Online Gambling's Intersection With Crypto Currency, Virtual Currency, Bitcoin, Etc.

Virtual currency/crypto currency and its various manifestations(bitcoin, ripple, litecoin, etc.) have become all the rage in the virtual  transaction world.  Individuals and businesses  are buying and selling items using virtual currency as opposed to "traditional" currencies which are backed by governments and their treasury's. The theory behind this hands off nature concerning crypto currency is that the market itself will self regulate resulting in a  democratic establishment of "value".

  Recently, I was exposed to an online gambling property that converted its investor  equity into a virtual currency. In the beginning all was well until the currency they were using "deflated" causing the investor to loss significant value as a result of the conversion of equity into crypto currency. 

This event was a real wakeup call for the investors as this was an unexpected event. Essentially, virtual currency is not created or backed by any particular government organization. Thus, the inability to intercede  if a virtual currency is hyper inflating or hyper deflating.

Organizations that are caught in this type of free fall in value or perhaps a significant boost in value have to engage in financial  engineering of their own. Should they buy more virtual currency and distribute the currency to the investors? Should they sell some shares of their own and distribute to investors, etc. Should they "cash out" entirely even if they could loss a significant amount of money?

Another issue for online gambling is the acceptance of virtual currency for gambling transactions. This has become a growing trend  with several online gambling sites using crypto currency to engage in gambling. If you with to convert your crypto currency into "traditional currency" you  must withdraw your crypto currency from the online gambling site, deposit them in a virtual vault of some kind and them find an  exchange that will take the crypto currency and exchange it for a traditional currency.

The transition from the traditional form of gambling using government backed currency to "virtual" currency is growing rapidly.  This is a natural transition given the movement away from brick and mortar commerce to online commerce.

Gamers that are new  to online gambling using crypto currencies should do their homework before they go "all in" with virtual/crypto currency transactions. Make sure you know how to "deposit" and how to "withdraw".  Also track the inflation and deflation of these currencies for the purpose of avoiding a loss of value or to take advantage of an increase in value as the crypto currency changes in value.

Kevin Flood is the CEO of Gameinlane, Inc.    Kevin has worked for and with US land based casino operators helping them evaluate social casino and iGaming platforms for the purpose of joint ventures and acquisitions in addition to launching online gambling operations in Europe. Gameinlane is also startup "friendly" understanding the unique value new gaming companies bring to the marketplace. Kevin frequently speaks at gaming conferences around the world providing him with a unique perspective on this very interesting business sector. Kevin can be reached at kflood@gameinlane.com  and or twitter  at @kflow1776.

  

What Facebook's S-1 Filing Reveals About Social Gaming

Many analysts have dissected Facebook's Security and Exchange Commissions S-1 filing. For the most part the goal of this evaluation has been to determine the risk/reward ratio of investing in the Facebook IPO. My interest in looking into the S-1 was to focus on the role of social games in Facebook's business model and how that impacts their future projections. The following are key portions of the S-1  relevant to that subject and my own opinion on how to interpret Facebook's social game commentary.

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. We currently require Payments integration in games on Facebook, and we may seek to extend the use of Payments to other types of apps in the future."

 Facebook's introduction of  its own virtual currency payment system was clearly the result of research conducted on the virtual gaming/currency bonanza  initially developed in China, Korea and Japan. The projections for a 15 billion dollar industry in 2014 is astounding and speaks to the shift away from the importance of physical goods and "traditional (Dollars, Euros, Yuan") currency. Clearly Facebook wants to establish itself as the issuer and manager of a universal currency to attract and retain social gamers and virtual currency transactions around the world. It also wants to draw social gamers and publishers in Asia that have already accepted virtual currency as a viable transaction model. Should Facebook use its IPO money to buy Tencent in China?

" The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue."

Why is advertising revenue dropping as a percentage of total revenue? It is dropping because social games are beginning to generate more and more revenue based on virtual currency and virtual goods transactions.  Essentially, game related revenue is growing faster than advertising revenue. 

"Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from Payments"

Social games are the only application(s) currently generating revenue from virtual currency and virtual goods transactions. This is likely to change as "gamification" begins to take hold and other types of Facebook applications begin to integrate virtual goods and currency into their models. The concept of loyalty points traditionally issued by airlines, credit card companies, etc would be a great target market for Facebook. Facebook also needs to leverage its virtual currency outside of the US and especially in Asia if it expects to support aggressive growth projections.

"If Facebook-integrated websites draw users away from our website, it may reduce or slow the growth of our user activity that generates advertising opportunities, which could negatively affect our advertising revenue.

Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites, these benefits may not offset the possible loss of advertising revenue, in which case our business could be harmed."

 So what is Facebook talking about here? Recently web sites and game sites have decided they do not want to go through the effort of building Facebook specific applications. Instead, they are redirecting people from Facebook to their web applications by embedding a redirect in Facebook. Facebook realizes this and worries that this will result in Facebook users realizing that there is a world outside of Facebook. Facebook wants to keep you in Facebook. They have already taken steps to shut down the ability to move Facebook users out of Facebook via the fake Facebook application strategy. 

"We currently generate significant revenue as a result of our relationship with Zynga, and, if we are unable to successfully maintain this relationship, our financial results could be harmed." In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected. "

Clearly Zynga's influence on Facebook is enormous. It also indicates that social gaming has an impact on advertising revenue as well. Not sure if the 12% takes  into account the advertising revenue that Zynga generates and how much of the total revenue Zynga contributes to Facebook. We will have to dig into Zynga's own S-1 to sort that out. Also, Facebook does not mention the total revenue influence of all social games in Facebook from a virtual currency and advertising perspective. I suspect Wall Street was not wise enough to ask this question. If you are going to invest in Facebook you should find out the answer to this questions. There are several large game publishers in Facebook and I suspect the aggregate has a big influence on Facebook's bottom line. 

