Internet Gambling Regulation Present and Future

Technology Outpaces Legislation as the MMORPG Problem Emerges

Mark Methenitis

Texas Tech University School of Law

12/2/2005

I. Introduction

The Internet has completely changed the landscape of the planet.  Suddenly, thousands of miles are the mere click of a mouse and practically any information or entertainment you desire is at your fingertips.  As a result, many areas of the law are being re-thought or re-developed, while other new issues emerge that defy all remotely related regulations.  Online gambling is one of those areas in which the laws have lagged behind the technology, and are still in need of an overdue update, along with an official chosen course of action toward bans or regulation.  However, as with many other fields, there are developments at our doorstep that stand to turn the concept of internet gambling on its head and re-define the scope of all currently proposed regulations. 

In order to analyze the current state of internet gambling, some terms must be clearly defined for their use within the scope of this paper.  For years, gambling and gaming have been used interchangeably in discussions of regulation on wagering and in the text books on the topic.  However, for the purposes of this paper, a distinction must be drawn between the two.  Gambling is placing a wager on the outcome of a game of chance or a game of skill, as essentially all betting is on one or the other.  Gaming, on the other hand, is the act of merely playing a game, absent wagering on the outcome.  This distinction becomes critical in analyzing the emerging problems in internet gambling regulation.

This paper will first serve as an overview of the current state of internet gambling regulation.  This first section will address the distinctions that have been made legally in the realm of gambling on the internet in both the United States and abroad, as well as the proposed solutions to the problem in the United States.  The remainder to the paper will be dedicated to an emerging realm of internet gambling that completely defies the traditional concept of online gambling.  This analysis will be divided into two parts.  First, the system will be described in full.  As most people within the legal profession are not the most up-to-date on the activities in the electronic gaming world, this description will be thorough and complete as it is necessary to understand the scope and depth of the problem.  The remainder of the paper will deal with potential ways to regulate the key problems that emerge from this new form of internet gambling, as well as the other emerging sectors these regulations may impact.  While much of this paper may seem very avant-garde, it is critical that these issues be known and discussed before the problems emerge to their fullest.

II. The Present State of Internet Gambling

            Internet gambling, at present, is nothing short of a mess.  The only major portion of the issue that has been truly addressed in full is the matter of online sports betting.  That will be the first issue addressed in this survey of the current state of internet gambling.  The second portion addressed will be the status of the remaining forms of gambling, as well as the three proposed regulations to resolve the issues definitively at the Federal level in the United States.  The third and final section of this discussion will be the international stance on internet gambling, which will cite some specific other countries and their respective regulations.

A. Sports Betting and the Wiretap Act

            The Wire Act,[1] the common name of a bill titled “Sporting Events- Transmission of Bets, Wagers, and Related Information,” was passed by Congress in 1961.[2]  This title has proved critical in interpretation of the act, as it has been taken to limit the act to sports betting.[3]              The act itself is limited to pursuing the bookmaker rather than the causal gambler.[4]  More importantly, the Wire Act has been interpreted to include internet betting on sporting events.[5]  This would seem to leave online sports betting pretty clearly illegal in the US, at least for the bookmaker.

            There is an emerging issue, however, that remains wholly unresolved.  The Wire Act requires that the illegal betting take place through a wired communication.  As technology has progressed, wireless communication has become more and more the norm for internet activities.  The theory that the Wire Act would not apply to wireless communications has not yet been tested, although, in this author’s opinion, the Wire Act would still likely apply.  The root of that application lies in an understanding of internet infrastructure.  Ultimately, all wireless internet transactions still take place through a portion of the backbone of the internet, which is still entirely wired.  Moreover, it is extensively likely that even in the event of a wholly wireless transaction, the court would be reasonable in broadly interpreting the statute to include transmissions, both wired and wireless, that otherwise fit the statute as the kind of widespread wireless technology that exists now was nothing but science fiction at the time the act was passed.  This is an issue that will be resolved once it comes up, but it would be reasonable to assume the outcome will be consistent with other interpretations of the Wire Act.

B. Other Forms of Gaming in the US

            Unfortunately, the Wire Act is where the clarity in internet gambling ends.  In fact, the waters are so muddy that the situation cries out for a unified Federal answer.  While some states have attempted answers, a Federal answer is the clear path in something as ubiquitous and borderless as the internet.  After years of attempts, there is still no actual regulation specific to internet gambling.  Following a brief discussion of the current state of the issue, some of the most common potential answers will be discussed.      

            The current state of the issue must be divided between state and federal interests, as right now both are competing to regulate the matter.  There have also been industry attempts at regulation through groups like eCOGRA[6] and the Interactive Gaming Council.[7]  However, without the force of law behind them, intra-industry regulations are exceptionally limited and can therefore not provide a complete or final answer.

State gambling laws vary widely by jurisdiction.[8]  However, only a few states have attempted to address internet gambling directly.[9]  Of these, all are attempts to ban the activity,[10] with the exception of Nevada, which has granted regulatory power to their state Gaming Commission.[11]  For example, the state of Washington has very explicitly banned internet gambling, even making the gambler liable to punishment rather than just the “house.”[12]  The reasoning behind many of these regulations is the desire to retain local control of gambling and profit from what local gambling is legal.  The irony is that these “offenses” are difficult, if not impossible, to enforce, especially when it comes to the gambler rather than the “house.”  As such, they seem to have minimal impact in terms of accomplishing the bans they set out to create.  Moreover, the people who are truly hurt by this are the people who win and are never paid, as they have no legal recourse for an illegal activity.  Ultimately, allowing states to regulate the matter will not work effectively.  Online gambling cannot be controlled in the ways land or water casinos can be controlled because the internet is in and of itself difficult to regulate and defies the concept of “state lines.”

