As virtual communities come of age, the corporate world is just beginning to grasp the potential opportunities they present—and the phenomenal disruptive influence they might have on global commerce.
Grand designs: Banking group INGhas invested heavily in its Second Life presence
Many banks and companies are getting in on the ground level, building up a presence in one or more of the largest virtual communities in much the same way that they tiptoed onto the Internet in its early days. But what business model will eventually be successful in making a real-world profit from virtual ventures remains to be seen. Estimates have put revenues from the virtual gaming and virtual community industry at almost $10 billion by 2009, and this reflects only revenue by the hosting companies, not those entrepreneurs and corporations that are setting up shop and looking to eventually make a profit. All evidence suggests that figure will be just the tip of a very large iceberg.
But while most of the focus so far has been on the potential for real-world companies to promote and possibly sell real goods to members of virtual communities, another area is quietly developing that holds possibly even greater promise: virtual financial services. Even in the real world the financial services industry already has a substantial virtual component to it. It is also one of the most technologically advanced industries on the planet, and there are some who believe that the financial services industry will benefit most from the online revolution that these new 3D worlds are spearheading.
To an extent, the virtual communities are already evolving rudimentary financial services industries. Each of the biggest communities and game sites has its own virtual currency—or an online token that represents money within that world. Currency can be earned either through game play or by selling goods and services, or it can be bought at exchanges for real-world currency. For example, there are PEDs in Entropia Universe, Isk in Eve, Gold in World of Warcraft, Acorns in South Korea’s Cyworld, or Linden dollars in Second Life. Hong Kong messaging firm Tencent offers the Q coin, which is not an official currency for any one site but is generally accepted in China and Hong Kong for use in various online game sites and for various online services—including, significantly, the purchase of some real-world items.
There are countless exchanges, both official and unofficial, for trading between real-world and virtual currencies. MindArk, the Swedish firm behind Entropia Universe, offers an ATM card to add PEDs to an inhabitant’s account and has various mechanisms for users to convert back to real-world currencies.
Speed: The learning process will be painful
In order to bring some transparency to virtual economics, a New York University economics student has developed a model bank in Second Life to provide real-world-like banking services and to look at how virtual economies are developing. SL Bank offers in-world accounts for residents and has a web-based administrative panel. The bank provides transparent information on interest rate fluctuations, project goals and fund investments.
In many ways it is no different from the web-based interface that many people use to manage their money in real life. It is this apparent crossover—and the sheer volume of money changing hands—that is catching the attention of real world financial services companies.
As yet little crossover between virtual currencies has occurred, although this would seem to be a logical next step. A few sites, such as Iron Prairie, are beginning to spring up that claim to offer trading between different virtual currencies, but those few that do plan to offer inter-site trading are fledgling at best. One website, GamesUSD, was dedicated to providing exchange rate information between virtual currencies and real-world currencies, but it appears to be defunct.
Peterson: Any laws must focus on fair competition
Many virtual communities are now of a size to have an independently functioning economy, with all the advantages and difficulties that implies. As this develops, so too is regulatory awareness of virtual economics. Kountz says that there have been some discussions in the United States about taxing virtual profits. “But how you do that is a very interesting question. There are no easy answers for that,” he says.
David Johnson, visiting professor at the New York Law School, says that virtual economies are real economies and virtual commerce is real commerce. “Some form of regulation is always necessary to create healthy markets and enable the formation of companies and organizations of all kinds,” he says. But that regulation can be made by groups that come together online in particular places or by the hosting companies that establish rules and the people who decide to visit such hosts.
These views are reflected by Jeanette Hofmann, program leader for Internet governance at the Social Science Research Center in Berlin and a member of the Internet Governance Forum. “Markets need regulation to make them work—more precisely to enable and to protect competition. Regulation should ensure a level playing field—particularly that market power does not prevent choice and the freedom of innovation,” she says.
Simmonds: MindArk is offering banking licenses
According to Dan Speed, senior graphics programmer for Eve, such actions are misguided. “It will be a painful learning process, and many mistakes will be made in doing this. It is very easy to misunderstand the issues that are truly going on under the surface,” he says.
One big concern about a virtual currency is how to ensure the solvency of the organizations that issue it: If an organization were to become insolvent, that currency could become completely devalued overnight. But as Johnson notes: “The world is full of exchangeable things that could change in value depending on the activities of others. The way to protect oneself against this is to be careful about the kinds of value/things you accumulate, and to diversify. The Internet provides opportunities to create rating systems and distribute information that can help people correctly assess risks.” This kind of decentralized, reputation-based control will be far more effective than regulatory intervention, he adds. “Of course governments should intervene to attempt to prevent and punish fraud. But the global economy is far too complex to allow governments to attempt to prevent economic failures or fluctuations in the value of various goods and transferable tokens,” he says.
Getting In Now
For those banks and companies looking to take a piece of the virtual action, the question may be whether getting in on the ground level will be the best investment—building up a strong brand and growing with the community—or waiting to see how such communities will evolve and how regulators will address them. Kountz says that no one yet understands how these virtual communities can best be accessed by real-world entities. “But there will be an opportunity here. Beyond that, it is a matter of ensuring that the brand is where the potential consumer is,” he says.
Free trade: A store in Entropia Universe, where virtual banking licenses are up for sale
“Banks in particular are aware of the changes that are going on,” notes Kountz, “and it is clear that the rise of virtual communities and, associated with that, the rise of virtual currencies provides an opportunity to blur the line between virtual currency and real-world currency.”
Both ABN AMRO and ING have communities within Second Life. Wichert van Engelen, director of ING Venturing, says: “We believe that now in virtual realities there is something developing that is like a real economy. Any economy is serviced by one or more financial institutions, so that is why we think we can play a good role in this developing phenomenon.”
The virtual banks are almost certainly not making money yet, but as Kountz says, “Anywhere there is a chance to be involved in a transaction—virtual or not—there is opportunity to take a piece of that.” Van Engelen goes further in his plans for virtual banking: “In the long run I believe that the normal way we use payments on the Internet will be replaced partly or in total by virtual worlds. It is not a matter of ‘if’ you will move real-life banking services to virtual banking services. It will happen; it is a matter of how and when.”
Virtual worlds are websites that allow users to create a 3D avatar—or character—that can go through the world interacting with other users, playing games, shopping, building or buying their own domiciles, businesses and so on, and creating an entire 3D online life for themselves within the context of the website itself. Some of the most popular virtual worlds are Second Life, Entropia Universe, There, World of Warcraft, Everquest and Eve.