Do We Need a Virtual Gaming Commission?

In another life I was a researcher on gambling, and perhaps the most important public policy question that (legalized) gambling presents is regulatory: how are the games guaranteed to be "fair"?  In Nevada, for example, the Nevada Gaming Commission oversees the casinos to ensure that the operations of the employees and of the technology (roulette wheels, slot machines) are, as their mandate from the legislature puts it, "honest and competitive." The point is not to protect people from making some bad bets (such as betting on a single number in U.S. roulette -- a 38:1 gamble that only pays 35:1), but to guarantee that the games are (a) run as they are claimed to be and (b) in the case of slots, not paying out less often than a certain floor percentage. Why think about this here?  Well, with RMT now openly encouraged by the makers of some virtual worlds, can their players trust the 'house' not to skim a bit too much off the top? 

In recent discussions here and here, the possibility was raised that in MindArk's Entropia Universe making money is more akin to striking it rich in Vegas than to the just rewards from applying oneself through hard work and entrepreneurial skill. In a related vein, Jason Archinaco has recently posted a piece to ssrn about the career of a virtual horse at horseracingpark.com. While the piece for the most part applies a number of the ideas by our esteemed messrs. Castronova, Hunter, and Lastowka to ask questions at the intersection of law and (virtual) horse-breeding, Archinaco also points to the position of the game's makers and their high level of control over the conditions under which the virtual breeding and racing take place.

Big deal, you might say. If people want to bet their money in an enviroment where the mechanisms for determining outcomes are hidden, it's their money to lose. But public policy on gambling has usually wound up in a more regulatory position, forcing gambling venues to open their procedures and machines to the public or barring that (in the case of slots) to a licensing commission. Most policy experts on gambling point to the well-documented capacity of gambling to prey upon the hopes of the desperate, thereby worsening poverty. The Nevada legislature's mandate to the Nevada Gaming Commission states:

The free market, then, does not reign over gambling in Nevada. Should it reign over online virtual worlds that encourage the speculative inflow of real capital (via RMT)? The key issue here is information; must virtual world makers with significant economies and RMT "open their books" about how their economies operate, given how much control they have over the conditions and mechanisms of those economies?


Comments on Do We Need a Virtual Gaming Commission?:

CmdrSlack says:

It would seem that your question is best answered on a case-by-case basis. Does a world like Second Life really have much of an element of chance linked to financial success? It would seem that "striking it rich" in SL is based on having a good product and selling it well.

Perhaps in EQ2, with the station exchange servers, you could make the argument that there's some need to check up on things, but only if SOE was selling items for cash as oppposed to being a middleman for the players.

You might do well to look at the companies that develop mobile games. From what I understand, there's a lot of tweaking that must be done to the mobile games that have prizes -- there's some magical amount of player skill vs. chance that prevents them from being gambling. This leads me to believe that a chance vs. skill ratio might be a good indicator of a need to regulate. At least, that's how state laws apparently shake out.

Posted May 31, 2006 11:55:33 AM | link

randolfe_ says:

Isn't a significant source of SLL/USD revenues in-game gambling proceeds?

This almost surely already falls under existing US laws governing "internet poker". Although I think the theory applying to such relies upon older laws, these laws are in the process of being revised at this moment.

Games like SL that involve some aspect of direct gambling activity will most definitely fall under gambling/gaming regulations and restrictions eventually. The question is more when the authorities decide to enforce these laws and how any court tests play out.

For games that do not involve gambling, the industry will probably be allowed to continue in a self regulatory manner. Hedge funds are essentially self regulated and represent many times the RMT market size. Just because RMT is big doesn't mean it can't be opaque (at least in the US).

Posted May 31, 2006 2:16:23 PM | link

Matt Mihaly says:

Hedge funds have participation requirements though, don't they? Qualified investor? 2 years of income over 200k/year or 2 million net worth? Assuming I'm not mis-remembering, that's potentially a major difference been hedge funds and RMT, and a difference between hedge-funds and gambling in a casino or online.

--matt

Posted May 31, 2006 2:37:42 PM | link

Chas says:

CmdrSlack> Does a world like Second Life really have much of an element of chance linked to financial success? It would seem that "striking it rich" in SL is based on having a good product and selling it well.

