612 Lawns

What at first was plunder assumed the softer name of revenue.
~Thomas Paine

When is lying illegal?

That's a fundamental question in any system of laws. If you and I agree that you'll give me a dollar, and in return I'll give you two back later, we have a contract. If I skip town, I have committed a crime: fraud. It's the most basic of crimes, and simply boils down to lying. Of course, there are a thousand ways to lie and be nothing more than a cad. If I tell you I'm a lousy pool player, we bet a dollar on a game, and it turns out I'm better than you, you're a sucker, I'm a con artist, and there's been no crime. Yes, I misrepresented myself, but it was a matter of judgment, not fact.

And there are plenty of cases where lying is a sanctioned risk. If we play a poker tournament -- a legally constructed one, regulated by our fine system of government -- it's not only acceptable to lie, it's expected. The card player who fails to lie effectively will almost always lose. It's a condition of the game.

Consider if you will, Eve Online.

Last, week, Dentara Rast -- a character in CCP's Eve Online massively multiplayer online world -- pulled off an impressive stunt. He ran a classic Ponzi scheme and walked off with 700 billion ISK (in game money, and quite a lot of it). Normally, this kind of in-game bravado would generate nothing but a confuse stare from someone not deep inside the Eve universe, and little more than scandal-of-the-week titillation and subsequent yawns there. But I believe this case is more interesting than that.

I believe Dentara Rast committed fraud.
I believe he owes the IRS a lot of money.

Admittedly these are bold statements likely stuffed with straw, but they have deep implications, and bear argument.

The Scene of the Crime

Eve Online is a unique persistent world. It's the only successful, long term Science Fiction world. Science Fiction is hard. As our friends-in-spirit at 2d6 feet posited recently, it's harder because of the details. Fantasy worlds have extensive shorthand. Toss me into a quasi-medieval setting, tell me there are elves and magic, and I've got a whole library in my head to fill in the blanks. But in a science fiction world, you need to tell me a LOT more. Are there aliens? What do they look like? What's the technology do? What does a spaceship look like, and how does it work? What are the moral codes and motivations?

Is there money?

It's a real question. The two largest competing SF universes have radically different answers. Star Wars' Han Solo works for cash. We see him loading the Millennium Falcon with crates of the stuff. His world is filled with the crimes of acquisition. Star Trek's James. T Kirk lives in a universe that grew beyond the need for commerce. It's never explained in great detail, but some sort of vast communism or invisible spirit guides the known worlds of the Federation.

Eve takes the Star Wars route. Money isn't only important, it's everything. Piracy and scheming drive most of the Player-vs-Player (PVP) interactions, and PvP is what Eve is all about. Eve embraces capitalism in a way that goes far beyond the auction houses and crafting of World of Warcraft. Eve embeds the idea of a corporation into the roots of the game. A corporation, by definition, is an entity created to act like an individual person in a marketplace. Anywhere from one to an infinite number of biological individuals create a commune of ownership, and drive that new fictional individual towards a common goal.

In Eve, corporations are formed, engage in exploration, exploitation and extermination in the pursuit of wealth for their members. Thanks to the efforts of a dedicated community, corporations can create initial public offerings to grab new investors. Most often these public corporations are formed to pool the capital required to purchase the blueprints for the games most powerful ships. These blueprints can then be copied and sold, generating cash for dividends. Shares can be traded on the open market, portfolios managed, speculations made.

This user-controlled market is entirely unregulated. Eve is a pocket universe for students of unfettered capitalism. As one would expect, there are good actors and bad actors.

And it's the bad actors that are interesting. Financial scams have an easy time of it in Eve. Anything beyond a simple purchase involves a transfer of wealth between players. Someone has to give a real person in-game cash to buy something -- in this case shares in a corporation. And once that money's sitting in the corporate account, the CEO can just transfer that wealth to an alternate character, and disappear. There is no SEC to go after the bad guy. There is no court in which to make an accusation and seek recompense.

CCP is well aware that they have created a world where bad actors can thrive. Their own FAQ makes this clear:

"A scam is the act of obtaining goods from other players through misinformation, confusion, pressure or by taking advantage of basic trust. Players enter into business dealings with others at their own risk and are strongly urged to exercise good judgment and common sense when trading. Scams that relate to issues such as password scams or account theft scams are more serious and will result in an immediate ban."

