The Virtual Currency Schemes

Abstract

This chapter starts in Sect. 3.2 by discussing the different virtual currency schemes currently in existence in virtual environments. It will analyse the different currency schemes in relation to the physical economy. Based on this analysis this chapter continues in Sect. 3.3 by discussing the currency schemes in the Metaverse. This chapter will then conclude in Sect. 3.4 by analysing the virtual currency schemes of the Metaverse in relation to the real physical economy.

3.1 Introduction

Due to its interoperability, the Metaverse will provide a different virtual economy than currently in existence. The Metaverse could combine the convenience of staying at home with daily (office) interactions.¹ The potential applications of this type of virtual reality are therefore endless. In particular, it is likely the Metaverse will facilitate a variety of economic transactions. Before entering the debate on whether the current legislation can govern the Metaverse, it is important to distinguish between different virtual currency systems. The dissection of the different currency systems will enable the next chapter to analyze the risks and legal framework necessary. This dissection will be done according to the developments of the virtual worlds as described in the previous section. The systems will be described according to a virtual currency classification developed by the European Central Bank (ECB).

3.2 Virtual Currency Schemes

The ECB provides three different types of virtual currency definitions.² These definitions are established in the contours of examining monetary policy and do not form legal definitions. They are however practically useful in defining the different types of virtual currency and their respective MLFT risks. The first virtual currency scheme considered by the ECB is a “closed virtual currency”. This type of scheme does not have a connection to the real world.³ Under this type of scheme, the currency cannot be bought or sold and is given based on a game subscription or in-game reward. This type of currency is best compared to the offline games. These types of schemes have no risk of MLFT and will not be given any further attention.

The second scheme is described as a “uni-directional flow”. Within a virtual reality based upon a uni-directional flow, the virtual currency can be bought with fiat currency. The virtual currency can then only be spent within a single virtual reality.⁴ These schemes are often found in games whereby the player is able to purchase the in-game currency. This currency can then only be used to buy virtual in-game items and quests. Most MMO games are based on this concept.

Figure 3.1 shows a closed system currency and economy. The virtual currency cannot be used to purchase real-life goods, its redemption rate is therefore limited. The currency furthermore cannot be traded for fiat currency and there is only one provider of the virtual economy. The regulation of this economy can therefore be done by simply regulating the providers. This system is however the most simple virtual economy currently in existence. More complicated is the third scheme identified by the ECB.

Fig. 3.1

Uni-directional flow

This scheme provides a “bi-directional flow” meaning that the currency can be purchased and sold through the real economy.⁵ There are two different types of virtual currency schemes with a bi-directional flow. Staying with the example of WoW, officially the trade in WoW currency outside of the official platform is prohibited.⁶ Users are not allowed to buy currency other than through the platform provider.

There is, however, a lively black market. The black market as indicated by Fig. 3.2 provides ties to the real economy. It is therefore possible for players to gather or buy virtual currency which they can transfer to other players or convert to fiat currency. This type of currency scheme creates a potential for conducting MLFT. The currency acquisition requires little effort as it can be bought from the gaming platform. It can then be transferred to another player and converted into fiat currency. It is furthermore difficult to regulate as it is not the virtual reality provider that created or supervises this market. This system should therefore be considered as a currency with an unintentional bi-directional flow. These systems are particularly vulnerable to MLFT because of the lack of supervision. Research found that the game Fortnite was used frequently for MLFT purposes.⁷ Another research indicated that a two-month eBay surveillance had produced 53,000 signals of money laundering.⁸ Black markets with MMO games should therefore be considered of high MLFT risk.⁹ The black markets are furthermore more difficult to regulate than the intended bi-directional flow designs.

Fig. 3.2

Virtual currency with unintended ties to real economy

Figure 3.3 has an intended flow between the currency used on its platform and fiat currency. The users can buy and sell currency to the platform provider, trade with each other and buy virtual items in different shops. This virtual reality is more complex than that of most MMOs. Users can operate shops and earn currency through the platform. Thus making it more difficult to discover potential money laundering. However, as only the provider exchanges the currency it is easier to regulate. As it only requires the regulation of a single provider. However, a potential black market can still arise which would be a likely source of MLFT.

Fig. 3.3

Virtual currency with intended ties to real economy

The black market would be a serious indicator for MLFT. The only way to make the black market economically attractive is by selling the virtual currency against a lower fiat currency rate. Thus providing a loss to the trader on the black market. Leaving aside altruistic reasons, the main motivator for taking a loss on the black market is to avoid official or monitored channels. Thus the black market provides a serious indication that the traders have illicit motivations. The transactions occur partially between characters online and payment takes place offline. Thus regulation and governance are not unlike that in the physical world. With the general challenges of monitoring MLFT.