            This means, simply, that a Federal response is needed to control this on a national level.  Currently, there are a hodgepodge of laws that apply in part depending on whom is interpreting them.  Among others, the following statutes have had some relation to internet gambling: Travel Act of 1961, Interstate Transportation of Wagering Paraphernalia Act of 1961, Illegal Gambling Business Act of 1970, Racketeer Influenced and Corrupt Organizations Act of 1970, Professional and Amateur Sports Protection Act of 1992, Interstate Wagering Amendment of 1994, Amendment to Interstate Horseracing Act, and Illegal Money Transmitting Business Act of 1992.[13]  Of course, the vast majority of these regulations pre-date the widespread use of the home computer and even the concept of the home-based internet connection.  In fact, the mere suggestion that everyone would have a home computer and be connected to most every other computer worldwide via an internet connection over a phone or other cable line at the time of many of these statutes might land someone in an insane asylum.  The rate of technological advancement since 1960 has been astonishing, and even regulations as recent as the early 1990s cannot truly comprehend the internet phenomenon. 

            Despite this, there have been a number of cases tried and other notices made under existing law relating to internet gambling, including the previously mentioned U.S. v. Cohen decision under the Wire Act.  The Department of Justice has acknowledged that online casino games are not explicitly covered by the Wire Act, and have supported legislation to clarify the matter.[14]  The Department of Justice has many resources available on Internet Gambling topics,[15] although they have seemed to make an attempt to avoid reaching the merits of certain internet gambling issues in recent cases like Casino City v. Department of Justice.[16]  In the wake of the few successful prosecutions in the US, many providers are moving entirely offshore to avoid prosecution.  This has to be done carefully, however, as even Cohen involved certain levels of offshore activity.  Moreover, foreign companies are usurping the business domestic companies could have with little potential for recourse from the US Government.  The ambiguity in US law is clear, and one that likely cannot be resolved under current regulations.[17]

            Because no current legislation fully addresses internet gambling, a number of Congressmen have attempted to put forth legislation to deal with the issue.  These regulations tend to take two forms: bans and regulating legalization.  There have been two proposed bills that follow the “ban” theory.  The first is the Internet Gambling Prohibition Act of 1999, the latest in efforts by Senator Kyl to enact a direct ban on internet gambling.[18]  The 1999 bill was the closest to passing of all of Senator Kyl’s attempts.  The newer “ban” concept is found in the Unlawful Internet Gambling Funding Act, which has been introduced in both the Senate[19] by Senator Kyl and the House[20] by Representatives Bachus and Spencer.  The theory behind this bill would be to ban bank transactions related to internet gambling by US banks and credit card entities.  Either ban scenario, while popular, seems rather idealistic and unrealistic.  It is unlikely that even the funding ban, which does seem more potentially effective, would be 100% effective. The funding ban could theoretically be circumvented by using international banks, which would not be subject to the regulation.  While it would deter many, it is not impossible to circumvent.

            The alternative, proposed by Representative Conyers, is to create a commission to study the possibility of licensing and regulating internet gambling.[21]  Testimony seems to indicate that regulation is a far more viable option than bans, which may be entirely futile.[22]  While this may not be the popular opinion, it is likely the more realistic one.[23]  Eventually, one of these bills may finally pass and solidify the Federal answer to internet gambling.  However, recent events have put these bills on the back burner.  Inevitably, they will be brought back to the forefront once other events die down.  When that happens, there may finally be an answer to the biggest internet gambling question: where is the line between the legal and the illegal?

C. International Stance

            The international community is equally lacking in terms of the regulations on internet gambling overall, though some jurisdictions have proved to be significant exceptions.  While the purpose of this paper is not to analyze the state of international internet gambling, a brief survey of international opinion is definitively relevant to the topic at hand.   Moreover, the future of international internet gambling lends itself to international treaties to either ban the practice, which would be about as effective as previously mentioned, or further legitimize the activity to ensure the legitimacy of games and payouts.

            The Caribbean has actually become one of the most popular places to start up an online casino.[24]  In fact, a recent WTO decision has sided with Antigua against the US relating to bans in internet gambling.[25]  Under the decision, the US banning internet gambling is equated with a trade restriction prohibited under the General Agreement on Trade in Services.[26]  While it seems unlikely the US will comply with the WTO ruling should appeals fail, it does show the need for a more certain answer in US law on the matter to fall back on, either to support the ban or for compliance with regulations.

            Australia was actually one of the first countries to adopt a regulatory scheme for internet gambling,[27] and if the US chooses to regulate rather than ban, their regulatory system will likely be looked at as a model.  Other islands in the South Pacific region may follow suit, as the Republic of Vanuatu[28] already has.[29]  The Channel Islands near the United Kingdom have also become a popular host for internet gambling.[30]  Most other nations have made no effort to contemplate internet gambling laws.  Interestingly enough, even the United Kingdom, which has extensive opportunities to gamble otherwise, has not specifically addressed the issue.[31]  Meanwhile, the European Union is currently discussing the issue, but with no clear answer at this time.[32]  The potential for conflict between the EU and the US on this issue, however, is definitely present.[33]

            As time passes, more jurisdictions will inevitably weigh in on this issue.  It seems likely that regulations will supersede bans in global popularity, and as a result, treaties on gambling regulations are likely.  Of course, the ultimate outcome in the United States could dramatically alter the course of these treaties.  Only time will answer the questions left related to internet gambling and international law.

III. The Future Problem: The MMORPG

            There is an issue on the horizon of internet gambling that stands to redefine the definition of internet gambling in many serious ways.  However, in order to understand where the problems lie, an understanding of the MMORPG is necessary.  As most people in the legal profession have no idea what an MMORPG is, much less how it works, the game system will be described in full, followed by an explanation of their potential for gambling and why these virtual casinos have a true real-world relevance but also defy proposed internet gambling regulations as they truly fall more into the grey area between the realm of internet gaming and the realm of internet gambling.