The Offense

But if you're playing for fame, not just fortune, you need to put on a show. This is where Dentara Rask made good theater. His scheme was interesting, but unoriginal. He ran the EVE Investment Bank, in which he promised a return on deposits. And he delivered. If you got in early, he paid you your return, and most likely, you reinvested. It was, of course, just a Ponzi scheme. Investors were paid out of the capital from new investors. When the pyramid become too big to manage, he pulled back the curtain and proclaimed himself the victor. He'd amassed more than 700 billion ISK (in game cash), perhaps 10 times the previous record for a market scam. He gloated in the forums about his prowess. He basked in the glory of hatred, even posting a video confession complete with I'd-like-to-thank-the-academy antics. He took out a bounty on his own head, so people would hunt him down. The act of me writing about this plays further into the ego trip.

But there's a catch. What if he committed a real crime?

If this was a "real world" scam, few would argue that this was fraud. In the US (and we don't know where he lives) he would mostly likely be guilty of racketeering under RICO.

The first argument against the fraud case is one of substance. After all, this was imaginary money, right? Not really. Eve ISK is a fungible asset. While no regulated market exists for converting ISK into cash directly, there are markets available. CCP sells 30 day time cards for 120 million ISK. Time cards are available legally for $14 a piece. So the implied value of an ISK is roughly $1.17E-07. Put another way, that 700 billion ISK is worth 5,834 time cards, or $81,667. (A figure worthy of note, as it bumps the value up into the realm of the money laundering -- a swiss-army-knife-meets-sledgehammer of a law if ever there was one.)

The second argument is that somehow this path of conversion is illegal, and thus in itself not a crime. This is spurious: fraud does not require the underlying transaction to be in legal goods. If I bilk you on a drug deal, I still committed fraud, I'll just never sue you for it.

The third argument is that according to the EULA for the game, CCP retains ownership of all in game assets. Note that this is not a law, this is an agreement between CCP and an individual player, and I don't believe it frankly matters what CCP claims, as long as the market exists to convert the in game assets into real world assets (which it clearly does). CCP can ban you for it, they could even sue you for copyright violation, but none of this matters to the fraud argument.

The last remaining argument is that of poker: implied consent. Did the players who lost money to Dentara Rast enter into the transaction with an implied consent to be deceived as part of the game? Honestly, I don't think there's a clear cut answer. Certainly, CCP admits that scams can happen as part of the game. They denounce them in public forums, but they also make it clear that whether they do anything about them is a decision they will make on a case by case basis. They have, in the past, made victims whole. This is clearly different than a poker bluff -- I don't believe that the Bellagio has ever given a penny back to a loser at their poker tables. At least not me.

My opinion (and no, I'm not a lawyer) -- there's at least a case for fraud.

The Punishment

The second major issue here is taxation. Taxing in-game earnings isn't remotely a new idea, and a bevy of academics are already front-running the IRS.

The logic is simple in concept (if complex in application). Dentara has acquired wealth – as clearly as Al Capone acquired wealth in his bank accounts and rum-running operations. The IRS doesn't particularly care if that wealth is US currency or not (Topic 140). If I work for a company who pays me in gold bars or candy bars, I still got paid, and I still owe taxes. Remember, the IRS did threaten to assess whomever caught McGuire's 62nd home run ball, and it took the White House to calm them down.

The fact that this wealth, if converted into US dollars, would crash the real-world market for ISK or game time cards is also irrelevant -- just ask anyone who excercised a non-qualified stock options at the end of the dotcom boom. The alternative minimum tax caused people to sell their houses to pay taxes on worthless stock.

Dentara's only real defense would be one of recognition. If he hangs onto the ISK, never converting them into a more tangible asset, he could argue that he had not yet realized any gain or income on which he could be taxed. He would argue that -- at most -- he had a taxable gain on the difference between his investment (the amount he has paid to CCP as an Eve Online customer) and his return (the $81,666), and as a capital gain, it shouldn't be payable until the asset is sold.

He might win that argument. And should he choose never to sell on the open market or convert into game time cards, he might avoid all taxes. The reality is that the IRS has remained relatively silent on the issue of in-game earnings, but I don't expect that to last long.

He might, in fact, owe the IRS $12,250. Or, if the IRS was feeling particularly frisky, they might see this as self-employment income and hit him up for $15,077 (assuming he's otherwise unemployed).

How are these two issues connected: fraud and taxation? While the IRS has so far declined to pursue virtual earnings, they've been known to be spurred into action when faced with criminal activity outside the realm of tax evasion. Frank Wilson only grabbed on to Al Capone's leg after the FBI was unable to bring him down on prohibition charges. If Dentara was actually pursued under RICO, the FBI might be inclined to use the tax-hammer once again, as rounding up injured parties to testify in a fraud case could be exceptionally difficult. And once the FBI walks into the room, everyone pays attention -- not just Business Week and Terra Nova.