The current design of online environments has therefore led to three distinct currency schemes. The schemes with a bi-directional flow carry the most risk of MLFT. In particular when the bi-directional flow is left unsupervised. The Metaverse has payment options built into the platform and will therefore become a reality with a bi-directional flow. The economy and payment infrastructure within the Metaverse will be more complex than a simple bi-directional flow. Unlike the previously discussed schemes, the Metaverse will incorporate multiple coins, payment services and exchange opportunities.

3.3 The Metaverse

The Metaverse is interoperable with various platforms. That means that the eventual reality of the Metaverse will be highly complex. This section will examine the currency scheme from the simplest to the most complex version. The focus will be to identify the possible transactions, currency used and the providers involved. The Metaverse will primarily contain the bi-directional flow virtual currency scheme identified by the ECB. Yet it is not accurate to speak in terms of uni and bi-directional flows. The bi-directional flow virtual schemes identified by the ECB are only adapted to the first scenario that will be discussed. This research has therefore decided to generate its own terminology. This terminology will be based on the relationships that will be in existence.

The first version of the Metaverse that will be examined is one whereby the whole universe is regulated by a single provider. The example is given in Fig. 3.4. For this example, this research has chosen to use the Metaverse provider. In this scenario, the transactions are made between the participants through virtual avatars created by Metaverse. The avatars use the digital wallet also provided through the same provider. The currency used for payment between the participants is also provided by the same provider. The object sold and Non-Fungible Token (NFT) is also created through the Metaverse. From a regulatory perspective, this scenario is the simplest to govern. There is only one party to govern. This scenario will be considered a ‘single party Metaverse’. Unfortunately, this scenario is the least likely to occur most frequently. As stated before the Metaverse allows for interoperability. Thus making it more likely that the virtual transactions occur through different providers.

Fig. 3.4

Metaverse room fully operated by a single provider

A reality provided by a provider different from the provider of the wallets would constitute a dual-party Metaverse. Though such an environment would technically not be too difficult to govern, it gains complexity. The complexity could be increased when more providers are added to form a multi-party party Metaverse. This system becomes more complex when considering that not all transactions and services remain within the same room or even within the Metaverse.

The next scenario increases the complexity by adding a third-party, outside of the first room to deliver a service inside the virtual reality (Fig. 3.5). This could be a virtual service such as a translator or a virtual object such as a virtual watch. These situations demonstrate the increase in complexity. Furthermore as demonstrated the same wallet and currency can be used inside the Metaverse and outside. The wallets can purchase goods online which are either virtual or physical. These transactions can be labelled as “third-party transactions”. These types of structures can be continued to increasing complexity.

Fig. 3.5

Metaverse reality with multiple parties and external transactions

Figure 3.6 provides a good overview of the difficulties that will be associated with regulating and governing the Metaverse. There are different providers of realities, and payment structures coming together in a web of interactions. Before identifying the exact risks. There is one more complexity that needs to be discussed: the real economy of the Metaverse.

Fig. 3.6

Complex metaverse world

3.4 The ‘Real’ Virtual Economy

The Metaverse potentially offers another complexity compared to earlier versions of virtual realities and that is the ‘real’ value of virtual items. In earlier virtual realities the virtual goods had no value outside the providing virtual reality. The reason for this lack of value is that virtual goods cannot be transferred to or enjoyed in the real world.

The Metaverse will allow for virtual shopping whereby physical products are shipped to the buyer’s home address. However, the Metaverse will also introduce the enjoyment of virtual goods in real life. Mark Zuckerberg CEO of Meta, however, explains this lack of real enjoyment might change in the future. In his opinion, a hologram TV will replace the physical TV in our homes.¹⁰ Continuing in this line of possibilities the art on our walls might become virtual rather than physical. The need for physical goods therefore might decrease and virtual items gain in value. There are however items that cannot be replaced by virtual objects. In order to comfortably watch TV, a physical chair or couch will still be needed. Similarly, it will be difficult to satisfy one’s hunger with virtual food. The real economy however should not be limited to the physical realm, as the Metaverse has the potential to provide enjoyment of virtual assets.

The Metaverse economy would therefore result in a highly complex system that has links with the physical and virtual economy but with little need for central banks and regulated financial services. Considering this new reality that society is facing the question is where the risks of MLFT are.