May 26, 2024

Virtual World, Meet Terrestrial Government

Something remarkable is happening in virtual worlds. These are online virtual “spaces” where you can play a virtual character, and interact with countless other characters in a rich environment. It sounds like a harmless game, but there’s more to it than that. Much more.

When you put so many people into a place where they can talk to each other, where there are scarce but desirable objects, where they can create new “things” and share them, civilization grows. Complex social structures appear. Governance emerges. A sophisticated economy blooms. All of these things are happening in virtual worlds.

Consider the economy of Norrath, the virtual world of Sony Online Entertainment’s EverQuest service. Norrath has a currency, which trades on exchange markets against the U.S. dollar. So if you run a profitable business in Norrath, you can trade your Norrath profits for real dollars, and then use the dollars to pay your rent here in the terrestrial world. Indeed, a growing number of people are making their livings in virtual worlds. Some are barely paying their earth rent; but some are doing very well indeed. In 2003, Norrath was reportedly the 79th richest country in the world, as measured by GDP. Richer than Bulgaria.

(Want to try out a virtual world? SecondLife is a smaller but interesting world that offers free membership. They even have a promotional video made by members.)

Virtual worlds have businesses. They have stock markets where you can buy stock in virtual corporations. They have banks. People have jobs. And none of this is regulated by any terrestrial government.

This can’t last.

Last weekend at the State of Play conference, the “great debate” was over whether virtual worlds should be subject to terrestrial laws, or whether they are private domains that should determine their own laws. But regardless of whether terrestrial regulators should step in, they certainly will. Stock market regulators will object to the trading of virtual stocks worth real money. Employment regulators will object to the unconstrained labor markets, where people are paid virtual currency redeemable for dollars, in exchange for doing tasks specified by an employer. Banking regulators will object to unlicensed virtual banks that hold currency of significant value. Law enforcement will discover or suspect that virtual worlds are being used to launder money. And tax authorities will discover that things are being bought and sold, income is being earned, and wealth is being accumulated, all without taxation.

When terrestrial governments notice this, and decide to step in, things will get mighty interesting. If I ran a virtual world, or if I were a rich or powerful resident of one, I would start planning for this eventuality, right away.


  1. go had..

  2. First of all there is a BIG difference between Virtual Worlds and Games, that isnt to say that there cant be Virtual World with a game in it. The reason I bring this up is Virtual Worlds on there own are NOT games, Second Life is not a game is a place. You could say it is its OWN country and since when does the US or any goverment have legitament authority over another countrys government? I say never..

    As for games, well they are games and not to discredit them but they are less about money making and more about the entertainment so I dont consider WoW to be a Virtual World in the sense of Second Life type Virtual World. WoW was made to entertain Second Life was basiclly ment to be another country but on the virtual plane. Goverment has no right to even think about regulating a Games virtual world but even when in comes to a true Virtual World they still at the most only have ambassidor because they are outside of the Second life Country.

  3. The game worlds are a dictatorship, but you can leave at any time. The revolution would be people deciding not to play any more.

    Alternatively, a decentralised game world without moderation would be a curious thing. Imagine an MMORPG based on Usenet protocols.

  4. I think there’s one very real difference to game worlds — their continued existence, and the existence of items and wealth within them, is entirely at the whim of the company that made them.

    If Uncle Sam declared that we would all have to trade in our houses and get randomly assigned new ones for an “upgrade,” we’d have a revolution. But if the game company takes away everybody’s vorpal swords +17, the players just have to live with it.

  5. I’m not sure this is really new — virtual-world interactions have had real-world consequences for pretty much as long as there have been virtual spaces. Just ask someone who lost a job as a result of speaking their mind on a newsgroup or mailing list, someone who’s been stalked in virtual form, or someone who parlayed other people’s writings into a profitable book deal. And regulators have been in the game since the beginning as well (remember when digital cash was going to lead to the breakdown of government because of untraceable money transfers?).

    What might be new is the scale of the markets emerging ancillary to these environments. If it’s big enough to draw substantial individual and corporate investment, then it might be big enough to draw a more principled (fsvo “principled”) approach to regulation. (Ulrich Hobelmann’s throwaway “virtual tax collector” line captures some important issues about such regulatory efforts — in most of the developed world, tax collectors aren’t peers of the people they’re taxing, but rather are endowed with fiscal and investigatory superpowers. How that played out in a virtual world would depend on how much power the owners and players were able to wiled back in meatspace.)

  6. Even the real world is remarkably virtual. When my employer pays me, all that really happens is that an integer in one bank’s computer is decreased by an amount and an integer in another bank’s computer (along with the inland revenue) is increased.