A. What is an MMORPG?

            MMORPG stands for Massive Multiplayer Online Role Playing Game[34], and is a genre that emerged in its current state with the release of Ultima Online on September 30, 1997.[35]  However, the MMORPG traces its roots back to the early days of the internet as the theoretical evolution of the Dungeons and Dragons dice-based games of the early 1970s.  Toward the end of the decade, the first Multi-User Dungeon, or MUD, appeared, and the popularity of these bulletin-board, text based adventures truly took off in the 1980s.[36]  The genre moved from text to graphics with Neverwinter Nights on AOL in 1991.[37]  However, it was the previously mentioned release of Ultima Online that truly popularized the genre. 

            The obvious following question is: What is entailed in playing these MMORPGs?  The games are essentially giant online worlds where people can interact with each other as well as completing certain goals within the game, often called quests or events, which progress the online world’s storyline.  While moving through these online worlds, it is common that the character will grow, or level up, causing new and increased abilities and opening up more difficult areas of the world to explore.  These games are also theoretically endless, as the world is perpetual and new “events” can constantly be added by the designer.  Because of the pace of technology, however, games do eventually end.  The server space and bandwith required is eventually allocated to a newer title from that software publisher, which is often in the form of a sequel.  Sequels take many of the same basic elements of the original game and improve upon them while adding more features.  The enhancements are often graphical, as technology constantly allows for improved graphics, as well as changes to the interface or other underpinnings of the game, as will be discussed in the next segment of this paper.

            The final point to note is all of these games have a central theme to their world.  Many of them are a medieval fantasy type world, similar to what appears in the Lord of the Rings or Chronicles of Narnia books.  Most of these worlds are totally original, or play into an existing series of video games with which fans are already familiar.  However, other games have played off of a well known science fiction series, such as Star Wars or The Matrix.  Still other series use what is essentially a mirror of our modern world without the same governing laws.  The themes are limited only by what the game designers can create, and what people are willing to buy.

1. How the Games Work

            The complete workings of these games are highly complex.  The systems behind these games can be broken down into a few distinct elements: technology, character, property, combat, and social interaction.  First, all of these games rely on similar technological infrastructure.  The MMORPG begins with a server, which is a high-powered computer attached to the internet via an ultra-high speed connection.  These connections can handle far more traffic than any kind of home connection.  This server is what holds most of the data that governs the world, as well as handling all interactions between players.  At any given time, hundreds or thousands of players may be on any given server.  Most games have multiple servers, often at different locations in the country to optimize connection speeds, but each character is generally limited to use on one particular server.  On the other end of the internet connection are the players, each on their own personal computer.  That computer has a licensed piece of software installed which allows them to interface with the game server and interact in the game world.  Depending on the demands of the software, games will have different minimum system requirements, although the requirements for MMORPGs tend to be lower than other types of games, as the graphics require less real-time 3D rendering.  Further, each of these licenses are linked to an account.  The account is billed monthly to play the game, typically $10-$20, to cover the ongoing costs of the game, such as server use, bandwith, and in-game employees who help users who are experiencing problems.

The other key element is the internet connection.  The advent of high-speed connections have greatly improved the quality of the game experience, as there is less incongruity between separate user’s individual computers.  As all of these people are interacting with each other in one world in real time, a user’s connection can make his movement appear much slower or jumpy[38]  to other users than they do to him, or vice versa.  This phenomenon is commonly called “lag.”[39] 

The second major component of the system is characters, of which there are two types: player characters and non-player characters.  Non-player characters, or NPCs, are characters controlled by the game itself.  They are entirely artificial, and often act as shopkeepers or sources of information for in-game tasks.  However, their actions are entirely scripted and do not change unless a change is made by the game company.  Player characters are the visual representation of a player on screen, and are entirely controller by the player.  One player can have multiple characters on their account without incurring an additional monthly fee.  Many players do keep multiple characters, either to interact on different servers[40] or to experience different character types.  All of these games offer multiple character types, for example, some specialize in hand to hand combat while others specialize in ranged combat or magic use.  It can be thought of kind of like a football team.  Some players catch the ball, some run with the ball, and some throw the ball, while others may want to be a dual-threat quarterback or play more than one position, like a running back/wide receiver combination.  Players in MMORPGs may make one character, or multiple different characters with different attributes to play the game in different ways because all of the character types are fairly distinct.

The second aspect to characters is character development.  As the game is played, characters increase their level, which will increase their power and abilities.  This will allow players to kill larger monsters or perform other activities, like mining for gold, more effectively.  Higher level characters can also use higher quality items, like weapons and armor.  Character development is one of the primary reasons people play these games beyond the main quest, if for nothing more than bragging rights among other players.

The third element of these games is property, which can be divided into the typical two kinds of property: real and personal.  The key difference, however, is that none of this property is “real.”  It is just a construct of the game.  All games have personal property, most often in the form of money, equipment, and perishables.  Money in the game works just as money in the real world.  Items are bought and sold with shops and other players.  Equipment includes items that are worn, like armor, or used in combat, like weapons, and the term for wearing or holding these items is “equipping.”  The final group is perishables, which are used once and then they disappear.  Typically, this is to recover health lost in battle, and they may take the form of actual food or potions. 

Real property, on the other hand, only exists in some games.  The games that do include it allow players to own houses, castles, islands, or even space stations, depending on the nature of the game.  While the players do have exclusive rights to this virtual property, they do not actually “own” it, per se, as it does not truly exist.  The issue of virtual property and the problems it can pose will be discussed further in later parts of this paper, but many issues in terms of ownership are still very vague.

The fourth element of these games is combat, which is probably the primary task in any of these games.  Every game has some kind of conflict that drives the storyline, and this conflict always involves combat.  Combat is the primary way to increase the level of a character, acquire items, and progress through the world.  As was discussed earlier, characters are developed.  For example, after a monster is killed, the player receives a certain number of experience points, often abbreviated EXP.  Once enough EXP is acquired, the character’s level increases, which increases their abilities.  Because this is one of, if not the only, way to earn EXP, players spend hours killing monsters to improve their character.  The other result of battle is that most defeated foes will drop money, an item, or both.  While it is not terribly realistic that a giant spider would be carrying around a wallet, it has become the norm within the industry, and is the primary way to make money in game for most characters.  Finally, the way to move the story along is typically to defeat something.  Therefore, in order for the game to progress, combat is unavoidable.

