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Money laundering in virtual worlds

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In the last of a risk-focused week of blog entries, I thought it worth talking about virtual worlds.  Now, we talk a lot about virtual worlds these days, after the hype cycle of Second Life and not forgetting the other worlds of Entropia, There, World of Warcraft and more.  In fact, the growth of virtual worlds and MMORPGs (Massive Multiplayer Online Role Playing Games) has exploded over the past year and it is raising concerns in the risk community.

Maybe this is not surprising when a great deal of cash is flowing through such systems.  For example, one nutter recently paid out over $10,000 for a virtual character in World of Warcraft according to Gizmodo: “The character, a rogue, came wielding the much prized Twin Blades of Azzinoth, which drop off big baddie Illidan Stormrage from the Black Temple.” 

The official view from the risk community is that it’s not something that they are too concerned about right now, but they are watching.

According to one friend in this community, they’ve now tracked seven distinct types of financial threat in the virtual economies.  For example, Linden $ are being used as a way to transact for services outside of Second Life anonymously.  In other words, it’s becoming an alternative electronic currency that can be traded and converted into real US$ at will.  This is specifically being used for pornography, where it allows complete anonymity at both ends of transactions for less than US$20.

Of course, we all know about this stuff don’t we?

Even more notable is the cash flowing through Second Life, which is why it has had so much hype.  Over one million real American crisp and shiny dollars are spent every day by the over ten million residents in Second Life.  Of these, there are over 400 residents who spend over Linden $1 million (around US$3,750) a month and around 100 transactions a month of over L$500,000 each (around $1,750).

Now, this may not worry us too much today, but the Chinese have been seriously worried by this development in their economy.  This is because the population has caught onto the
opportunities of using virtual currencies to avoid Big Brother big time.

In particular, China has a virtual currency called QQ which is part of Tencent QQ, China’s largest instant messaging service provider’s proposition. Tencent QQ has over 235 million users, and the QQ coin is worth the equivalent of 1 Yuan (US$0.125).

Over 150 million people, many of them youngsters, buy QQ coins with Yuan for downloads, cartoons, games, ringtones and other things for their mobile, avatar and blog.  The thing is though, a bit like Second Life L$, the QQ became a popular currency to transact outside Tencent QQ for other gaming websites and, gradually, with call girls and gambling dens.

How does it work?

The basic operation is that a retailer sells QQ coins at a discount price. Customers pay for the QQ coins with Yuan through a debit card, money-order transfer or online payment service such as PayPal.  The retailer then transfers the QQ coins to the buyer's account or gives the buyer access to the QQ account, where QQ coins are stored, by giving them their username and password.

According to one government estimate, the total volume of trading in virtual items in China last year was worth about $900 million. About 45% of that went for items in the Tencent QQ world.  That’s why the People’s Republic of China started worrying, as almost a trillion dollars flowing through the economy going into illicit activities such as pornography and gambling is undesirable, to say the least.

So I would reckon that the risks of new worlds, new currencies, anonymous trading using prepaid and virtual accounts is going to create quite a challenge for risk managers in the future.

Ah well, that’s me done for this week.  I’m off to go and be the rogue “Aragon Doomsaver” for the day flashing my Twin Blades of Azzinoth in the Black Temple.

 

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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