But... we have games in second life, like Tringo, that players will often play for a prize that can be RMT to cash. If I made a virtual vegas, or if the prizes for these social games grew- organically, mind you- no developer endorsement- at what point do regulators step in and say that laws for online gambling now apply?

After all, isn't that how the online casinos work? RMT to "chips" or other in-game credit, then RMT out.

Some of the early MMO's I played (more specifically remembered in SWG) had gambling tables- total games of "chance." Add a sanctioned method for RMT, and what exactly makes this differ from online casinos? Why shouldn't it apply?

And... if it does, how does a developer with player-generated-content insulate itself from the actions of its players? What are its responsibilities, if any?

Beyond gambling, there are oversight agencies for many industries that emerged simply to combat the lack of trust perceived in an industry: whether through fraud or public perception of fraud, or simply market instability.

Posted May 31, 2006 3:03:31 PM | link

Chas says:

I tried to keep Mindark out of my post, honest. I figured they'd had enough of a beating recently, so I used Second Life as my virtual vegas home.... then the next headline I see is the $320,000 lease of Wager Island

Posted May 31, 2006 3:08:04 PM | link

Scott Jennings says:

I agree that the online gaming industry (and the gaming industry in general) is in desperate need of oversight, and hope that the industy itself comes up with a solution before one is forced upon it.

Posted May 31, 2006 3:08:17 PM | link

Chip Hinshaw says:

Using SL as an example, who would be responsible for the "legitimacy" of the gaming content?

Linden Labs? The content creator? The content owner?

For example, if I purchase a blackjack table in SL that was created by someone else, can I be held responsible if it cheats (presuming that I just think its paying out the house what it should)? Is LL responsible for examining the "regulatory compliance" of every object built in their world? Or does it simply get traced back to the creator?

I imagine that, in RL, the casino and the game-maker (if we're talking about a crooked slot machine, say) can both be held responsible (if it can be proven that the casino knew it was fixed, which you would kind of have to figure they would. So, content creator and content holder are both potentially responsible. How does LL figure into this RL scenario? Are they the land owner? The government? What? I guess in either view they would not be responsible for the compliance of such devices, but they might be responsible for conducting audits ... maybe?

As RMT grows something like a "commission" will be a necessity, imo.

Posted May 31, 2006 3:27:45 PM | link

Chas says:

Chip,

The example you provide is an excellent way to see how difficult such regulation could be:

The "cheat table" need not be so obvious- and probably wouldn't be. The table might have a few "unintended bugs" that could be exploited, but isn't "expressly made to cheat"

The "house", (the table's "owner") can claim ignorance of the bug... unaware on how the code interacted with other assets to create the errant behavior. More often, the "house" wouldn't directly take the gain of the cheat, but would be in collusion with "players."

For that matter- is it that "player" using the cheat code that is to blame: a "hacker" that exploits an otherwise honest system.

Then, there's the possibility that the object itself wasn't buggy, but bugs in the underlying virtual world platform affected the object's actions.

If the system's distributed as a Peer-to-Peer MMO, as some have proposed, then we have to look at the reliability of the host system too.

What's regulated would depend largely on how the regulatory agency operates, and how much authority it's given. A player-organized system could offer a "stamp of approval" to assets they put under scrutiny, another for "houses" that run legit shops, and possibly a "blacklist" of less reputable players, but they'd have a tough time getting the developers to submit to a code review, for example.

Posted May 31, 2006 3:46:44 PM | link

Thomas Malaby says:

Great comments, all. As a point of clarification I was thinking of the issues of legitimacy, transparency, and fairness at the level of virtual worlds themselves, and how their code structures things like scarcity, etc., rather than for gaming within a virtual world, such as is common in Second Life. Quite a few of the issues do indeed overlap, but the point is precisely that the kinds of emergent solutions to in-world games' lack of transparency ("stamp of approval" and similar) are of a different order than those that would address concerns at the next level up, as it were.