The final element is social interaction, which can be divided into combat interaction and non-combat interaction.  Combat interaction can be in the form of player vs. player competition or cooperation between players to accomplish a goal, such as defeating a very high power enemy.  Non-combat interactions take many forms.  Players often simply chat about both in-game and real life topics.[41]  Players interact to trade goods.  Most importantly, at least for our purposes, players interact to gamble.  While the methods of gambling will be discussed at length in following portions of this document, the fact that there is gambling is a critical point to the analysis of this problem.

2. Who Plays Them and What are the Social Implications?

            The MMORPG playing community keeps continually growing.  In the early days, when the internet was not nearly as widespread, the lack of access kept player counts and popularity artificially low.  However, with the advent of widespread internet access and high-speed internet access, the genre has really grown.  At its peak, Ultima Online had 250,000 subscribers in July 2003, but other games have proven that 250,000 users is a comparatively small number.[42]  Everquest peaked at approximately 450,000 subscribers.[43]  World of Warcraft has proven that the subscriber base can be even larger, acquiring over 4.5 million subscribers in under one year.[44]  The growth trend is presumed to continue, as what was once a game for computers only has expanded to home consoles such as Sony’s PlayStation 2 and Microsoft’s Xbox360 with Final Fantasy XI Online.[45]  It has even been theorized that the MMORPG may become the golf of the future, as a sign of social status and a meeting place of the upper-middle class.[46]

            The makeup of these players is as varied as the population of the world.  Players range in age from middle school to middle age.  Players may be students or retail workers or doctors or lawyers or retirees.  While exact statistics are difficult to come by, anecdotal evidence shows that the players span the gamut of society, with the only caveat being possession of a computer to play the game on, an internet connection, and a way to pay the monthly service fee.  The few statistics that are available do paint an interesting picture.  The average player age is 26 years old, but 25% of players are teenagers.  Roughly 50% of players are employed full time, over one third are married, and nearly one quarter have children.[47]

Because of the unique level of anonymity that exists online, and the extraordinary level of personal input into both the character’s look and behavior by the player, the MMORPG has provided extensive potential for study by psychologists.  In recent years, studies by Edward Castronova,[48] Sherry Turkle,[49] and Nick Yee’s Daedalus Project[50] have provided in-depth insight into the psychological aspects of the MMORPG world.  These formal studies are in addition to the high volume of more anecdotal documented odd behavior[51] mirroring other parts of the real society in the eSociety.[52]  As the volume of players increase and the MMORPG becomes more widespread, more studies are likely to present themselves.

B. What is the potential for Gambling within the MMORPG?

            As was mentioned previously, there is gambling within these online universes.  Gambling in these games has actually been a source of some controversy within the MMORPG developer and player communities, and there have been a number of positions taken up by both groups.  As a result, there are two types of MMORPG gambling: un-integrated gambling and integrated gambling.  The results of these two systems are very different, as are their theoretical limits.

1. Un-integrated Gambling

            Un-integrated gambling is the far more common method available at the present time, however it may not be in the future.  Un-integrated gambling means that the developer has not specifically made gambling part of the game, but players have figured out a way to use what is available in the game to gamble regardless.  While some games simply assume that they have skirted any connection to gambling by not explicitly providing for it, other games have gone as far as to actively ban and police un-integrated gambling.[53]  However, even after these virtual casinos are shut down, newer, more inventive adaptations of gambling to the MMORPG inevitably follow, such as the recent BINGO outbreak in World of Warcraft.[54]

            Un-integrated gaming is very limited.  Players are constrained to cobble together what the game allows.  Moreover, they are required to trust in other players to pay out the prizes or results of bets made.  Much like real world illegal gambling, a player who does not receive payout has no recourse within the game as it is a prohibited activity.  However, much like real world illegal gambling, it seems that un-integrated gambling will occur whether or not it is permitted by the game.

2. Integrated Gambling

            Integrated gambling seems to be the growing trend within newer games, though there is the notable exception of World of Warcraft, as mentioned previously.  Integrated gambling can be defined as gambling in the game that is directly supported by the game engine.  In other words, the developers have built gambling into the game itself.  Because of the limitless potential for programming, any type of gambling currently known can be added to the game, and this ignores the potential to develop new hybrid or entirely original gambling systems.  The most notable example of this is Lineage II.  In an update from December of 2004, the creators added a very thorough gambling system to the game, which was a first in the MMORPG world.[55]  The gambling system includes pari-mutuel betting on monster races that resemble horse races, dice games, and a lottery. 

            While Lineage II was the first to include such a system, it is unlikely to be the last or the most in-depth.  Some games seem to dictate its inclusion more than others.  For example, a wild west themed MMORPG would be likely to include a variety of card games.  Because Lineage II has started this trend, it is safe to assume other games will not be far behind in adding gambling features.

C. Why does this even matter?

            To this point, the reason this gambling poses a problem has not been made entirely clear, and this omission was entirely intentional.  Now that the games have been explained, the problem can be explained.  Without the background in the games themselves, the problem is far more amorphous and ambiguous.  After all, no one has ever proposed regulating electronic games that involve gambling.  The reasoning was the gambling winnings had no value, and the activity was entirely for fun, not profit. 

            The MMORPG has blurred the line between pure entertainment and entertainment for profit.  With the proliferation of eBay and other electronic auction sites, ways to profit have begun to dramatically change.  In the case of the MMORPG, an entire external economy has emerged outside the game.  This is an unregulated and rapidly expanding economy.  Just as understanding the game itself was key to seeing the problem, a thorough understanding of these eBay economies is necessary to truly understand the scope and potential for problems, as well as ways to potentially regulate this emerging industry.

