The Banking Executive Magazine - September Issue 2022

Virtual Economy out having to switch to fiat in be- tween. GOVERNANCE A set of rules and mechanisms are needed to govern any economic sys- tem. Governance is the way in which rules and actions are structured, sus- tained regulated and held account- able. Fiscal policy is the policy a govern- ment follows to collect money and then spend to influence the econ- omy. Revenue collection is primarily through taxes, and expenditure can be done in several ways including through direct investment and by providing subsidies for certain sec- tors. Fiscal policy is used to stabilize the economy over the course of a business cycle. CENTRAL BANKS A central bank is an institution that manage a state’s currency, money supply and interest rates. A central bank holds a monopoly on increas- ing the monetary base in a state. Monetary policy is the process by which a central bank controls the cost of short-term borrowing or the monetary base, often targeting an in- flation rate or interest rate to ensure price stability and trust in the cur- rency. It is set by the central bank. WHAT IS A VIRTUAL ECONOMY? A Virtual Economy is an economy that exists in a virtual world where users can exchange virtual or real as- sets, products and services in the context of a game or platform envi- ronment. Users can participate in vir- tual economies for entertainment or for real economic benefit. Virtual economies originally emerged in MUD (Multi-User Dun- geon) games as early as the late 1970s. Today the largest virtual economies exist on MMORPGs (massively multi player online role- playing games) such as World of Warcraft & Guild Wars. A virtual economy can exist on any platform on which real money can be spent on user created digital as- sets, products, services and interac- tions. INTERACTION BETWEEN REAL AND VIRTUAL ECONOMIES There is a growing overlap between virtual and real economies. Assets that exist in virtual economies are often traded in the real world using real money. These transactions are usually conducted on online auction sites and are referred to as ‘Real Money Transactions’ (RMTs). Many platforms actively promote the idea of linking virtual goods to real world money. Some gaming plat- forms, however, discourage and even prohibit the exchange of real-world money for virtual goods, as it is be- lieved to be detrimental to gameplay. RESOURCES IN A VIRTUAL ECONOMY The characteristics of resources in virtual economies are: • Rivalry: Possession of a resource is limited to one person or a small number of persons within the virtual world. • Persistence: Virtual resources persist across user sessions. In some cases, the re- source exists for public view even when its owner is not logged into the virtual world. • Interconnectivity: Resources may affect or be affected by other people and other objects. The value of a resource varies ac- cording to a person's ability to use it for creating or experiencing some effect. • Secondary markets: Virtual resources may be created, traded, bought, and sold. • Value added by users: Users may enhance the value of virtual resources by customizing and improving the resources. ECONOMIC THEORY OF VIRTUAL WORLDS Virtual worlds have properties similar to those in contemporary economies. Therefore, basic economic theory and notions can often be used to study virtual worlds, this involves: • Pricing: Items are priced according to sup- ply and demand rather than by the developer's estimate of the item's utility. • Marketplace: Real money commerce in a virtual market has grown to become a multibillion-dollar industry. Hun- dreds of companies are enor- mously successful in virtual markets, with some virtual items being sold for several million dol- lars. • Currency: Many games, both online and of- fline, use a common or standard type of currency that can only be earned in-game and used to spend on in-game items that cannot be traded with other players or con- verted to real-world funds. • Premium currency: Many online games, particularly those that use the freemium model, offer at least one additional form of currency beyond its standard one, called premium currency. • Taxation: Most scholars agree that the sale of virtual property for real currency or assets is taxable. Theoretically, vir- tual world transactions could be treated as a form of barter, thus generating taxable income. • Regulation: Conversion between in-game and real-world currency has led to di- rect comparisons with other online games of chance as 'virtual win- nings'. This is why gamers and companies engaged in this conver- sion may fall under gambling leg- islation. the BANKING EXECUTIVE 10 ISSUE 165 SEPTEMBER 2022