Imagine a world where this happens. Where someone drops the dime on Dentara Rask (hey, there is a 15% bounty on tax evaders), and he has to cough up the dough. Imagine the implications. Whole genres of gaming now become taxable activities. Does Blizzard establish two sets of servers: one where you can transfer accounts and assets, one where you can't? Does over-the-air television start generating an implied receipt of a good, and thus trigger a gift tax? Can a hacker who downs your server now be the subject of a class action suit for all those "workers" denied their place of employment? Do I owe someone money because I listen to Pandora all day long and have never paid a dime?

And what if Dentara Rast is underage? Has CCP somehow violated child labor laws? It doesn't really matter, the IRS will still want their pound of flesh. The tax man must be paid.

The going rate in my neighborhood is $20 for a small front lawn by a entrepreneurial teenager.

Best case, this kid's got 612 lawns to go.

Comments

Looks like you've been slashdotted. Front page this time. Good one.

KaterinLHC wrote:

Looks like you've been slashdotted. Front page this time. Good one.

Yeah, way to knock the site on its ass during a slow news day, jerk

All part of my evil plan. Bwahh hah hah... Nobody suspects an island in the carribean shaped like a skull with a nuclear missle in the middle of the fake volcano...

Interesting

The part about the scam is funny, and I couldn't care less, this is one of the purpose of theses games.

But the part about the tax regulations implications really trigger something I believe.
I'm reluctant to it but I can indeed see tax regulations organisations taking interest in virtual property being traded for real money.
But ... If they go as far as trying to give a value to virtual possessions, they're going to face a huge problem I believe.
What about when a virtual world terminates, when the last server closes ? Then all the virtual property ceases to exist ! This smells like a lot of money (which is usually basically valued by the time needed to obtain it) vanishing suddenly into thin air. Would customers of the virtual world turn against the editor then ?

Very interesting article, indeed.

I think fraud would be difficult to prove, seeing as how noone in the game technically owns the in-game currency. Can you be defrauded out of something that is not yours? The isk is part of a larger contractual relationship with CCP; if a person defrauds you out of your isk, then they're interfering (tortiously) with your contractual relationship with CCP - which might be easier to prove. Still, going to court over this is a practial impossibility. I doubt most gamers have the money or the time just to make a point - because you're likely to receive nothing from the tortfeasor.

I bow to tortfeasor.

I agree that even if we all could agree it was fraud, and I admit it's a straw man arguement, it would be nearly impossible to get through the courts in this case. I also think that it's inextricably related to the tax issue. It would seem to me that if the Tax issue went in the wrong direction -- recognizing in game earnings as taxable in some way -- that the criminal issues get put into sharp relief very quickly.

Very good post; I do have a quibble though- judging from the accent in his "haha I pwned you" video, I believe Dentara Rast resides within the United Kingdom. CCP is based in Iceland. I believe it would be the United Kingdom's FSA, not the IRS, which would take an interest in his ill-gotten gains.

As a member of EVE-Online's financial community, I can verify that CCP usually does nothing to compensate victims of any scam, including this one. To my knowledge, they have not done anything for victims of the EIB scandal. It's considered part of the game.

Players must accept a high degree of risk by transferring their money to other people. Because there are no regulatory bodies and no way to account for money, the entire community operates on nothing more than trust. In that sense, it's much like the olden days of Wall Street, where the NYSE was nothing more than a bunch of people standing under a tree with a ledger book and pockets full of cash. Rast abused that trust and made himself rich.

I don't know whether he should be taxed on his earnings, but I know I wouldn't want to make quite so much if I had to pay income tax on my in-game investments.

Static:

Don't disagree with a word you've said here, and I certainly am *not* advocating either taxation or criminalization here! My point is simply that the authorities are starting to pay attention.

And if you don't think the US is capable of messing up perfectly good ex-border internet economies, just see what our little expedition into regulating internet gambling has done the the UK based gaming companies.

The site upgrades do tend to make spam posts slightly more entertaining. Now, if we could somehow automatically detect spam posts and translate them into "Certis is Awesome" (or links to our affiliates/sponsers?) that would be hilarious.

On a side note, another great article rabbit. Recognizing that it is partly hypothetical, it seems a curious matter of 'when' rather than 'if' we see government taxation agencies take a more serious look at these things. Even more curious is how this may effect MMO's that follow the free-to-play + micro-transaction model that have a direct dollars-to-in-game-value correlation.

edit: Bah, just realized that the spam necro'ed the post. In any case, was a good article that I somehow missed the first time around.