1. The Economy Surrounding the MMORPG

            It seems extraordinarily hard to believe that there is a significant potential for profit in playing video games, but between the MMORPG and eBay, this has become the new reality.  It is also hard to believe that virtual property would acquire a significant real world value, but the market is not only there, it’s booming.  There are four primary eBay markets: currency, personal property, characters, and real property.  Just to get an idea of how real this issue is, an eBay search for World of Warcraft generally turns up 2800 or more auctions.[56]

            Currency markets have become far more legitimate in the past few years, and the volume of trades is constantly increasing.  A number of web sites, such as MMOMarkets.com[57] and the Internet Gold Exchange,[58] actively track the trading rate of online currency in many games.  For example, as of October 25, 2005, World of Warcraft gold was trading at a rate of 100 gold pieces to $8.71.[59]  With the advent of tracking, many people have become virtual gold traders,[60] and legitimate business publications and business schools, such as the Wharton School of Business at the University of Pennsylvania, have begun to explore trade in virtual gold as a legitimate investing strategy.[61]  From January to April of 2005, over $2 million was spent on World of Warcraft gold.  Moreover, the top seller in January and February topped $40,000 in sales each month, and that number is expected to grow as the player population grows.[62]  Expanding these numbers out to the entire year, the top seller can make in excess of $500,000 in 2005, and the total transactions in 2005 could top $6 million, and these numbers are just for gold in one game.  Considering the number of MMORPGs currently active, it would not be surprising to see 2005 top $10 million in auction transactions.

            Other markets are not nearly as closely tracked, but they do exist.  Personal property auctions tend to be for rare, high level weapons and armor.  Character transactions are for high level characters, and single characters often sell for hundreds of dollars.[63]  The real property market online, however, sees far fewer transactions.  These transactions do tend to be much higher value.  For example, in the game Project Entropia, one man bought an island for $26,500 and another bought a space station for $100,000.[64]  The odd part here is the people who bought these properties have already broken even,[65] or in the case of the space station, expect to make over $20,000 per month from the virtual property.[66]  This once again illustrates the amount of money changing hands as a result of these games.

            There is, however, a major complexity to the entire virtual commodity market.  Many games have specifically outlawed these transactions in either the End User License Agreement (EULA) or the Terms of Use/Terms of Service (TOU/TOS).[67]  However, these policies are difficult to enforce as the volume of traders is so high, and the auction transactions are difficult to trace to any particular account.  In addition, the argument is frequently made that the transaction is not for the item itself, but rather for the cost of the time to acquire the gold or build the character’s level.  While this argument has not been widely accepted by the game companies, they have also done little to actually enforce their EULAs and TOU/TOSs.  In response, Sony has created their own auction system in order to monitor the transactions in their Everquest game.[68]  As will be discussed later, this is one step toward actually solving the problem.

2. The Potential for Leaving the MMORPG Unchecked

            The theoretical potential for abuse of a continually unregulated MMORPG economy is limitless.  Just as any industry with a large volume of untracked money has the potential for abuse, the MMORPG and eBay have the potential for abuse.  However, this potential is magnified by the level of anonymity the internet can provide to potential abusers.  While three examples will be discussed here, the possibilities are truly nearly limitless.

            The first possibility is that a large number of underage gamers will begin to profit from gambling.  After all, it is not difficult to circumvent current age gates to create both a game account and an eBay account.  This would allow players to enter the game, gamble enough to win, and sell the winnings for a profit.  As age is always a concern for any gambling regulation, it would be reasonable to assume that if teenagers began to profit significantly, people would notice.

            On the flip side, it would be reasonable to see situations where children got a hold of their parent’s credit card and purchased large volumes of gold to feed a gambling addiction.  Addiction is always a touchy subject, and as will be discussed later, is one that has become a significant problem among MMORPG players.  If you can imagine someone having what is essentially a double-gambling addiction, you can imagine the potential here.

            The final possibility is one that many industries face.  As the volume of unregulated trades increases, the potential for money laundering through virtual gold transactions becomes quite real.  As these eBay transactions are untracked, it becomes a simple way to hide the source of money, or even transfer large sums of money with the only margin for error being the fluctuation of the price of these virtual assets.  Just think, someone could use drug money to buy gold, then give the gold to another character, who in turn sells it to make back approximately the same amount of money that went it, give or take the market fluctuation.   

             While these three examples all may never come to pass, if steps are taken now to regulate what could be, then a problem will hopefully never arise.  This is a rare opportunity to take a proactive approach to an emerging problem, rather than attempting to play catch-up once the problem gets out of hand.  With these issues in mind, the final section of this paper will lay out potential regulatory solutions to the problems created by the MMORPG.   

IV. Regulating the MMORPG

            The previously mentioned potential regulations for internet gambling would not apply to the MMORPG problem that has been laid out.  The MMORPG is such a non-traditional form of internet gambling that it would be outside the scope of internet gambling bans or other regulations.  Moreover, as it is conceivable that a player could never gamble nor profit from these games, the internet gambling regulations should not apply on their face, as they would penalize non-gambling activity.  Therefore, the only way to regulate the MMORPG is to create regulations specific to the problem, which could also apply to other similar non-traditional internet gambling should it arise.

            The regulations have to address 4 primary issues: age, money, intellectual property, and addiction.  Moreover, these regulations will require some cooperation from the game companies in order for them to work as they should.

A. The Issue of Age

            As was pointed out previously, the problem with age is that players span the gamut of ages.  A survey of the minimum age to place a bet shows that the minimum age is typically either 18 or 21.[69]  The main issue of contention will be to determine whether to regulate based on an 18 or a 21 minimum age.  This would be a level of consistency that is absent from allowing States to regulate age.  Because of the 18-21 age group, the players can be divided into three groups: 21 and over, 18-21, and under 18.  The age issue, however, is one that will have to be regulated in tandem with the money issue.  The exact nature of this regulation will be discussed in the money section.

