Question: Investment fraud schemes are common in massive multiplayer

Investment fraud schemes are common in massive multiplayer online games such as Second Life or EVE Online. These games almost always have some form of virtual currency, and players are often looking for ways to earn a quick (virtual) buck. In 2006, a character named “Cally” in the popular game EVE Online started the EVE Intergalactic Bank. Cally would take deposits of the game’s currency (the Interstellar Kredit, or ISK) and pay interest on these deposits. He claimed that he was reinvesting the money, but in actuality he was pocketing most of the money. It has been reported (though widely disputed) that when Cally’s scheme started to fall apart, he walked away with 790 billion ISK. It is important to understand that there are many Web sites that allow players to exchange ISK for U.S. dollars and vice versa. At the time Cally’s bank failed, the 790 billion ISK that he had allegedly stolen was worth about 170,000 U.S. dollars.

Cally bragged about his scam, admitting it openly, but he was not punished. Why not? EVE Online is a computer game about piracy and commerce in outer space. Players are encouraged to steal each other’s cargo, attack each other, or extort money by threatening to attack. As a commentator writing under the name Ralphedelominius reported in the blog Ten Ton Hammer, CCP hf. (the company behind EVE) decided that what Cally did was within the rules of the game. In other words, although creating fake investments is wrong in real life, it is perfectly acceptable within the EVE Online game.

Reflection Questions

1. Either defend or refute the following claim: Fraud is fraud regardless of whether or not it occurs in a virtual world; if something stolen can easily be converted into real currency, then it is a real fraud and should be punished.

2. Either defend or refute the following claim: Committing fraud in EVE Online is like bluffing in poker. Everyone knows and accepts that bluffing is part of poker, and therefore it is morally permissible. For the same reason, scams and frauds inside EVE Online are morally permissible. You agree to those risks when you play the game.

3. Assume that you live in a society (such as the United States) that has a personal income tax. Should ISK earned in EVE Online be subject to income tax? Or should only U.S. dollars earned by selling ISKs be subject to income tax? Explain your reasoning.

DRAFT/STUDY TIPS

Introduction

Investment fraud is a pervasive issue in both real-world financial markets and virtual environments like massive multiplayer online games (MMOs). The case of "Cally" in the game EVE Online, who ran a fraudulent investment scheme through the EVE Intergalactic Bank, raises critical questions about the nature of fraud in virtual worlds and its implications when virtual currency can be converted into real-world money. This essay explores the complexities of investment fraud in MMOs by critically analyzing three key positions: whether fraud in virtual worlds should be punished similarly to real-world fraud, whether such frauds are morally permissible within the game's context, and whether virtual earnings should be subject to income tax.

Fraud in Virtual Worlds: Real or Imagined?

Position 1: Fraud is fraud, regardless of whether it occurs in a virtual world or reality; if something stolen can be converted into real currency, it constitutes real fraud and should be punished.

Fraud, in its essence, involves deception for personal gain, often leading to the financial loss of others. In the case of Cally in EVE Online, his actions mirror those of real-world Ponzi schemes where investors' money is siphoned off rather than invested, leading to significant financial losses. The critical point of contention is whether such actions in a virtual setting, where currency can be exchanged for real money, should be treated as actual fraud.

From a legal and ethical standpoint, the argument that fraud in virtual worlds is equivalent to real-world fraud is compelling. Virtual currencies like ISK in EVE Online have real-world value due to exchanges where players can trade them for U.S. dollars. This tangibility blurs the line between the virtual and real worlds, making the argument that fraud in such environments has real consequences valid. For instance, if a player loses a significant amount of ISK due to fraudulent activities, they have lost something of real value. The fact that Cally's 790 billion ISK could be converted into approximately $170,000 highlights the real-world financial impact of his actions.

Moreover, the concept of fraud is not confined to physical spaces but extends to any scenario where trust is exploited for financial gain. The legal system in many jurisdictions is increasingly recognizing the value of virtual assets and the implications of fraud within virtual environments. For example, in 2018, a Dutch court ruled that virtual items in online games have value and are protected under property law. This precedent supports the notion that virtual fraud should be treated similarly to real-world fraud.

However, one could argue that the context of the game, where deceit and betrayal are part of the gameplay, complicates this issue. Yet, even in such environments, the establishment of an in-game bank represents an implicit contract between the bank and its depositors, who expect their virtual assets to be safeguarded. When this contract is violated through deception, it constitutes fraud, regardless of the virtual setting.

In conclusion, given the real-world value of virtual currencies and the potential for significant financial loss, fraud in virtual worlds should be considered real fraud and subject to legal consequences similar to those for fraud in the real world.

Fraud as a Game Mechanic: A Moral Dilemma

Position 2: Committing fraud in EVE Online is akin to bluffing in poker. Everyone knows and accepts that bluffing is part of poker, and therefore it is morally permissible. For the same reason, scams and frauds inside EVE Online are morally permissible because players agree to these risks when they play the game.

