Tip:
Highlight text to annotate it
X
Hello, and welcome to another edition of Get Set, a video blog on legal insights and
strategies for social media, entertainment and technology companies.
My name is Jim Gatto, and I lead the Social Media, Entertainment, and Technology team here at Pillsbury.
In this edition, I'm going to talk about virtual currency
and mobile payments. Many types of businesses are leveraging the
use of virtual currency, whether it's end game or for social media sites
or as part of a reward system for traditional bricks-and-mortar companies.
Each these presents great business Opportunities, but so too, it
presents legal risks. There are a significant number
of potential legal issues with virtual currency models. One of the challenges
that
arises is that there are very many different business models around virtual
currencies.
In some games or other applications, there's differences in how a user
requires a currency. Do they earn it through end game action, or do they pay for it?
Other issues arise depending on
what they can use the virtual currency for. Can only be used in game
to buy virtual goods, for example, or is it more of an open-loop system
where the virtual currency can be used to buy
real-world goods or, in some cases, be traded
for actual money? Depending on these and other factors around your business model
using virtual currency, different laws will apply, and there's both federal and state
law.
If users are prepurchasing virtual currency,
then you’ll have things such as the stored value card laws that apply
that’re both federal and state. If you’re acting as a middleman
in which you are receiving funds which you undertake an obligation to pay to a
third party,
even if it's in the form a virtual currency, assuming it has value,
then you may be subject to the money transmitter laws. We're seeing a great deal
of innovative business models around contest sweepstakes and promotions
involving virtual currency.
Unfortunately many companies believe that
just because the currency is virtual that many of the traditional laws in this area don’t apply.
That may or may not be case depending on the facts of your particular
circumstances.
In general, however, if you're dealing with something where the user is putting
in something of value,
whether it's actual cash for virtual currency that has value, or
taking out something of value, there may be issues you need to consider
under these laws. Another issue that arises in some cases
is how the Terms of Service apply to virtual currency.
In many cases it's advisable
to grant a user a license to the virtual currency, as opposed to actual
ownership. Some examples of cases that have arisen where this has proven to be
important
is when a user has virtual currency that can only be used in connection with a
particular service.
They violate the Terms of Service and you want to terminate their account. If it's only a
license and is terminable
upon termination of their account, then you may not have to
reimburse them for the value of their virtual currency. If, however, they owned it,
and you didn’t have the right provisions in your Terms of Service, they might be able
to make a claim that
they were entitled to reimbursement. There have been a number lawsuits in this area,
none have actually gone through to final judgment, but it’s an issue
of which you should be aware.
Another area around which there's significant issues with respect to virtual currency is tax.
There is limited guidance out there, albeit some,
regarding the proper treatment for tax purposes of virtual currency.
When is a gain realized, when is it recognized and other traditional principles of
taxation apply here,
but in some cases the answer is a little bit more complex due to some of the variable
business factors assciated with
virtual currency. Last but not least, it's important to consider intellectual
property issues around
virtual currency. Many people overlook this. We're seeing many
innovative business models that are patentable or potentially patentable.
We're seeing some technology implementations for managing
virtual currency based systems that are patentable, and aditionally
on the trademark side, it's important to think about how you
use trademarks to protect your virtual currency
nomenclature. One of the reasons that this can be important
is that there's a number of secondary markets that have sprung up where people are illegally
or
at least unauthorized trading according to the Terms of
Service
of virtual currency. If there's a trademark associated with it,
it can give you additional basis for enforcement against secondary market
operators.
This is just the tip of the iceberg with respect to
legal issues around virtual currencies. For more information on these issues,
please see
our client alert on virtual currencies. Mobile payments can involve
virtual currency but can also involve other mechanisms as well
using more traditional forms of monetary transfer.
Nevertheless there are significant legal issues that arise with respect to
mobile payments as well. For more information on mobile payments please
see our website.
Thanks for joining me today and join us again next time for another edition of
Get Set. In the interim, if you have any Questions, please feel free to contact me
or any member of the
Social Media, Enterntainment and Technology team.