So what is the total revenue contribution of social games to Facebook's bottomline? I suspect far greater then the 12%  that they are reporting from Zynga. If you add up the other social game publishers and the advertising revenue they generate for Facebook the story is very different than the one pitched in the S-1.

"Our users can use the Facebook Platform to purchase virtual and digital goods from our Platform developers using our Payments infrastructure. Depending on how our Payments product evolves, we may be subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require us to demonstrate compliance with many domestic laws in these areas. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results."

There are a number of things we can derive from this statement. Clearly government  regulators are beginning to look more deeply into Facebook's virtual currency payment platform and social game transactions that allow or require players to "buy" virtual currency with traditional currency. There are all kinds of issues that could arise from drawing so much attention and revenue from these transactions. First and foremost is the age of people transacting with virtual currency and especially in games like poker and other gambling style games.  If people under the age of 18 are buying currency to enter gambling games and losing is this legal? If it is should the authorize do something about it? Even if they are not gambling games should these people be allowed to buy unlimited amounts of virtual currency and goods?

With the opening up of US legalized gambling and the history of  legal Internet gambling in Europe Facebook is rumored  to be interested in allowing gambling games in its environment to serve these markets. How will Facebook make money on this and how will they safely implement gambling within Facebook?   Regulators will be watching.

"Twelve percent of our total revenue in 2011, and less than 10% in 2010 and 2009, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015."

Zynga begrudgingly entered into this agreement with Facebook. They even threatened to pull out of Facebook all together.  Zynga did  cut a deal with Google to put games into Google+ to offset their dependence on Facebook. 2015 is certainly  light years away in social networking time. However, if the Zynga/Google partnership can make a dent in Facebook's social gaming dominance Zynga will have more negotiating power to reduce the 30% haircut.

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the social game FarmVille. According to an industry source, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future. Our future revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiences that engage users and create user demand for their products, and the fee arrangements we are able to negotiate in the future." 

Facebook is clearly thinking about how it can encourage "force" all e-commerce transactions though its payment system. Not a bad idea really if they can pull it off. Facebook's current dependence on social games to generate all of its virtual currency revenue is certainly dangerous, especially if Zynga threatens to withdraw from Facebook unless the fees are reduced. The more Facebook dominates the E-commerce world requiring all business to have a presence in Facebook the more likely this will occur. 

In conclusion the Facebook S-1 does not reveal much more than most followers of Facebook already know. The dependence on social games for Facebook's long term growth is obvious. Add the advertising revenue generated in social games with their virtual currency and goods sales will expose a much higher dependence on games then the S-1 has revealed. From an investor perspective impeding legislation to regulate virtual currency transactions may have a significant impact on Facebook's revenue if many of the social gamers are under the age of 18. The introduction of gambling in Facebook could be paradoxical adding an additional revenue stream and at the same time resulting in regulation of existing virtual currency transactions. Although Zynga has made a fortune off of Facebook they have also become a prisoner of this relationship. They have to be thinking about how they can diversify outside of Facebook to reduce their own risk and to increase revenue outside of Facebook.  This means that Facebook should, and is going to decrease, its revenue dependence on Zynga by expanding virtual currency beyond games and to attempt to gain market share with Asian game publishers.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

UK Courts Challenge the Premise That Winning Virtual Currency In Social Games Is Not Gambling

 Facebook and casual online game properties that offer casino style games of chance have used the no cash out for "real" money argument to protect these properties from adhering to traditional gambling laws.

A recent case argued in UK courts  involving stolen virtual currency used in Zynga poker and then sold to a third party for real cash forced the judge in the case  to further explore the notion that virtual currency has no "real" value if it is not exchanged for traditional currency. The court concluded, that the  action taken by the seller and buyer in the case, combined with the common practice of using virtual currency to buy virtual good's in many online gaming sites, does imply that the participants in these games do ascribe a real "value" to virtual currency and goods even if there is no "cash-out".

Marcus Charif, from the London law firm Harris and Hagan, has dissected this ruling in a recent publication entitled "Show Me The Money; Social Games, Virtual Currency and Gambling".  Although it is  obvious to people that play gambling style games in Facebook or on casual games sites using purchased virtual currency  there is a real gambling element involved in game play, businesses have dodged the "gambling" label sighting the no traditional currency cash out rule.

I can not say that I blame the businesses for this practice. If that is what the law states then  let the games begin. However, with mounting evidence that virtual currency transactions within games are beginning to eclipse traditional online gambling revenues you have to believe that the establishment of "value" in the virtual world is there even without a cash out to dollars of euros.

This salient yet obvious point was driven home at the GDC conference this year when one of the speakers at the conference indicated that high rollers were contributing $50,000 to $100,000 a year to virtual currency fueled social games. Certainly not all of these whales were buying this currency in casino style games. However, the behavior does make it clear that virtual currency and virtual currency have "value".

It is difficult to say how bold and brave the courts will be in taking on the virtual world value issue. Ironically, the online gambling business community may be the ones that call the courts bluff based on the industries loss of players and revenue to the virtual world. If I was running a legal online gambling operation in Europe and dealing with all of the tax issues, government harassment and anti-competitive restrictions associated with online gambling I would call into question what is happening in the virtual world. Certainly if online gambling becomes legal in the US the big guys are going to resent what is happening in Facebook and want it stopped.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Monetizing Social Games Conference Summary (London January 2011)

The conference  revealed some interesting surprises even for the more educated social gaming attendees. The conference attendees and speakers represented a good cross section of casual games, online gambling, social gaming, social media and advertising, legal and payment processing representatives. US and European entrepreneurs, business owners, legal experts and investors provided a good mix of opinions providing a global feel to the conference.  The following are some of the more provocative revelations that were uncovered during the conference.