    If the virtual world currency is ruled to be an illegal currency, the game organisers would either have to switch to using “notes” exchangable for real world currency, or clamp down on converting game-money to real-money.

    How do you exchange game money for USD anyway? Ebay? Forex?

  7. Ulrich Hobelmann says

    IMHO there would be some problems in taxing the virtual world directly (in contrast to taxing all revenues from virtual objects sold for USD): how would you measure the value of virtual objects? Would virtual citizens have to pay taxes in virtual currency? To whom? And wouldn’t that make room for gaming over anonymized connections?

    Maybe gov reps should send their own virtual tax collectors and have them confronted with thousands of angry players, armed and dangerous 😀

  8. Jack – the key is in the phrase “a legally-recognized entity”. Historically, there was much resistance to the idea of stock-market regulation, with arguments which were roughly, in comparable terms, that it was a virtual world which shouldn’t be subject to terrestrial laws. After all, a company is a VIRTUAL entity. It’s not a physical thing – it’s an abstraction.

    We aren’t debating whether one has citizenship in SecondLife. It’s about games. and products. Calling it “Virtual Worlds” just makes it confusing with linguistic difficulties.

  9. Seth,

    Of course your suggestion is as perposterous as you meant it to sound, because despite what language you might use, a stock in an actual stock market represents some level of ownership in a legally-recognized entity. On the other hand, a virtual stock in a virtual company has absolutely no legal standing or ‘intrinsic’ (ie government enforced) value. That difference is fairly major, and extends far beyond this specific example.

    Taxing the income from sold virtual items is fairly reasonable since income is still income, and it seems most people in the US respect the right of the government to levy income tax. That certainly seems like a simpler solution that trying to figure out the jurisdiction mess, not to mention if (to throw out a fairly extreme example) SEC regulations should apply to in-game companies which choose to issue in-game stock.

  10. Sigh …

    If the stock market labels itself a “Virtual World”, where you become an “trade-avatar” doing “barter” in “share-olians”, can it claim to be above and beyond the [gasp! spit!] horrors of g-g-g-(trying to say the word)-GOVERNMENT (argh .. I said it! I said it! I am forever cursed for uttering that most unholy of terms)?

    This is actually very old stuff – private currencies (“scrip”), and when something becomes a lottery or a scam, are in fact pretty ancient financial issues.

  11. at what point does “no taxation without representation” come in?

    What national jurisdiction does the world fall under? The home country of the parent corporation? The location the servers are at? What about splinters/shards with different servers in different countries?

    Would the worlds eventually have their own form of governance? Sovereignty? How would that work with emigration and border control?

    While I see the movement in this direction, the parent company is literally able to “create” wealth by creating new objects in the world. Though I guess that would more have the effect of hyperinflation and not really “create” new wealth, but more would be able to destroy existing wealth through hyperinflation. Again though, that still means the world is more real that previously thought… though a country that is able to be “unplugged”.

  12. Mark Christiansen says

    These games run the risk of being regarded as gambling with intense government involvement. A game operator who doesn’t want that would do well to prevent or limit the real money trade in his game. Of course there is big money to be made in gambling and some will go that way deliberately.

  13. Very interesting point. I agree with you that thinks are going to become even more interesting, but I’m really curious: if, as you said, you were one of these worlds’ owner or influent resident, what would you start to plan? What kind of action would make sense?

  14. Ulrich Hobelmann says

    Well, of course they don’t want to. I’m only saying they shouldn’t.

    Being somewhat free of regulations has made the internet prosper. Virtual communities will do likewise, unless their development is quenched (regulated).

    I think there’s a big difference between judgement/enforcement of order and arbitrarily creating new laws all the time. The latter shouldn’t be possible just because the legislator was “elected” by some people. It’s a question of making sense vs ruling other people’s lives.

  15. Governments regulate voluntary arrangements all the time. Why would they stop now?

  16. Ulrich Hobelmann says

    Aw no… Now that there finally is an example anarchic economy that works, real-world dictators can’t wait to extend their bloody grasp to those lands…

    They should be reminded that everything people do inside a virtual world IS VOLUNTARY and thus shouldn’t be subject to fascist restrictions. Regarding taxation: if someone sells Virtual dollars for real ones, why not just tax the result and leave the virtual economy unconstrained? We have already enough sand in the world’s wheels.

    “Freedom is the freedom to think different.” We should leave every community the right to decide over their own lives, no matter if they’re socialist, libertarian, conservative, virtual, or prehistoric. From this point of view, democracy (tyrannical majority rule) is a very, very sad thing indeed.