1. Players 21 and Over

            Players over 21 will require no age-specific action.  No state requires players to be over 21 to gamble in some form or another.  Players over 21 are definitively adults, and should not have their freedom to play impinged by unnecessary regulation.  Of course, some form of age verification will be necessary to validate the claim that the player is over 21.

2. Players 18-21

            Players 18-21 are truly the only group under debate.  Some states allow 18 year olds to gamble, especially in lotteries.  Others require gamblers to be 21, especially in states that allow casino gambling.  In the case of the MMORPG, the 18 year old cut-off is probably the more appropriate one.  In the case of casino gambling, much of the concern in allowing people under 21 to drink is the expanded potential for underage drinking.  Obviously, there would be no alcohol involved in MMORPG gambling, as people will be gambling from their homes.  Moreover, 18 year olds are adults, and absent a showing of damage to those age 18-21, they should be allowed to participate in MMORPG gambling just as those over 21.

3. Players Under 18

            Players under 18 are just as clear a group as those over 21.  No reasonable legislator will want to allow them to gamble.  Moreover, there is no reason to.  While no regulation will be perfect in preventing underage gambling, restrictions could be designed to significantly improve security over the current age gates, especially as additional information will be needed.  This need will be explained in the monetary section.  Of course, there is no substitute for parental education, and parents need to be aware of the potential in the MMORPG so they can look out for it.  In this case, parents also need to be punished if they allow their children to circumvent the age requirements.  Unlike a parent who allows a child to watch an R rated movie or play an M rated game,[70] there are real-world monetary impacts of allowing underage players to gamble.  As such, regulations need to take this disparate impact into account.

            An alternative would be to create strict “No Sale” servers and restrict minors to playing on them.  If the gaming company is using the tracking and monitoring systems described in the next section, it would be feasible to designate some servers as “No Sales.”  These “No Sale” servers would allow for all normal game play, but no real world monetary transactions for in game items, currency, or characters within that server.  Should these servers be set up, minors could be limited to “No Sale” servers, while adult players would be allowed the choice between “Sale” or “No Sale” play, much like the choice between PVP and non-PVP servers currently.[71]

B. The Issue of Money

            At the most basic level, the root of all gambling regulation is money.  In the same way, the root of the MMORPG regulation must be the control of the money flow.  As such, the money issue has four components: money flow, taxation, tracking, and cheating. 

1. Analysis of the Money Flow

            The money flow was briefly discussed in the earlier explanation of the MMORPG external economy.  To quickly review, all of the actual money transactions occur through online auction sites, such as eBay.  All of these transactions are electronic, and that is critical to monitoring the transactions themselves.  However, before the transactions can be tracked, the modes of profit must be analyzed, and broken down into forms of taxable income as defined by the Internal Revenue Service.

a. The Ways to Profit

            Referring back to previous discussion, people profit from the sale of characters, property, and currency from within the game.  These in-game “assets” can be acquired from ordinary play of the game: completing quests, performing tasks, participating in combat, mining the landscape, etc.  This is what would be considered part of the “legitimate enterprise” of the MMORPG.[72]  However, as gambling is beginning to permeate the games, gambling winnings suddenly become a way to quickly profit.  This poses a real problem for tracking and taxing: how do these assets get classified, and how much tracking will be needed to make that tracking a reality?

            The reality of the situation is that all of these activities in-game are the same thing.  At its core, the MMORPG is just one large, complex game of skill, with some sub-games of chance.  This would be a bold step in classification, but an essential one.  Under this theory, all profits from playing an MMORPG are, in fact, gambling winnings for the player.  At the same time, someone who plays the game and never sells anything from the game for profit would never face any tax issues, nor be required to comply with the registration system.  This issue will be explained in full in the upcoming tracking portion of this paper.

            At the same time, the game companies are profiting from both sales of software licenses and monthly service fees.  This, however, is still ordinary business income.  Unlike casinos, MMORPG makers are not taking a cut of the total amount gambled.  Moreover, the number of games played bears no impact on the amount they profit.  Rather, it is like any other service: based on the volume of customers they serve.  As such, MMORPG developers, for the time being, would be able to classify all income from the game as ordinary business income.[73]

b. The Unique Problem of Unlimited Assets

            There is a unique economic problem posed by the very game engine itself, and this problem is unique to the player’s end of the experience.  Specifically, there is no limit to the assets the game can produce.[74]  Taking currency as an example, players are constantly mining for gold.  At the same time, other players are constantly killing monsters to earn gold.  As more players enter the fray, the total amount of gold on all servers increases exponentially.  Of course, as items are typically not transferable between servers, the limits of one server would be the main concern.  While they will increase over time, the rate is much slower and is highly dependant on the server’s population and activity.  This is the basis of inflation in game, which occurs much more rapidly and severely than inflation in the real world.[75]  These economies theoretically can be leveled out, although more often than not the developer does something to destroy the economy before this happens.[76]

            Can, or would, regulations make any great strides in stabilizing the MMO market?  Arguably, yes, if they were to follow the regulatory scheme that follows in this portion of the paper.  As with anything that imposes an instant tax burden on an industry, far fewer people will see an economic benefit in participating.  As such, with fewer people entering the MMO workforce, inflation should be initially slowed and more quickly stabilized.  This would apply equally to the first server and the last server because the trend repeats with each new server and its own non-transferable property universe.  Of course, should any developer ever be able to create one server that could handle all users, or make property transferable between servers, then the market would behave differently.[77]  As the MMORPG becomes a more legitimate form of income, market stabilization is obviously a desired effect.  Any business venture requires some risk, but a stable market would be more desirable for both the buyer and seller.