Posted May 31, 2006 7:04:26 PM | link

Chas says:

At the game level, I can see some form of "certified rating" that would review policies for consumer protection, but I see this functioning differently for "game" and "world" play

In worlds that put value in "user created content" and "user ownership," the goods still have value in the context of that virtual world. A business practice that offers stability for the goods or a planned path of expansion would be of higher value to the content creator/owner than one without such guarantees. Imagine your $100,000 investment in a space station 1 month before the servers shut down.

An independent "auditor" that reviews the policy and health of a virtual world would reduce fears of investment there and encourage player participation.


In our current stock of games-more-than-worlds, we're less likely to see the game mechanics openly reviewed and rated. However, if a game developer wanted his product to be rated for "serious" (money wagering) competetive play, then some guarantee of a level battlefield would be helpful.

Such "semiprofessional" gaming would still likely emerge at the player level, with player datamining "rating" games for competition, and agreeing among themselves what's fair and unfair within the league. As these gaming leagues become a more influential bloc, the developers will adopt a few of the league standards, and the league will then have started to migrate to a game mechanics regulatory agency for games that wish to be considered more "sport" than "play."

Posted May 31, 2006 8:09:13 PM | link

Juuso - Game Producer says:

I'm with Chas on this. A rating or a certificate of trust could be used.

I believe the same problem is with making Internet payments: can I trust to give my credit card number to some site in the Internet? How can I know that the site processes my card number securily, uses encryptions etc. => by showing credibility: both in terms of familiar site (where uses have reported the site to be ok) and/or with certificates that report "secure playing/paying"

Some kind of program could be compiled to automatically play the casino slots thus giving accurate rating on how much is won... and how much is not.

Posted Jun 1, 2006 6:54:44 AM | link

says:

@Chas --

Actually, I somehow managed to forget the casinos in SL. This is probably because the only time I've visited one, it was empty. Also, I don't much like playing REAL slot machines let alone virtual ones. ;) It would be interesting to see how casinos in SL are handled if some of the current state and federal anti-online gaming laws are passed and signed into law. From what I heard at the gamer technology law conference in Beverly Hills this year, LL would avoid most liability (hopefully) as simply being a "provider." I do wonder whether some of the content rating functions would demonstrate their knowledge of what's on the system, but I think anyone who has even casually entered into SL could attest to the difficulty of policing everything on the system.

It would be interesting to see governments try to come after individual residents. It would also be interesting to see how some of its biggest business people, especially non-U.S. residents, handle tax issues with the U.S. since arguably most of their money is made in the U.S. But that's offtopic.

As far as Tringo is concerned, I think that may fall into the skill > chance category. I'd say this because while the pieces appear randomly, it takes player skill to place them for the best possible score. From what I understand, it's probably enough to avoid anti-gambling statutes. (I don't work for a mobile gaming company, so I'm not 100% versed on the fuzzy math here.)

Certainly, I think that there is attributed value assigned to virtual cash. I think that it's pretty clear that when someone cashes out to real money, there's an obvious tax issue. The IRS even provides for ways to pay tax on value received via bartering, theft, and drug sales.

If, however, we accept that anything RMTable is just as good as cash, especially in RMT-enabled/encouraged systems, should those who simply hold the virtual currency be forced to pay out tax and whatnot for the potential value received?

Gah, sorry for the ramble, I'm still working on the morning coffee dose.

Posted Jun 1, 2006 8:50:44 AM | link

Chas says:

Interestingly, "skill vs chance" is only a metric used in some states. Many disregard skill as a factor see the table.

Still, tringo on a mobile phone might still fall under "social gambling" definitions, as there's no "bookie" or "house" that makes additional money from the event. Again, many states don't even allow social gambling, so check the table, then check your lawyer.


I agree that, in Second Life's case, the "Service Provider" policy should give them some protection. I'm not a lawyer, but in many cases the "service provider" requires very little involvement with the content in question. For copyright cases, a policy of reviewing content before allowing a post can weaken the "service provider" defense, IIRC, because the "provider" now has a more active role in the content.

Project Entropia may have to walk a tighter line here, as their use of customers as unpaid spokespeople and their tendency to promote the success of their participants might tend to tie them closer to their customers' products, perhaps eroding their right to claim "providership." I'm not entirely familiar with the content creation possibilities in PE, so if they're actually providing the gambling objects as well, the insulation of "service provider" might be very thin.