Traditional Online Gambling Companies Are Investing In Social Gaming Companies - 888 and Bwin have decided that social gaming is the place to invest in  for the future. Both Mytopia and United Games have received funding from the big online gambling companies. The interesting thing about this investment is it is not designed to feed gambling leads to the major gambling brands. Instead these social and casual game publishers/developers are looked upon as a separate business unit with the objective of penetrating the social gaming market and growing that part of the online gaming market.

This says something about the emergence of social games as a legitimate "revenue" generating segment of the online gaming market. Not too long ago conventional wisdom considered social gaming as a small and insignificant revenue generator. Most attention was placed on spending big marketing and acquisition numbers on acquiring "real" gamblers. This has obviously changed with the realization that social gaming is a legitimate contender for the wallets of online gamers.

Do Virtual Currency/Goods Transactions Categorize Social Games As "Gambling" ? The speakers and panelists were pressed very hard on this question and would not concede that virtual currency/goods transactions with gambling style social games constituted "real" gambling. The legal experts indicated that virtual transactions were not even on the radar of European regulators. This indicates that it will be clear sailing for social gaming companies using this form of revenue generation to monetize their games.

Virtual Currency Inflation - There was some acknowledgment that the flooding of the  games economy with Facebook credits could be a future problem. However, most social games companies using Facebook credits were more concerned about the 30% of revenue that have to give up to Facebook to use their credits.

Facebook Threat As Payment Processor For All Facebook Transactions - The audience acknowledged that Facebook was moving into PayPal territory by becoming a payment processor for all forms of monetization within Facebook. The representative payment processors also conceded this with the caveat that the current processors would be processing all virtual currencies and not just Facebook credits giving them a competitive edge with publishers and merchants.

Getting Recognized In Facebook Is Getting Harder And Harder - With the Facebook pull back on notification based  virality it is harder to achieve massive player acquisition without resorting to Facebook advertising as a primary source of lead generation.  The days of  exclusively depending on virality are over. It is time to pay up and get the word out through conventional Facebook advertising.

More sophisticated development of Fan pages, cultivation of groups, co-marketing relationships with other Facebook application aggregaters all need to be used in tandem to achieve critical mass for a game promotion and continual player growth.

Does The Little Guy Have A Chance Anymore? - Yes and no. The budgets for game promotion are going stratospheric with big box companies like Zynga spending tens of million on game promotion and game development. Game development and advertising is now taking the same track as Hollywood movie development and promotion leaving the smaller developer and publisher in the shadows.

With this said the little guy can have a successful social/casual game business within social media platforms. A game does not have to be in the top tier to make money or to be popular. In many was this niche market  approach may be the best place to be. Under the radar and making money does not attract competitors and allows a company to sustain a realistic business model.

Portfolio's Of Games Helps To Increase Revenue Per Player - If you have a game that is reasonably successful monetize the players of that game over a wider array of games. Essentially, more game content matters. Having a bunch of games helps raise revenue per player and player retention.

Opportunistic Game Demographic Targeting - Currently the demographic of a frequent casual or social gaming player is female between 32 and 40 years of age.  They are spending the most money. Yes make sure you make games for them. However, this also leaves a big hole in the market. Facebook and big box game publishers ares clearly starting to lose the per-teen. teenage and early 20's segment of the marketplace because the majority of the game content is not geared to them. This may be the biggest opportunity for new game companies or new games.

Big Brands Want In - It is no secret that big consumer brands want in on the social and casual game party. They do not have the game development chops or advertising know how of seasoned game developers and publishers. Look to the big brands as a major source of revenue. This is tricky because you do have to build and promote a popular game no matter the brand. However, if this can be sorted there will certainly be good money in it.

Mobile Casual/Social Games - Mobile games have been a big disappointment primarily because it is difficult if not impossible to get the viral effect going. With this said everyone believes that there is gold to be found in mobile gaming if cost effective virality can be achieved. There were two companies presenting that had abandoned model game development all together and moved to conventional social game platforms because of their frustration with poor revenue generation from mobile gaming. However, they both indicated that they woulds dive back in if virality could be achieved in the mobile gaming environment.

Conclusion - Now that everyone realizes that games are the key to monetizing social network participants the competition amongst game publishers and developers is intensifying. Companies that considered social gaming as a fun yet insignificant segment of the online game space have now decided things have changed and they want part of the action. This means that the competition for social gamers is going to intensify. It also means that success breeds success. If a title goes viral and generates big numbers then revenue will be plowed into yet other big budget titles. There is room for new games developed and promoted with low budgets to succeed in generating enough players and revenue to support a sustainable business model. This may be the best place to fish for success in the casual/social gaming space.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Virtual Currency Exchanges Moving Virtual Currency Closer To Wall Street

 I have been writing about virtual currency  for some time and have witnessed its emergence from an obscure form of monetization and reward system in role playing games(RPG), virtual worlds(VW), airline and hotel bookings to a world class currency system challenging the valuation of the Yuan and the creation of the Facebook credit  universal virtual currency. I have also suggest that regulated and sophisticated virtual currency trading is inevitable given the proliferation of virtual currency in gamified business applications and the popularity of online games using  virtual goods and currency as a proxy for conventional e-commerce transactions.  It is estimated that virtual goods/virtual currency revenue will reach 2.5 billion USD by 2013. This is a difficult number to ignore considering the worldwide slow down in traditional commerce. Virtual currency is international and becoming common appearing in retail stores in the form of virtual currency cards and as a bonus and award system for shopping. This is causing currency trading business(real and virtual) to take a much closer look at the viability of legitimate virtual currency exchanges.

