Author Archive for Sestino

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Fantasy Life, Real Law

You know this is getting serious when the ABA has taken notice of second life in it’s writings. Below is an excerpt from an article I found on the ABA Journals website. I may just have to publish my own Second Life paper that I’m working on.

Travel into Second Life––the virtual world where lawyers are having fun, exploring legal theory and even generating new business

By Stephanie Francis Ward

Beathan Vale was concerned about his local court system, which had only one judge.

As a member of the Confederation of Democratic Simulators, he took an active role in the development of his local government in the community of Neufreistadt. Ideally, Vale believed the community’s judicial branch should be modeled to resemble the U.S. Supreme Court. But its lone judge, an English barrister and fellow confederation member named Ashcroft Burnham, favored an English common-law approach. Burnham also got to personally select the court’s new appointees, and the lack of oversight didn’t sit well with Vale.

Ultimately Vale prevailed. Neufreistadt rejected Burnham’s court scheme—and the idea that partici­pation be limited to lawyers.

Both men meet on a regular basis to discuss—and often debate—the direction of Neufreistadt’s legal system. Yet they have never actually seen each other in person.

That’s because Neufreistadt isn’t an actual town, and Vale and Burnham aren’t real people. While they do exist, they do so within the realm of virtual reality, in an expansive cyberworld called Second Life.

Launched in 1999, Second Life is an animated, three-dimensional virtual world run by a privately owned com­pany called Linden Lab, based in San Francisco. Its investors include Amazon.com founder Jeff Bezos. Anyone at least 18 with a computer and a high-speed Internet connection can join, and millions have—about 3.3 million at press time, with more joining every day.

Among this growing group of participants are people who live as lawyers in both real life and in Second Life. They are drawn into Second Life for reasons including rainmaking and nation-building. Others say they are attracted by the myriad legal issues arising from—and existing within—this expanding alternative universe.

A Second Take on Second Life’s Economic Situation

A Second Take on Second Life’s Economic Situation by Video Games
Tristan Louis, an application development VP for HSBC, recently made public his economic analysis of the pertinent numbers available on Second Life’s website.  For those of you who don’t know, Second Life is the highly controversial MMO 3D digital world in which paying subscribers interact in ways analagous to real life.  The only things truly connecting it to reality are a) subscription fees for high-tier membership plans, and b) its in-game economy, which can be exchanged for real money.  Like all real currencies, the exchange rate  from “Linden Dollars,” as the currency is called, to USD fluxuates.
But back to Louis’ economic survey of Second Life.  By dissecting the pecuniary affairs and the raw number of users who’ve subscribed since last August, Louis arrived at a conclusion that affords us a new perspective on Second Life:
On average, the number of logins over a 60 day period seems to be about 35 to 40 percent of the total population reported. The people who log in, however, seem to spend a fair amount of money ($50-60 a week) within the Second Life economy.
GigaGamez accentuates the highlights of Louis’ findings concisely:

If accurate, this would mean that some 200,000-230,000 active Second Life users are on average currently spending more on their in-world experience than any existing online world by far. (For comparison, a World of Warcraft subscription is but $15 a month, and that’s money paid to the Blizzard/Vivendi, not user-to-user.)
To summarize Tristan Louis’ conclusions, Second Life is relatively sparse according to its amount of active users, but absolutely economically lively based on the average amount of cash trading an active user’s hands.  Furthermore, even though Second Life doesn’t have an enormeous amount of active users, Louis predicts that that’s all going to change:

[I]t looks that, under the most conservative growth rate, we will see 3.5 million users registered and over 600,000 using the service by the end of April 2007. Under a liberal interpretation of the data, those numbers would shift to 9.6 million and just under 7 million. However, in the most likely case, it is probable that there will be 7.2 million users registered with 1.6 million logging in over the previous sixty days. Not too shabby.
“Not too shabby,” Tristan Louis concludes, but he also advises his readers “to go with the most conservative estimate because [his] data set is still relatively small. Even then, this type of growth mirrors some of the growth patterns we’ve seen in the early days of the commercial web and seem to support the contention that LindenLab is going to be a very strong player in the future.”
In response to Tristan Louis’ analysis of Second Life’s economic situation, Tateru Nino analyzed his analysis, ultimately judging that although many of the user-to-user transactions aren’t meaningful, there is still significant economic activity:
The way money moves in Second Life with tip jars and alternate accounts and refunds means that probably about half of the value given is double-counted. That would leave us with roughly 75% that we could count on, but let’s go the highly conservative route and say a mere 40% of that figure represents actual meaningful transactions, where there’s a net change in the distribution of funds that is in line with the stated figure. Averaging out Tristan’s weekly samples for December 2006, and then applying our own conservative 40% figure to it, we get a daily movement of L$ equal to $269,848 USD.

IRS taxation of game assets inevitable.

IRS taxation of game assets inevitable – PC News at GameSpot

I’m currently working on an academic paper which discusses the what is a virtual economy, whether those activities should be taxed, a how should they should be taxed. My current thoughts are leaning toward characterizing the realization events which give rise to tax liability as occurring when the income is withdrawn from Second Life, by converting the income form Linden dollars to real US dollars. I feel any other way would be unfair, because Second Life is owned and controlled by Linden Labs. Linden Labs could go bankrupt and take the income of their residents with them, and it would be unfair to tax individuals on money which they didn’t have full possession. Also, once the income leaves the virtual economy it gives the government something to attach, if need be, to satisfy any tax liability.

After all, the rights the users of Second Life and other MMOGs enjoy are a function of their Terms of Service agreements they enter into with the online game providers. As such, those rights are subject to that agreement, which include clause that allow Linden Labs to delete a users account for any reason, and in the event of dispute arising under the agreement, an arbitration clause.

So, in short, let the money leave the game before we worry about taxing it.

NEW YORK–If you are a hardcore player of virtual worlds like World of Warcraft, Second Life, or EverQuest II, IRS form 1099 may soon take on a new meaning for you.

That’s because game publishers may well in the not-too-distant future have to send the forms–which individuals receive when earning nonemployee income from companies or institutions–to virtual-world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons, or Second Life currency, even when those players don’t convert the assets into cash.

Most governments are only beginning to become aware of the substantial economic activity in online games, but the games’ rapid growth and the substantial value of the many virtual assets changing hands in them is almost certain to bring them into the popular consciousness.

“Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues,” said Dan Miller, a senior economist with the Congress’ Joint Economic Committee, who is also a fan of virtual worlds. “So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way.”

Miller’s comments came during a Saturday panel called “Tax and Finance” at the State of Play/Terra Nova symposium, the fourth annual gathering at New York Law School of academics, lawyers, and other scholars to talk about the legal, social, and economic issues surrounding virtual worlds.

The panel was formed in the context of recent questions–first raised by author Julian Dibbel in his book Play Money and in an article he wrote earlier in Legal Affairs magazine–about whether the transfer of virtual assets, or players’ acquisition of virtual loot by, for example, killing monsters, creates taxable events.

“If you haven’t misspent hours battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service,” Dibbell’s article began, “you probably haven’t wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is: Why hasn’t it happened already?”

And while Miller’s committee began examining these issues in October, his comments Saturday suggested there could be wider future congressional oversight and a revised IRS tax policy. That’s in spite of the fact that Miller said his committee, and Congress in general, is not out to gouge virtual-world players.