Seriously?

The Silicon Valley legal firm Orrick held a Virtual Currency Summit this week featuring representatives from a number of local companies servicing the virtual currency industry. Their presentations were followed by a lively question and answer period engaging the audience in a dialogue about the state of virtual currency transaction processing and monetization in the US. The summit was informative with the presenters providing information on the percentage of online gamers transacting (1-3%) with virtual currency, total volumes of online game players, the challenges associated with monetizing online games with ads, the future impact of Facebook credits, the emergence of mobile payments as a way of paying for online currency/goods and the tight margins for virtual currency businesses.

All of these subjects were interesting and revealed a significant commitment on the part of consumers, gamers, businesses and investors in the virtual currency value proposition.

The most interesting part of the summit was the subject matter not discussed. The noticeable absence of dialogue surrounding some of the more challenging and provocative aspects of the virtual currency business was no doubt intentional on the part of the speakers. However, if the industry does want to flourish it should take into account the entire picture.

Look To Asia For Direction - Virtual currency/goods transactions have been in play for years with Chinese and other Asian businesses and communities leading the way. Most of what is starting to happen in the US has already happened, matured and has become institutionalized in Asia. Essentially, we are in import mode from Asia. The US is actually in catch-up mode following the lead of China, Korea and Japan. Just glancing across the Pacific will give US game developers and virtual currency platform providers good information and direction regarding integration of virtual currency monetization into online games, legal challenges, consumer habits and the lead Asian business have in terms of market penetration throughout Asia.

US Payment Processors/Payment Gateways - Many online game companies are having trouble getting payment gateway providers and payment processors to handle their virtual currency transactions. I do not have specific reasons for this hesitation. Is it a charge back issue, an online gaming issue or age issue? Indirectly this could cause a defacto monopolization of the business by companies that have good payment processing arrangements. It is also a bit perplexing because the underlying systems that handle transactions do not appear to be anxious to sign-on to the optimism we are all generating about virtual currency transactions.

Age Verification - I was really surprised that the audience or the speakers did not raise the age issue in regard to virtual currency and goods purchases. In fact, there was one individual heading up an organization representing a pre-teen and teen audience acknowledging the fact that this segment of the population is using cell phones to buy virtual currency and virtual goods. He wanted to know what payment methods they will migrate too once they move into the adult category. Neither he or the speakers addressed the danger of pre-adult age individuals actively buying virtual currency and goods online without parental supervision. This is an area that should be given a bit more respect. Given the amount of money that can be exchanged in online games, as well as the game and advertising content involved. Online game operators might want to consider how they are going to police this space before external organizations start asking questions.

Is It Gambling? - I hate to bring this up and rain on the virtual currency parade. However, we have already heard rumors of Zynga being under investigation by state attorney generals and The justice department because of their use of virtual currency to monetize game play. The businesses building a monetization model around virtual currency and goods sales need to be careful. They should face this issue head-on and make sure they position their virtual currency transaction model in a way that is legal and consistent with state and federal law or get clearance from the authorities that virtual currency transactions are OK providing they adhere to a certain criteria.

We do not want to see a reenactment of October 2006 when the federal government passed the UIGEA. It essentially wiped out millions of dollars in investments and killed off a number of legitimate businesses. The same thing could happen with virtual currency based businesses. Eventually, these transactions need be recognized as legitimate transactions under SEC, state of federal law.

Virtual Currency/Good Trading - The practice of trading virtual currency and virtual goods is occurring. It happens on Ebay, in Zynga poker chat rooms and on Chinese auction sites. The Chinese government went to the extreme of drafting legislation that specifically prohibited the exchange of virtual items and currency for traditional currencies. In China virtual currency transaction volume rivals traditional currency transaction volume. How do we handle this in the US? The industry should draft its own policy on this before government bodies get involved.

Conclusion - The conference was great! It demonstrated that the virtual world is eclipsing the physical world creating great opportunity for businesses and investors. It highlighted the popularity and willingness of business to jump in to address the emerging US virtual currency/goods demand.

Enthusiasm and adoption is great. However, it comes with a responsibility. Showing tacky abusive ads in games is a minor annoyance compared to what could happen if virtual currency transactions are not recognized as "real" transactions. The US has the ability to legitimize virtual currency and become a transaction hub and exchange center for virtual currency. The US could make a mess of it if it does not deal with the obvious issues that have already been seen in Asia and are now growing in the US. The US is currently a follower and not a leader in this space. If it wants to take the lead and offer virtual currency on a worldwide basis the industry needs to grow-up quickly and show the way for the rest of the world.

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