In games like EVE Online, the line between gameplay and real-world ethics becomes blurred. The game's environment, designed around the concepts of piracy, betrayal, and risk, inherently encourages deceit as a legitimate strategy. This creates a unique moral landscape where actions considered unethical in real life may be permissible within the game's context.

Bluffing in poker is a well-accepted strategy where players deceive others about the strength of their hands to gain an advantage. This is not considered unethical because it is an integral part of the game, and all players enter the game with the understanding that bluffing is part of the strategy. Similarly, EVE Online's gameplay is built around the premise of a ruthless universe where deception and betrayal are expected risks. In this context, Cally's actions can be seen as an extension of the game's mechanics rather than a violation of moral or ethical standards.

The moral permissibility of Cally's fraud hinges on the understanding that players voluntarily engage in a game where such risks are part of the experience. Just as a poker player accepts the possibility of being bluffed, an EVE Online player accepts the risk of being scammed. The game's developers, CCP hf., have explicitly stated that such actions are within the rules of the game, reinforcing the notion that players are responsible for navigating this treacherous environment.

However, this argument assumes that all players fully understand and accept these risks, which may not always be the case. New or inexperienced players might not be fully aware of the extent to which deceit is embedded in the game's culture, leading to an imbalance in the gameplay experience. This raises questions about informed consent and whether it is truly fair to hold all players to the same standard of moral permissibility.

In summary, while fraud in EVE Online may be morally permissible within the context of the game, this permissibility is contingent upon the players' understanding and acceptance of the risks involved. The game's design encourages deceit as a strategy, making Cally's actions a reflection of the game's inherent mechanics rather than a breach of moral conduct.

Taxation of Virtual Earnings: A New Frontier

Position 3: Should ISK earned in EVE Online be subject to income tax, or should only U.S. dollars earned by selling ISKs be subject to income tax?

The taxation of virtual earnings presents a complex issue that intersects with both legal and economic principles. Virtual currencies like ISK in EVE Online are not considered legal tender, but they can be exchanged for real-world money, raising questions about when and how they should be taxed.

One perspective is that only the U.S. dollars earned by selling ISK should be subject to income tax. This approach aligns with the current tax systems, where income is generally recognized when it is realized in the form of legal tender. For instance, if a player sells ISK for U.S. dollars, the transaction results in real-world income, which should be subject to taxation. This method simplifies tax reporting and aligns with existing tax principles, where barter transactions or earnings in foreign currencies are taxed when converted into the taxpayer's home currency.

However, another perspective argues that ISK earned in the game should be subject to income tax, even before it is converted into U.S. dollars. This view is based on the notion that virtual currency has intrinsic value within the game's ecosystem and can be considered a form of property or income. The IRS, for instance, considers virtual currency as property, and transactions involving virtual currency are subject to the same tax principles as those involving other types of property. Under this framework, earning ISK could be seen as akin to earning income in a foreign currency, where the value at the time of receipt would be taxable, and any subsequent conversion would be subject to capital gains tax.

The challenge with taxing ISK directly lies in its fluctuating value and the difficulty in determining a consistent exchange rate. Additionally, the enforcement of such taxes would require detailed tracking of in-game transactions, which may be impractical and intrusive. It would also raise concerns about double taxation if both the initial earning of ISK and its conversion to U.S. dollars were taxed.

Given these complexities, the most pragmatic approach is to tax only the U.S. dollars earned by selling ISK. This method avoids the complications of valuing and tracking virtual currency while ensuring that income generated from virtual activities is taxed when it enters the real economy. This approach also aligns with the principle of fairness, as it ensures that only realized income is taxed, preventing potential overreach by tax authorities into virtual spaces.

In conclusion, while ISK has real-world value, it should not be subject to income tax until it is converted into U.S. dollars. This approach maintains consistency with existing tax principles and avoids the practical difficulties of taxing virtual earnings.

Conclusion

The case of Cally's fraudulent investment scheme in EVE Online highlights the complex interplay between virtual worlds and real-world ethics, legality, and economics. The first position argued that fraud in virtual environments should be treated as real-world fraud due to the tangible value of virtual currencies, supporting the idea that such actions warrant punishment. The second position explored the moral permissibility of fraud within the context of the game, likening it to bluffing in poker, and concluded that while deceit is part of the game's design, it raises concerns about informed consent among players. Finally, the third position examined the taxation of virtual earnings, concluding that only real-world income derived from the sale of virtual currency should be subject to income tax, avoiding the complexities of taxing in-game earnings directly.

As virtual worlds and real economies become increasingly intertwined, the need for clear legal and ethical frameworks to govern these spaces will grow. The lessons from EVE Online serve as a valuable starting point for this ongoing conversation, illustrating the challenges and opportunities that lie at the intersection of virtual and real-world interactions.