We are now seeing Wall Street style monetary exchange trading systems specifically designed to handle virtual currency exchange. Startup companies, traditional currency traders and online game related businesses are stepping up their efforts to seriously integrate virtual currency trading into their business models. The ultimate goal is to establish valuation for virtual currency based on transaction activity and to allow for the free flow of goods and services between virtual currencies and eventually traditional virtual currencies such as the Dollar and Euro. Yes , these currencies are virtual as well because they are not backed by any physical assets and derive their valuation based on the amount of currency in play and their value relative to other economies and currencies. 

The following are a few companies that have either contemplated launching virtual currency trades or are already up and running.

Hi5 - Hi5 is a social network that has moved from a generalized social network to a focused online gaming social network. Hi5 is encouraging online game operators and providers to offer their games within the Hi5 environment. Hi5 helps these game companies by promoting and advertising the game providers content to the HI5 community  providing a virtual currency exchange system between Hi5 virtual currency and the game providers virtual currency. The currency valuations are calculated everyday based on the volume and amount of virtual currency in the Hi5 system. The level of sophistication of Hi5's valuation system mimics the way currency traders and governments value traditional currencies. Hi5 has an interesting model  allowing a business or game property to maintain their currency(and branding) and co-exist in the Hi5 environment. This trading system could easily exist outside of HI5 on its own platform.

FirstMeta - First Meta is a relative new comer to the virtual currency trading world. It is unique because it is a distinct trading platform divorced from the business of generating virtual goods or virtual currency. This business model comes closest to a traditional independent currency trading company.  It is also interesting because the co-founders are not gamers they are bankers, investors and Wall Street type traders.This is significant because the company's model does encourage the exchange trade business to take a closer look at how virtual currency can and will be traded on open exchanges.

MyYearbook.com - My Year Book is the grand daddy of virtual currency exchange. They started this exchange to move players and consumers form one property to another increasing the player pool for gaming companies and to increase their membership. This is similar to the airline game with the exception that My Year Book has been more aggressive  offering virtual currency exchange between online game properties and their business.Companies such as IMVU and Wee World are just a few of the companies that are in the MyYearBook system. Although the virtual currency exchange system is not currently a separate business it will not take much of an effort to move it out of My Year Book and into an open public exchange.

PlaySpan - In the true sense PlaySpan is not a virtual currency exchange platform. However, it is not far from it. . Playspan let's individuals buy and sell virtual currency for a number of different game sites. The relationships that PlaySpan has established with various virtual game and currency providers has positioned PlaySpan to launch a fairly robust virtual currency exchange with a wide array of virtual currencies.

Forex - I have to mention Forex, the traditional monetary exchange big boy on the block for traditional  currency exchange. They have been considering virtual currency exchange for at least two years. Unfortunately, I can not reveal my sources. There has been reluctance to move forward because of the quasi legal opinion on virtual currency trading and the lack of real volume. With the emergence of Facebook credits as a virtual currency and billions of USD virtual currency transactions we have to believe that Forex is going to give this another look. Obviously. they are very well positioned.

The mentioned green shoots of activity in virtual currency trading are only a few of the total number of startups and conventional companies either considering or already in this space. Virtual Currency Exchanges(VCE's) are like so many previous online trends they start slow  almost unnoticed by the general public and all of a sudden they become big really fast. Virtual currency trading will be no different. The early movers that stake a claim to the space will be winners and future common brand names in the financial services industry.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about gamification, online games and the impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Are Facebook Credits Becoming A Universal Virtual Currency?

The announcement that PayPal and Facebook have a deal to allow people to buy Facebook credits with cash in their PayPal accounts, combined with the push to make Facebook credits the currency of choice in Facebook, begs the question if we are witnessing the maturity of virtual currency putting it on par with pounds, euros and dollars.

In April 09 I wrote a blog about the emergence of a universal currency after witnessing the public offerings of two Chinese companies; Changyou(CYOU) and Shanda(SNDA). Both of these company's profits were based on the sale of virtual goods and the issuing of virtual currency and exchange of virtual currency. At the time most people found the blog interesting but could not grasp the concept of a game based currency as a base currency for general commerce. Is it time to reconsider now that Facebook has decided that virtual goods purchase and sales should be done with Facebook credits?

It is certainly an interesting question. Game and e-commerce vendors of all kinds are feeling pressure from Facebook to use their currency as opposed to a company's own currency to buy and exchange virtual items. With the PayPal deal when will people begin buying physical items with Facebook credits?

Granted there are some procedural aspects of Facebook credit issuance and exchange that will have to change to make this happen.

Facebook Credit Inflation - What is the real value of a "credit". With no control over the amount of credits being issued the currency could become heavily devalued or at least unpredictable and unstable. This would have to be fixed by controlling the issuing of it and listing exchange valuations with other like currencies. Hi5 is doing a good job in this regard with their newly emerging social game platform business plan.

Exchange with Other Currencies - Facebook's Paypal and credit card deals effectively establish an exchange rate between traditional currency and Facebook credits. The inflation issue is still problematic. However, consumer demand or dissatisfaction will force Facebook to take their currency more seriously by posting exchange rates.

So what happens to everyone else issuing virtual currency? If Facebook continues on its current path it will force every company to use its currency in the Facebook environment. This is a little strange because Facebook is charging other vendors to pay a premium for the use of their currency. I suspect there will eventually be a legal challenge to this practice.

Legal Issues - I wrote a blog about the US Justice Department and State Attorney Generals investigating Zynga for the trade in Zynga virtual currency for traditional currency. If Zynga and other social game companies are using Facebook credits is Facebook subject to the same scrutiny? The Zynga legal challenge trail has gone cold since it was first rumored. Will Facebook credits revive the investigation?

The emergence of virtual currency that act like dollars and pounds seems inevitable. Facebook just might be the company that takes the lead and exploits the phenomena for its own purpose.

