I used to watch Spongebob religiously. I loved the days when I could put on Nickelodeon and have Spongebob on for hours. One of my favorite jokes from the show is Mr. Krabs’ ongoing quest to fleece more money out of Spongebob for the work he was doing while paying little to nothing in return. In one episode, Spongebob confides that Mr. Krabs pays him not in real legal tender but in Mr. Krabs’ Wacky Bucks! Outside of the fact that they are called Wacky Bucks, the whole premise just kind of made me laugh in a “I can’t believe even a fictional character would fall for that!”

But then, I started to think, isn’t in-game currency just the gamer’s version of Mr. Krabs’ Wacky Bucks?

Existential crisis brought on by a yellow cartoon sponge notwithstanding, it did get me thinking about virtual currencies in games and how exactly they get away with… not being worth anything. It’s rare today for any kind of buy-to-play or free-to-play title to not include some kind of purchasable in-game currency.

So what makes it different, why are developers so adamant about their currency not being regulated like real currency, and what’s happening now to put a wrench in this thing? In this installment of Lawful Neutral, we’ll take a merry jaunt down the lanes of finance law to understand the current state of virtually currency. And as with most Lawful Neutral columns, I’ll be analyzing from the perspective of law in the United States.

Real, virtual, and convertible virtual currency

What is “real” currency? According to the Financial Crimes Enforcement Network (FinCEN), a “real” currency is “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” This is what everyone understands as the US Dollar (USD) the Euro, the Pound, or any of the other national denominations of money.

By contrast, a virtual currency “is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.” Virtual currency is further broken down with by quantifying it as convertible virtual currency: “This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.” This can be much understood much more easily by saying that convertible virtual currency can be legally converted from the virtual currency back to real currency.

Fun fact: The issue of virtual currency has actually been around since the late 1880s as by definition, coupons actually function as a virtual currency. They are a closed loop system with a single direction conversion; you can use a coupon as virtual currency with the store the coupon is for, but it has no value to anyone outside of the company printing the coupon.

In short, virtual currency cannot be turned back into real currency, but convertible virtual currency can be turned back into real currency.

Let’s look at a quick example: gold in World of Warcraft. Gold can be purchased in World of Warcraft through the Token system; players pays so much in real currency to acquire the token, which they then sell on the Token exchange for some amount of Gold. WoW Gold here is the virtual currency, but it’s not a real currency because there’s no way within the game to turn that gold back into real cashy-money, at least not without violating the Terms of Use by turning to third-party black market traders.

But not all MMOs are so easy to classify. In Intrepid Studios’ Ashes of Creation, your referral code earns you Intrepid Bucks. Those Intrepid Bucks can be used to purchase in-game items or content, or they can be converted back into real money. Here’s an example: Andy gives Bree a referral code. Bree uses the referral code, and Andy gets a credit on his account for so much money. Andy in this case isn’t directly purchasing the virtual currency, but in essence Bree is gifting the virtual currency to Andy. Andy can then convert that virtual currency back into real currency — meaning Intrepid Bucks are a convertible virtual currency.

Money services business and money transmission

Why does convertible vs. non-convertible virtual currency matter? It’s one of three criteria for determining whether a business is a “money transmitter.” If a business is a money transmitter, it gets hit with whole a ton of regulations as it falls under the Banking Secrecy Act/Anti-money Laundering rules. And the BSA/AML requires additional monitoring, reporting, staffing, and many other costs — in addition to demanding the company register with FinCEN as Money Services business.

Money Transmission is defined as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” That essentially means it “accepts currency and moves the currency between locations or people.” The three criteria that determine if a company qualifies as a “money transmitter” and must register its business are these: 1) it acts as the exchanger or the administrator of the currency, 2) the currency is a convertible virtual currency, and 3) the company facilitates movement of the currency between different locations or people.

Going back to our examples above, we would say that Blizzard doesn’t qualify as a money transmitter because it fails the second criterion, even though it matches the first two. Blizzard is the administrator of the currency WoW gold, as it issues the currency and is responsible for controlling the rewards players can gain with it. We established that WoW Gold isn’t convertible because there’s no way to turn it back into real currency. But Blizzard does facilitate the movement of currency between different locations and people, keeping in mind here that location is fuzzily defined (moving currency from your IRL bank account to your WoW bank actually fulfills this requirement).

But wait, you say. I can turn WoW gold back into real money through a third-party website! Very true. However, as we noted, doing so is technically a violation of the Terms of Use for WoW. Because we have no sanctioned way to work through a money transmitter, Blizzard escapes being a money transmitter on a technicality.

Intrepid Studios, however, would meet the criteria of a money transmitter as defined here. It is both the exchanger and the administrator of Intrepid Bucks, Intrepid Bucks are a convertible virtual currency, and Intrepid facilitates the movement of these funds between people and locations. Notice I say “as defined here” because there are convoluted exceptions that Intrepid Studios has surely taken advantage of to avoid regulation. While I’ve spent hours researching, the laws are very complex and I am not a lawyer, so I don’t profess to have a perfect understanding — just a functional understanding.

So why does any of this matter?

There are lots of downstream repercussions for games, both where the currency is convertible and the studio is considered a money services business. One of the downstream impacts is a topic that’s oh-so-close to our hearts: lockboxes and gambling in games. Convertible virtual currency actually does have legal value which brings us several steps closer to finally acknowledging the gambleboxes are, you know, gambling. And that’s without getting into the impact of virtual currency having value and what that means for the value of in-game items and game design as a result.

Additionally, and probably more ethically concerning, is the fact that because game companies are actively structuring their Terms of Use to avoid [3] being classified as a Money Transmitter, they are largely ignoring the fact that third-party markets exist for their games that encourage money laundering (which will be the topic of a future Lawful Neutral). So while yes, businesses themselves are protected from regulation, they are incentivized to turn a mostly blind eye to the fact that criminals are using their games to launder money.

So yes, it’s funny to think that WoW gold has more in common with coupons clipped from the Sunday paper than it does with real currency, but from a regulatory standpoint, that’s where we are. But it makes sense from a business perspective and explains why most games are so adamant about establishing that their currency has no real value – not only from the consumer perspective but also as a shield against regulations. For better or worse, in-game currency by its very nature meets two out of the three regulatory requirements. It’s only the non-convertible nature of the in-game currencies that saves it from regulatory hell.

Is the Krusty Krab a money transmitter? Can his Wacky Bucks be converted back into… whatever passes for legal currency in Bikini Bottom? Is Plankton using Wacky Bucks to launder money to sustain the Chum Bucket that somehow stays in business without ever having customers? The world may never know.

Every other week, Andy McAdams braves the swarms of buzzwords and esoteric legalese of the genre to bring you Massively OP’s Lawful Neutral column, an in-depth analysis of the legal and business issues facing MMOs. Have a topic you want to see covered? Shoot him an email!