Going beyond traditional "gambling" I think it will be very interesting to see how RMT-based games shake out in the long run. Even if games don't have gambling tables, many states don't distinguish between games of skill or chance.

Take a game with RMT. Include something equivalent to a "jackpot:" a very rare, very difficult spawn that costs alot of time and (ingame) money to track down, with a treasure trove easily worth considerable real world $$ for the slayer(s). It's essentially an unsanctioned lottery, with some skill thrown in, and it's easily capable of exploiting the cravings of habitual gamblers. In some states, it's bound to be illegal to participate in, and in others it's not.

Posted Jun 1, 2006 10:27:32 AM | link

Michael Fatten says:

I think there are many places where Commissional Oversight would be a boon, and some others where it might be needlessly intrusive.

Getting down to some detail in game design, when a group or party co-operate to kill a monster, how is the single peice of loot distributed? Guilds often have management-based mechanisms for distributing the rewards, and some groups can rely on popular concepts like "need before greed", but in your average, run of the mill "Pick up group", players have to rely on a programmed game mechanic to 'randomly' choose a winner for the reward.

I believe most academics will acknowledge that there is no such thing as a true Random Number Generator, and many commercial MMO's use fairly unsophisticated generators since perfection is unattainable. Some commercial MMO's have board forums where players have provided lengthy, detailed statistical analysis showing that the RNG's are less than faithful when distributing rewards. To the extent that RNGs are used to assign awards and determine outcomes of events (ability skill raises, resource harvesting specials), yes I do think that some governing body could certify a game's randomization utility as reasonably "honest and competitive", reasonably free of overlarge peaks and valleys of trending and the like. That is one area where I can see benefit to standardization: making more sure that the reality of how various rewards gets assigned matches up with the rate that designers intended them to flow.

Contrasting that with some governing body unifying the rates of returns for various in-game activities such as mob-spawning, resource-harvesting, combat engines; I dont think there is a happy place for a governing body to operate. The design of game environments should be free to have wide variation in how lucky and wealthy the players will be.

Posted Jun 1, 2006 10:54:38 AM | link

randolfe_ says:

matt,

Hedge funds do have participatory requirements, as do VC funds or any other private equity. Perhaps the industry needs some type of similar screening to qualify players (in an RMT embracing world) thereby inoculating themselves from later claims of loss by players. I think the private equity approach may not be that tortured of a parallel. Essentially, in PE you have an enormous amount of risk, black-box operations, and "games of skill and luck" that aren't categorized as gambling. What the game sector should do (IMO) is aggressively stake out a position and uniformly promote and defend it industry-wide.

Another apt parallel may be the wine industry as compared to beer and spirits. Another example of very different treatment by regulators almost entirely due to industry initiative.

Posted Jun 4, 2006 12:53:41 AM | link

Hiro Pendragon says:

I know I have heard tons and tons of complaints about gambling in SL. There's simply no standards of reliability, both in the programming end and with some unscrupulous casino owners. I remember before SL when I'd play EQ, they had the /roll gambling - and the odds were always very, very stacked. Most people gambling don't realize that legalized gambling odds return 95%+ of the money that they take in, and often virtual world gambling has a much higher overall house rake.

Posted Jun 4, 2006 12:23:14 PM | link

Prokofy Neva says:

Second Life has games-within-games like casinos, but they are no worse nor better than the entire world of Second Life itself in terms of the gamble and risk. The land market isn't at all a sure thing and has the feel of a casino stake more often than not. "Developing a good product" is a necessary fiction, but in fact, who can tell what fashion might take off and what might not? Because the markets are so accelerated and rise and fall so fast with windfalls for some and crushing losses for others, it's more like a gamble than any "investment".

Anyone who thinks they have "invested" in land has to take into account the possibility that they can be expelled for "any reason or no reason" but also the crashing of servers, loss of content, hours spent trying to log-in after game patches (like I just went through) etc. etc.

Everyone says SL isn't a game. I know, I know. But you still play it. You play it, and playing it makes it a risk.

Posted Jun 4, 2006 2:11:13 PM | link