Significance Of Harrahs WSOP Social Gaming Deal With Playdom Poker Room

At the 2010 GiGSE iGaming conference in Montreal I talked about the need for land based casinos to move quickly and aggressively into the online space if they had any aspirations of being real players in cyberspace. The recent deal that Harrahs cut with Playdom(now Disney) signifies an important step in that direction. The deal is significant because it leverages the WSOP brand, which arguable could be the most profitable online gaming brand of all times, generating more direct and indirect revenue then any other online gaming brand to date. The problem has been that WSOP has not been a big money maker for Harrahs. Instead it has been a big money maker for iGaming brands running online tournaments to get online players to qualify for the land based tournament.

It looks like Harrahs has decided that things are about to change. They have made an interesting end run around the big traditional online poker brands such as Party Poker and Poker Stars by entering the legal online gaming business in the US. Playdom has 42 million players playing on their property. That has to get the attention of the other big online poker sites that want to get into the US market when online poker becomes legal again. Essentially, The Playdom deal expands the WSOP brand from its current online gambling audience to a broader social gaming audience.

The other interesting part of the deal is the way Harrahs will be monetizing game play. They appear to be covering all the basis with sweepstakes(alternative method of entry) payments to enter tournaments, virtual currency purchases and virtual goods sales. Do not forget that Harrahs has been in virtual currency business for some time issuing virtual currency in their Total Reward program. This could lead to an interesting tie in with virtual currency and virtual goods exchanges between Playdom and Harrahs land based casino players.

Party Poker bought WPT last year buying into the legal sweepstakes model in the US. However, I doubt if WPT has 42 million active players.

In another of my recent blogs I researched the growth of the virtual goods market. It is growing a lot faster then the traditional online gambling method of monetization. Yes, the traditional online gambling sites are currently making more then the social gaming sites. However, the virtualization trend is working against them. More and more people are flocking to the easy to play social gaming sites buying, trading and selling virtual items and currency. From the land based casino perspective more people are choosing the virtual world over the traditional physical gaming experiences.

The Harrahs' move should get the land based casinos and online gambling sites thinking about how they should react and position themselves. First online game movers have proven to be hard to catch once they gain momentum. Zynga and Party Poker are recent examples of companies that quickly dominated their respective online game categories. The other land based casinos are no doubt the most vulnerable. Most of them have no online experience, brand, market share or expertise. They are going to have to engage in a partnership like the Harrahs Playdom deal or conduct an outright purchase of a high trafficked and well branded online property if they expect to compete in cyberspace.

Should Online Gambling Sites Sell Virtual Goods?

I have been working with social gaming, online gaming and virtual currency properties for some time. I have also been preaching the concept of convergence of these models in an Online Gaming Ecosystem that leverages the best aspects of these models for the purpose of increasing revenue per player, volume of players and player retention. This concept is now taking hold evidenced by traditional online gambling sites creating Facebook fan pages and teaming with social gaming properties to develop brand awareness and to move players back and forth between social game sites and online gambling sites.

A coincident trend and critical part of the convergence is the increasing importance of virtual goods sales to monetize online games. Social gaming and virtual world sites have been using the sale of virtual goods to generate revenue from inception. It is estimated that 2.2 billion US dollars was generated from virtual goods in 2009. This is up from 1.3 billion in 2008 representing an increase of 90% in one year. That is phenomenal growth and a trend that is likely to continue for sometime.

Should online gambling sites start thinking about adding this form of monetization into their properties? If so what are the advantages to adding this form of monetization and what are the risks.

The online gambling business certainly generated much more gross gaming yield with a 4.7 billion dollars generation in 09. However, the growth rate predictions are 19% a year coming in much lower then virtual goods projections. If the virtual currency transaction rate continues it will overtake the total amount of revenue generated by traditional gambling revenue sources.

Virtual goods transactions are actually more profitable because there is no physical payout with the money used to purchase the goods. This results in the company that facilitated the transaction retaining more profit. Currently there is no sanctioned way to trade virtual goods back into cash on legitimate sites. There is certainly trading going on in external auction sites or through private exchanges. However, it is difficult to determine the true value of these transactions and their impact on the issuer of virtual goods.

We are experiencing a worldwide cultural shift from physical to virtual goods purchases. This was started by the virtual work community and has now become a common part of online identity and gaming.

A traditional online gambling site may be concerned that virtual goods transactions will "cannibalize" their traditional revenue sources. I find this unlikely because there is a clear distinction between the two transaction types. Also, the purchase of virtual goods is more about identity and virtual asset accumulation then cash accumulation. This can be avoided by a clear distinction between a virtual good and a good that can be exchanged for real money. Avatars, avatar accessories, badges are clearly distinct from chips.

The notable intangible, and perhaps the best reason to add virtual good sales to traditional online gambling sites is the added fun factor. The fun factor does help in terms of customer acquisition, retention and revenue per player. An example of this is the experimentation by traditional e-commerce sites with the addition of "game mechanics" to the buying experience to enhance the experience and grow an e-commerce community. I am working with several traditional online retailers integrating virtual goods and currency into their properties to make the e-commerce experience an online gaming experience. Online gambling sites should take a hint from the e-commerce world.

In conclusion, virtual goods sales are becoming an important way to monetize the online experience and a critical part of online gamer culture. Traditional online gambling companies should start thinking about how they can take advantage of this phenomena and start creating economies around their own virtual goods. Online gambling sites are well positioned to take advantage of the virtual goods phenomena. The adoption of virtual goods for online gaming sites has few risks and tremendous upside potential.

The Emergence And Convergence Of Monetized Online Gaming (MG)

The world of online gaming is certainly changing at a rapid rate making it hard to figure out what category an online game falls into. Back in the day when times were simpler your could identify a game as a casual game, gambling game, MMOG, free to play, skill game, etc. With the advent of mass adoption of game platform virtual currency, Facebook universal virtual currency, virtual goods and the convergence of online games into an Online Gaming Ecosystem distinctions are hard to detect. To make things even more interesting traditional E-commerce businesses are now adding game mechanics(example:virtual currency) to their applications causing consumers to question if they are playing a game or buying something.