2. The Tax Classification

            It has already been mentioned that all profits from the sale of items in MMORPGs are the product of a game of skill.  Because of this classification, it would not be problematic to classify all MMORPG profits as gambling winnings.  The IRS defines gambling winnings as “winnings from lotteries, raffles, horse races, and casinos” without limiting it to these classifications.  Moreover, these winnings may include “cash winnings and also the fair market value of prizes such as cars and trips.”[78]  There are additional requirements for withholding by the payer for larger winnings.  This, however, is at odds with the basic premise of MMORPG payouts. 

            The MMORPG profits vary from a traditional casino payout.  In a traditional casino payout, the large amounts are paid out by the house, and having multiple payouts is a much rarer occurrence in casino gambling.  In stark contrast, the MMORPG payments tend to be very numerous, small, and from a high number of sources. Because of this difference, the sales totals are going to have to be tracked as the year progresses, and aggregated at year end to determine actual tax liability. Therefore, the role of the payer and house must be taken over by the auction mechanism, in terms of tracking and reporting. 

3. The Problem of Tracking

            The real issue to address is the tracking of these winnings.  At present, eBay is not required to track or report total sales for tax purposes.  This entire concept of tracking is going to require one of two activities: partnering between MMORPG developers and existing auction sites like eBay or PlayerAuctions.com,[79] or independent auction sites developed by the game company for their particular game.  The latter has been the choice of Sony Online Entertainment through the controversial implementation of their Bazaar system for the Everquest MMORPG.[80]  While Sony’s system does not use real money, a similar system could be implemented and integrated into future MMORPGs using real money.  In the alternative, a hybrid system could be created, making use of a web interface that is also integrated with the game.

The IRS requires that winnings over $600 must be reported by the payer, and that winnings over $5,000 have a 25% withholding by the payer.[81]  Based on this requirement, and the previous discussion of the auction system assuming the role of the house, the system would work as follows.  Players intending to sell anything from the game must register in full with the system.  This registration would go beyond the typical eBay or PayPal registration, requiring a social security number and concrete age verification to the legal age determined by the regulation.  The social security number is necessary for tax reporting purposes.

Once registered, the tracking begins.  Anyone whose sales exceed $600 will be reported to the IRS.  Once the $5000 barrier is broken, an automatic withholding system will need to take place.  This could be through additional fees attached to completed auctions, or through agreement with a payment company, such as PayPal.  Through this kind of mechanism, the “gambling winnings” could be accurately tracked, and IRS reporting and withholding requirements could be met.  The high tax rate coupled with the automatic reporting would create the kind of deterrence that would stabilize the market.  Of course, this entire system, even if regulated as such, would require cooperation from the game and online auction industries.  Gaming companies may be more than willing to cooperate, as the creation of their own integrated systems could be a new source of revenue for them through transaction and listing fees.  Profits could also result from successful collaborations with eBay and PayPal.

4. The Problem of Cheating

As with any game, cheating is a perpetual issue, and it always applies to the payout.  People primarily cheat in order to profit.  Cheating within video games has existed for years, first taking widespread use with the advent of the Game Genie for the Nintendo Entertainment System.[82]  Of course, at that time cheating was limited to the immediate players, which was typically a maximum of two.  Once online play became more prolific, cheating spread in a new way, taking advantage of external programs running simultaneously to modify the in-game data.  The real need for anti-cheating measures became evident with the game Diablo, which has many MMORPG elements, and subsequent games have looked to Diablo for ideas on both cheating and anti-cheating measures.[83]  Since Diablo, anti-cheating measures have improved greatly.  The ultimate goal is to provide a fair game for all to play and not allow a few cheaters to ruin the gaming experience for all of the other players.

Once the real-world value element enters, in-game cheating, either generally or in the gambling system specifically, becomes a major concern.  The irony is that cheating in the game doesn’t actually hurt anyone if they are simply creating more of what is already an unlimited asset.  This is the polar opposite from in-casino cheating, which hurts the house or other players by taking a limited asset form them.  In-casino cheating is theft, but MMORPG cheating is really more of an annoyance until profits enter the picture.  Game integrity has always been a priority for both gambling establishments and video game companies.  The midpoint between these conflicting interests would be to only punish those who both cheat and profit from it through the auction system.  Ultimately, a lengthy dialogue between game developers and legislators needs to take place to determine what level of regulation, if any, needs to be codified on the matter.  Criminal punishments, account terminations, and higher tax rates are some possible solutions, but not all require specific codification.

Like any other new regulations, the restriction will irritate some people who have grown accustomed to the way things are now.  Under the previously mentioned “Sale” and “No Sale” server concepts, some “No Sale” servers could be designated “Low Regulation.”  On these servers, the restrictions needed for real world money could be removed, allowing for greater player freedom and an experience similar to what exists now.  Once again, developing these servers would be up to the game company, and would largely be based on player demand.

C. The Intellectual Property Issue

            An issue that will also require cooperation, but will likely face more resistance, is the one left by intellectual property.  There has already been controversy on this front, and requests for compliance will likely be met with mixed reviews.  However, in the past, the gaming industry has at least been open to dialogue with legislators, so there is some hope.  After discussing the current problematic state of intellectual property, the steps needed to rectify the matter will be discussed.

1. Of Licenses and Legal Sales: Regulations in the Face of a “Black Market”

            As with all software, purchase of the software is actually purchase of a license to use the software.  Because of this arrangement, players never actually own what they are selling.  The argument, as discussed previously, is that the sale is for the time to acquire the item, gold, or character.  This argument has been accepted by some, and rejected by others.  The biggest controversy actually stemmed from the game Everquest and Sony Online Entertainment’s active policing of auction sites for sales forbidden by their EULA.  While no end result has been reached, there has been at least one class action lawsuit filed in the wake of account terminations.[84]  Similarly, Blizzard Entertainment has sent out cease and desist letters related to sales in World of Warcraft.[85]

            Newer games, such as Project Entropia[86] and Second Life,[87] actually accept real-world transactions for in-game property.  In fact, they encourage it.  This absolute disparity between different games causes a real problem for potential regulations, even though the reality is that sales occur whether the EULA accepts of forbids it.