The underlying intentional or unintentional goal of the blurring of gaming categories is to drive more traffic and to increase the amount of money generated by players/consumers. Essentially, different games are using the same fundamental underlying monetization and mechanics to draw people in and to get them to spend money based on game elevation "levels".

This phenomena has homogenized many online games into a single category I call Monetized Games or MG's. This overriding classification makes more sense and easier for consumers, regulators, payment processors and businesses to identify the true purpose of an online game; which is to provide entertainment and to generate revenue from a player's participation in a game.

The quickly evolving nature of MG's is currently creating real challenges for regulators, payment processors, government policy makers, portals and advertisers. For example, how do you distinguish between a game site that let's a 12 year old buy virtual currency, to play in a game that awards more virtual currency for the purpose of buying virtual goods from the site from a poker site that let's you buy poker chips(virtual currency) to play in a game to win more virtual currency which in turn you cash out into dollars or pounds. In point of fact nothing is different about them.

Ohh and how about the airlines. you can earn virtual currency by playing the flying game and you can even buy more virtual currency to supplement your flying habit combining traditional virtual currency(dollars, pounds) transactions with online gaming business virtual currency. You can also trade this currency between other businesses to purchase goods and services form those businesses.

Essentially, the rapid rate of online gaming innovation is outpacing the ability of payment processors, search engines, regulators and lawmakers ability to adjust their polices to the brave new world of MG's. Taking a survey of some of these institutions indicates that these institutions have conflicting online gaming polices creating confusion within their organizations and frustration amongst online gaming businesses and players.

I suspect this institutional state of confusion is going to persist as the online gaming/e-commerce world continues to evolve and merge. From a consumer/player perspective it is an exciting time with new gaming entertainment models emerging. Online businesses are going to benefit with the ability of online gaming businesses to monetize players in ways unimagined several years ago. E-commerce will become a fun and engaging activity(finally!) encouraging players/consumers to spend more time and energy engaged in the buying experience.

Are Credit Card Processors Shutting Down Online Virtual Currency And Subscription Gaming Models Illegally?

I work with a number of online game companies and startups and have been informed that the credit card processing companies are now denying them access to credit card processing facilities for legal gaming transactions.

This trend started several months ago coincident with Zynga and Pureplay leveraging virtual currency to generate revenue from casual online game play. It is also coincident with an increase in the number of "sweepstakes" gaming sites emerging as a result of the successful purchase of WPT.com by PartyGaming. This purchase has drawn attention to the fact that a number of gaming sites (EA Club Pogo, SpadeClub, etc.) have been operating successfully under this model and it is a very attractive way to legally generate revenue from online game play.

Their are two aspects of this new new credit card processing policy that are disturbing.

1.) Are legal authorities in the US putting pressure on the credit card processors to not accept perfectly legal gaming transactions?
If this is the case is that directive legal? Can a federal or state institution strong arm a business to do or not to do something when there is no legal justification for that directive?

2.) Existing online gaming sites that have been processing credit card transactions under this model continue to do so.
This situation is the most disturbing because it leads to monopolization in the US online gaming sector by companies that have grandfather clauses allowing them to take transactions. All of the new companies seeking to enter the market are frozen out.

This entire situation highlights the very confusing and contradictory nature of US gaming law. It also points out the frightening power of credit card processors and credit card companies to arbitrarily decide who they like and do not like.

The irony of all this is that the collusion of government authorities and credit card processors is leading to an undeniable un-American activity on the part of government and credit card processors.

The solution is simple. Is it legal or is it not? If it is not all businesses should be denied credit card processing of these gaming transactions. If it is legal then let them all have their transactions processed.

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.

Virtual Currency Blog "Censored" By Chinese Government

A colleague of mine residing in China recently informed me that he could not access the Kevin's Corner blog. Further investigation revealed that no one in China could access it and the blog had been censored. Apparently, my last blog item suggesting that there could be a link between the purchase and sale of virtual currency and gambling raised some eyebrows in China.

It is no secret that I have posted a number of items on Kevin's Corner relating to the phenomenal growth of the use of virtual currency, the purchase of virtual goods, the sale of virtual goods and the trading of these items in China. A host of Chinese companies have gone public on the back of revenue generated from virtual currency and goods sale. The purchase, sale and auctioning of virtual currency and virtual goods is big business in China despite the efforts of PayPal to stop the trade on their property.

The recent Chinese government legislation banning the B to B trade of virtual currency certainly got my attention which in turn lead to a couple of blog items and a lively debate amongst my blog readers about the true purpose of the legislation. The debate still leaves me a bit uncertain on the legislation's true purpose. Was it designed to stop virtual currency trade from undermining the yuan as the base commercial and trading currency in China or was it designed to stop gambling related to gaming virtual currency's ability to be traded for yuan?

Either way open discussions about virtual currency trade in China are obviously not welcome by the Chinese government. In a centrally controlled economy the government wants to set currency valuation and to control commerce in a way that can be tracked by the government. Somehow virtual currency trade is threatening their control.

Clearly, virtual currency has proven to be a bit of a challenge for China. On one hand their stock market is filled with companies making million on game play, virtual currency trading and virtual goods purchase and sale. I image it is hard for them to sort out how to keep their new age economy growing and at the same time control the very engine that is driving the growth. I am flattered that someone or some bot decided to block my blog. However, I doubt that blocking my blog is going to stop the proliferation of virtual currency trading in China or the desire for Chinese residents to use virtual currency as a proxy for real gambling.