2. Required Industry Steps to Match Legislative Steps

            In order to make regulations work, the gaming industry would have to cooperate with legislators in order to create an environment in which regulations will work.  Specifically, game companies will have to draft future EULAs to clarify that the real world sale of in-game property is acceptable.  Moreover, careful drafting would ensure that the intellectual property rights remain with the gaming company, as they do now under present licenses.  Regulations could further enforce these intellectual property rights, or at least make mention of them to encourage industry cooperation.

D. The Addiction Issue

            Just as with casino gambling, addiction is a real concern.  In the case of the MMORPG, the level of addiction is astounding.  The odd reality, however, is that the majority of the US is unaware of the problem.  Shows such as 20/20 and 60 minutes have occasionally aired segments on this addiction.[88]  After discussing the problem of addiction in the MMORPG, this paper will discuss the concept of compound addiction along with a possible solution.

1. MMORPG Addiction: An Unfortunate Reality

            MMORPG addiction is very real and arguably worse than compulsive gambling.  Termed “compulsive gaming” by some, this behavior is one of the most extreme addictive behaviors that exists in our society.  While statistics on addicted gamers are practically nonexistent,[89] anecdotal evidence is plentiful.[90]  One of the most unfortunate incidents resulted in the death of an infant because of neglect by the parents, who were both playing World of Warcraft obsessively.[91]  In fact, there is now even a small group called “MMOs Anonymous.”[92]  While the US has been slow to accept this new condition, other parts of the world have already acted.  The first MMORPG addict recovery center was opened recently in Beijing, China.[93]  Other treatment centers are expected to open in other parts of Asia.

2. Compounding Addiction: MMORPG Addict Meet Compulsive Gambler

            Seeing how severe MMORPG addiction can be, it would not be difficult to imagine how compounding this addiction with compulsive gambling would cause significant problems.  Just imagine the problems that could result from someone who is both addicted to playing their MMORPG as well as gambling within it.  Moreover, addiction to one could lead to addiction to the other, as often happens with drug addiction.  The potential for compound addiction is only more realistic if MMORPG addiction is in fact the result of an addictive personality.  Further study needs to be done on MMORPG addiction before any concrete answers are available.

Once the problem is acknowledged, the obvious following thought is to wonder what can be done.  China has proposed its own solution, limiting gamers to 3 hours of play per day by law.[94]  Such a limit would likely never be acceptable in the US.  While no regulation could likely deal with the problem directly, taking some of the tax revenue from the MMORPG games and applying it to at least one national MMORPG addiction center would be an acceptable alternative.  This first step could do wonders for this emerging problem, as well as provide a significant arena to study the MMORPG addiction problem further.

E. The Overflow: How Will This Affect Other New Age Gambling

            One major problem with regulating the MMORPG is that these regulations may have unintended effects on the emerging Professional Gaming Leagues.  These leagues, such as the CPL[95] and WCG,[96] have tournaments, and top players can earn over six figures per year. While these leagues do not compete in MMORPGs,[97] terms that are not clearly defined in the potential regulation could envelop these leagues as well.  While it is reasonable to assume that some people would like these leagues grouped in with the MMORPG problem, with their winnings considered gambling winnings, the comparison here should fall to other professional sports.  While these people are playing a game of skill, they are not wagering on it.  They are competing, just as teams in the NFL compete or players in the PGA compete.  As such, tournament winnings should be considered and classified the same as NFL player salaries or PGA golf tournament winnings.

There is another emerging trend that may fall outside both MMORPG regulations as well as normal internet gambling regulations.  Specifically, companies are allowing players to wager directly on the outcome of various games they can play online.[98]  While this falls closer to traditional online gambling in that these are direct, real money wagers, the classification of these games is wholly unknown.  While they are games of skill in one sense, in another they may be sports gambling based on the emergence of the previously mentioned gaming leagues.  While this concept has yet to take off, it will likely present a problem if or when it finally becomes widespread.

V. Conclusion

            Internet gambling is much like an old, condemned house on an otherwise normal block.  Everyone knows it’s there, everyone knows it’s a problem, everyone talks about it, and no one has done much of anything about it while it’s waiting to collapse on some kids who decide to spend the night in the “haunted house.”  Of course, once the house does collapse, maybe someone will finally clear out the lot and rebuild.  It may take some significant internet gambling incident to bring regulation back to a priority for Congress.  As it has been thus far unresolved, it may be expecting the impossible to think that an emerging problem like the MMORPG will be regulated before the problem is brought to the forefront by a significant activity or event.  It is only a matter of time until the problem develops to its maximum potential.  Once it does, regulations will be met with greater difficulty and resistance as the genre becomes more firmly established in the video game world and more diversified in the manners and methods available to profit and gamble within them. 

The time is now to regulate the MMORPG.  Years ago, it was far too new and far too uncertain to expend legislative time on.  In the future, the user base will only continue to grow and the problems will only multiply.  Internet gambling is close to a decade old without any true regulation.  While dealing with this well established problem, it would be worthwhile to address the emerging MMORPG problem.  If the solution chosen is to study the internet gambling problem to regulate rather than ban it, the commission should also explore the MMORPG so it can be regulated in similar but separate regulations passed at the same time.  The future undoubtedly holds even more complex internet gambling problems involving technology we cannot even imagine.  Before that technology arrives, efforts need to be made toward dealing with the technology we already have.  Technology poses continuing problems for a number of fields of the law, and gambling regulation will inevitably be one of them for years to come.

[14] Jon P. Jennings, Letter from the Department of Justice to Senator Leahy regarding S. 692, the Internet Gambling Prohibition Act of 1999 (June 9, 1999), available at http://www.usdoj.gov/criminal/cybercrime/s692ltr.htm