Virtual Currency And Gambling

Several of my blogs have addressed the emergence of virtual currency as rival currencies to traditional denominations such as the dollar, yen, euro, etc. The recent reaction by the Chinese government to restrict the inter trade of gaming virtual currency because of its ability to usurp the value of their currency created a stir in the online payment and gaming arena.

I received several responses to my comments on the Chinese government move implying the Chinese government was attempting to stop the proliferation of "gambling" by restricting virtual currency trade. Further investigation of the government's announcement did not reveal any relationship between online gambling and the legislation.

However, the debate made me think more deeply about the way online gaming companies are using virtual currency in their businesses.

Casual gaming, MMOGRPG and online video gaming businesses have evolved from granting virtual currency for game play to allowing players to purchase virtual currency. Virtual currency purchases are used to gain access to different levels of games and to purchase virtual items.

So how does this evolution of virtual currency exchange relate to gambling? There are many definitions of gambling and each jurisdiction has its own notion of gambling. However, a good rule of thumb used by the US government defines gambling as a combination of consideration, chance and prize.

If a gaming activity requires consideration/payment to engage in the gaming activity and there is an element of chance associated with a particular outcome and the outcome has monetary value then the activity is considered gambling.

So let's dissect this in the context of the recent evolution of gaming virtual currency. If I can purchase virtual currency using traditional currency (consideration) to play a game of chance that can lead to a prize of more virtual currency then is this not gambling???

To make thing even more interesting if the prize won is a virtual item which in turn can be sold for traditional currency inside the game or outside the game on e-Bay does this make it even more obvious that we have now entered the realm of true online gambling. If the virtual currency won can be traded outside the game universe for other currencies or traditional currencies is this not considered a prize in the traditional sense?

Subscription models such as World of War Craft also fall into this category. The subscription fee is paid in a traditional currency. The fee provides access to a game where play leads to the granting of prizes in the form of virtual goods which in turn can be sold on e-Bay for real cash.

My point here is that it appears the casual online gaming companies are implicitly or explicitly crossing over into the traditional world of gambling. This is creating an interesting challenge for gaming companies, regulators and consumers.

I suspect we will hear a lot more about this in the near future. Many of the online game companies are now generating "significant" revenue form the sale of virtual currency. In many cases this is becoming their primary source of revenue. When one of these companies attempts to go public or is engaged in a purchase by a public company will this bring this issue to the forefront and be challenged???

Gameinlane Virtual Currency Exchange

For all of the followers of my blog you know I have been interested in the rapid evolution of virtual currency. This weeks announcement that the Chinese government will begin the full regulation of virtual monetary exchange underscores the importance of virtual currency for the world economy. They have instituted this move because virtual currency trade is disrupting the trade and value of traditional currencies. This further confirms my prediction that the intersection of virtual currency and traditional currency is on the horizon. In fact, it is already here. I am of the opinion that this is the single most important development we may see in our life times. It will create all kinds of opportunities and challenges. It will rock Wall Street and redefine Main Street. The line between virtual goods and physical goods went from blurred to non existent.

So how do you get on board and not buried in the onslaught of virtual goods merchants and virtual currency issuers. You leverage virtual currency to get big fast!!!

We have marveled at Blizzards early success and Zynga's recent success in this space. Their big problem is that they act as insulated silos not encouraging the open exchange of their currency. Guess what! This is a big mistake and a great opportunity for other virtual currency issuers to create larger and more sophisticated trading environments. How about inter trade of virtual currency between issuers? Yes, this is the next step and a way to grow a much larger community of virtual currency users and virtual currency.

At the risk of self promotion I have started a business, www.gaminlane.com to do just that. I have begun to engage game companies and virtual currency issuers to join the virtual currency marketplace.

If you are issuing currency now leverage it by allowing it to be exchanged with other currency issuers. Start establishing a real value for your currency by allowing people to use it outside of your environment!!

Let's create the next big wave in virtual currency. For more information on how to sign-up please contact me at kflood@gaminlane.com.

Is my prediction of a Universal Virtual Currency on the Horizon??

Virtual Currency Meets Main Street

Several months ago I wrote a blog item about the emergence of a virtual currency. I received a fair amount of criticism about this prediction. I think the term "your are crazy" was used a few times. Recently, some of my early critics have reached out to me and admitted that I might actually be right. I do not know if you have been following the accelerated rate of virtual currency trading and virtual item sales but it has been intense in the last several months. Please read the information on the following links Communities Print Their Own Currency, Poker Goes Virtual, ChangYou, Investment In Virtual Worlds, SpareChange, MyCoke, Viximo, Habbo. This is only a small sample of the buzz about virtual currency and virtual items.
My current radical thinking is that the convergence of main street and wall street businesses with the virtual world and gaming environments is going to tip this phenomena over the edge and bring about a formal business exchange process involving virtual currency and traditional currency. This is the next step in the march towards a single virtual currency that acts as a trading currency bridging the gap between disparate businesses and traditional currency.

So Why Is This Happening And Why Are Traditional Businesses Going To Jump In?

Traditional Businesses Have Been Issuing And Using Virtual Currency For A Long Time - We seem to forget that airlines, hotels and credit cards companies have been issuing virtual currency for years trading in virtual currency well before the virtual world even existed. We do not think about frequent flyer points as virtual currency but they are. In fact, they are rewards for a job well done in the flying game. The most proficient road warriors receive points for their dedication and hard work.

Main Street Virtual Currency Trading History - Airlines, hotels and credit card companies have a history of trading virtual currencies within exclusive clubs and partnerships. If you own the virtual currency of a company in the partnership you can trade it for another company's currency.

Virtual Currency Monetary Valuation - The trade of virtual currency within traditional company networks has established a real monetary value for virtual currency. Points exchanged for real items such as airline seats, hotel rooms, camera's and cloths establishes a traditional monetary value for the virtual currency. These valuations float and change as the businesses change and the relative value of the items change. Essentially, these companies have created an organic and informal trading and valuation platform for virtual items and virtual currencies.

The Gamer Generation - I know many gamers and it is striking to me how the demographics for this community are changing. We are accustomed to thinking of gamers as people between the ages of 12 and 18. Not so anymore. Video games, MMOG and MMOGRP games have been around for a long time breeding an entire population of adults that have played these games, understand virtual items and virtual currency.

Virtual Items Become Real Items - The more you play games with virtual items as an essential part of the game the more you consider these items to be no different then a real sword, pair of shoes or poker chips. A person that engages in these games on a regular basis does not think that there is any fundamental difference between a physical item and a virtual one. They both have value and are used for a specific purpose. This may sound subtle but it is very important. People that play games involving virtual items and virtual currency inherently understand the value of virtual currency.

Traditional Companies Go Virtual - I was at a social gaming meet up in San Francisco recently and had the good fortune to sit next to a person building virtual worlds for traditional companies like Coke, Disney, NBC, etc. These companies have bought into the importance of providing virtual experiences for their consumers thus bridging the gap between their brick and mortar operations and the virtual world.

The Dollar Is A Virtual Currency - The dollar and many other popular real trading currencies have no physical backing. The US went off the gold standard years ago. The dollar's value is based on its trading power relative to other currencies. Scary as it sounds without this trading value it would have no value at all. Is the dollar a virtual currency?

Online Payment Option Limitations - In many parts of the world it is a difficult to buy things online with traditional currency and traditional payment vehicles such as credit cards. The phenomenal growth of virtual worlds, virtual items and virtual currency in China is directly related to the lack of good ways to buy and trade things online in a traditional manner. This has spawned the need for a different way of transacting online that inevitably drives the adoption of online specific trading and currency models.

The World Economy Facilitates The Use Of Virtual Currency - You may not have dollars, yen or rubles but you most likely have virtual currency in some form. If you do not it appears that some outfits are allowing you to create and trade some. This is all about the failure of the traditional economy to put traditional currency into peoples pockets and the large stores of point and virtual currency amassed by gamers and consumers. Why doesn't someone take advantage of this and let people use these points to drive customers to their properties. provide discounts on items, etc? What a great way to stimulate the world economy!!!



How Will This Evolve?

1. )Bridge The Gap Between Traditional and New Age Virtual Currency Issuers -I think what will happen first is companies like Delta Airlines or Disney agree to exchange virtual points with game companies like World Of Warcraft or Zynga. This seems to be relatively easy and beneficial to both worlds.

If I am not mistaken frequent flier points are considered to be an accounts payable and therefore a liability on the balance sheet. This should motivate an airline to encourage their patrons to use as many of their points as possible. If they can't take a trip then play a game online or buy a virtual item.

2.) Networks of Virtual Currency Trading Partners Emerge - What a great way to increase traffic to your gaming property. Many games sites are hungry for players and more content to provide stickiness. Why not form a coalition of game and other virtual currency sites to increase your traffic and provide new and fresh content for your consumers. The way in is to trade one currency for another increasing the overall value of all of the currencies. In many ways it becomes a game in and of itself.

3.) Networks Grow In Volume And Complexity - At some point the complexity of trading virtual and traditional currencies is going to require an intermediary step between the trading partners. Just the handshaking alone will require a common API and some standard rules so everyone is not wasting their time doing their own and creating barriers of entry in the process. It could be that one of the currency issuing companies emerges as this broker.

4.) A New Virtual Currency Trading Currency Is Born - The sophistication and volume of trading will result in the creation of an intermediary virtual currency that all currencies are converted into and out of. This would make valuation easier and more understandable.

5.) The Intermediary Trading Virtual Currency Becomes A Standalone Currency - In the final step the intermediary currency now becomes a currency with its own value and companies start using this currency as their purchase and sale currency avoiding the need to create their own.
In conclusion, the notion of a universal virtual currency could be perceived as Utopian and perhaps unachievable because of all the complexities, laws and business forces that exist in the world today. However, one should consider the business need to merge the virtual world with the physical world. In fact, the virtual world may become a larger part of GNP then most people can image. We currently do not have a good way to universally trade and value this currency. Some form of common trading currency is going to be required to make this happen.

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The Emergence Of A Universal Virtual Currency

Call me crazy but is this already well on its way to being realized!!! Perhaps I am a bit off the chart. However, my experience in the online game area makes me believe that this is certainly within the realm of possibility.

So what is virtual currency? It is a currency that is used exclusively to buy and sell products and services over the internet. In the gaming world "points" are frequently used to obtain access to game play and to win prices. In some cases the points are obtained by purchasing them with traditional currency. Essentially, a traditional currency is exchanged for the virtual currency. This exchange establishes a value and exchange rate for the virtual currency.

Virtual currency is also being used to purchase virtual goods in the video game and MMOG world. There are sites that cater specifically to this kind of transaction. A price of say $20 is placed on a single virtual item. A deposit is made in a traditional currency into an account. This account is used to purchase virtual items. These virtual items can then be sold and exhanged for virtual or traditional currencies.

There are trading sites where the virtual currency value of a real or virtual good can fluctuate based on its trade value and market price.

There are sites that allow you to exchange your virtual points for real items such as a Starbucks, Costco, Crate and Barrel coupon.

Today the value of virtual currency is set by the trading within each site. Each site has its own exchange rate. Essentially, each site is acting as its own country with its own virtual currency. I do not know of sites allowing people to exchange virtual currencies between sites. However, I suspect that this is not far off. It is certianly something my game site is going to do.

All of this activity begs the question: Is it possible to create a currency that acts as a virtual common denominator currency? How would the currency be managed and who would manage it? How would it relate to traditional currencies? Are we already organically on our way to this state?