How Covid-19 Might Create an Onerous Economy Inside Video Games

Nintendo has seen a surge in demand for its latest handheld game system, the Nintendo Switch, during the global coronavirus (Covid-19) pandemic. However, even after reportedly selling over 56 million units, the home gaming giant nevertheless remains bearish on future sales in light of pandemic-related production slowdowns, which could also affect the production of the latest iterations of Microsoft’s Xbox console and Sony’s PlayStation, currently slated for release at the end of 2020.

Part of Nintendo’s sales boost has been attributed to the wildly popular game Animal Crossing: New Horizons, the eighth iteration of the game’s franchise, released on March 20. Animal Crossing sells itself as a mundane but relaxing, drama-free online environment in which your avatar cannot die or get hurt, potentially resulting in a never-ending game.

 

Although only available on the Switch gaming platform, the game has already become more popular than some blockbuster multi-platform games, where avatars can both die and experience pain.

 

In addition to the many obvious explanations for its increased popularity in these stressful times, there is real-life usefulness to Animal Crossing: New Horizons, which might lead to additional purchases of the game. With unprecedented unemployment rates around the world and the hard-hit economy, people have taken to seeking out new forms of employment while forced to stay home. One emerging industry has been farming and selling bells—one of the virtual currencies of the Animal Crossing universe— for hard cash. A simple eBay search will turn up many sellers seeking to cash in on this gaming phenomenon.

Those who do not attribute much value to bells —as a known glitch allows users to easily farm an infinite number of them—can also find Nook Miles Tickets, another type of Animal Crossing currency.

 

Not everyone is happy, however, with these real-life intrusions into their Animal Crossing Shangri-Las. Some purists are against even the more benign trading of Animal Crossing stuff on the Amazon-like website Nookazon—a commerce site where players can use in-game currencies to make legitimate trades and purchases of game items—as they feel that the incursion of a capitalist mentality goes against the slow-moving nature of the game. Similarly, Nintendo, for its part, has also been against many of the monetization practices, which can involve controversial manipulations of both the console and the game.

 

Nintendo may also have legal reasons to be concerned if bells start gaining established real-world value, as it may raise questions as to whether bells and, as a result, Animal Crossing itself, will be regulated by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) as per the Department of the Treasury’s definition of convertible virtual currencies (CVC).

FinCEN, among its many areas of oversight, has developed anti-money laundering (AML) regulation vis-à-vis the use of CVCs. A CVC, according to these regulations, acts as a substitute for real currency, or has an equivalent value in real currency, like Bitcoin. If Nintendo allows or facilitates bells to be traded for the equivalent of real currency, bells could potentially become a CVC and fall under the onerous regulatory system of FinCEN.

Examples of virtual currency uses that may raise a red flag are aplenty. Some apps have a marketplace where tokens are purchased with real money for premium content, or where merchandise can be obtained through the use of in-game currencies. In this situation, the game producer may become a money transmitter under FinCEN regulations and will be subject to AML oversight.

 

Bellevue, Washington-based gaming company, Valve Corp. recently changed the way in-game purchases can be traded in its Counter Strike: Global Offensive game, reportedly because of these fears.

 

Under the definitions of the Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, bells might not yet be considered CVCs as they cannot be easily converted into fiat currency in the real world. However, in a 2014 report, FATF noted that “it is possible that an unofficial, secondary black market may arise that provides an opportunity to exchange the ‘nonconvertible’ virtual currency for fiat currency or another virtual currency.” In these cases, the development “of a robust secondary black market in a particular ‘nonconvertible’ virtual currency may, as a practical matter, effectively transform it into a convertible virtual currency.”

The U.S. Department of the Treasury is particularly concerned with the CVC black market as there is a growing use of CVCs not only in money laundering, but in drug trafficking, terrorist financing, weapons of mass destruction proliferation and financing, organized crime, human trafficking, and corruption in general.

 

This increasing focus on CVCs, especially those originating in online games, would create real problems for Nintendo if the currencies in its games were to reach CVC status, as defined by various regulatory agencies.

Without the implementation of regulations forbidding such uses by companies like Nintendo and Valve, online gaming will continue to be a haven for money launders and other criminal enterprises seeking to exploit their lack of oversight. Multi-billion dollar free-to-play online video game Fortnite, the tax implications of which were discussed in a previous column, is supposedly developing into a money laundering haven where accounts are created and local digital currencies are purchased illicitly. Eventually, these accounts are sold on eBay or the dark web in return for clean untraceable money.

 

While these transactions go against Fortnite’s terms and conditions, its parent company, Epic Games, has not done much to mitigate the situation.

Despite its recent boost in sales, Nintendo, like most other companies, is still suffering financially during these challenging times. FinCEN, however, is not giving anyone a break. Unlike other regulatory agencies which are ostensibly considerate, FinCEN “expects financial institutions to continue following a risk-based approach,” and “diligently adhere to their BSA obligations.”

 

This lack of any meaningful pandemic relief by FinCEN is compounded by the potential furloughing of corporate employees involved in AML and KYC, and the likelihood of increased fraudulent activities during the pandemic. The FBI even suggested recently that the pandemic will bring in an unprecedented wave of online criminal activity taking advantage of an anxious public. As if this wasn’t enough, in March, FinCEN imposed a large personal monetary civil penalty of almost half a million dollars on a compliance officer for failing to prevent compliance failures. Even at this trying time, FinCEN means business.

 

But not everything valuable in Animal Crossing has been converted into a potential CVC. Without their catwalks and fashion weeks, top fashion houses, like Valentino and Marc Jacobs are taking advantage of the game’s popularity to showcase their designs by making their clothing freely, digitally available for Animal Crossing avatars, while the gamers stay safely at home in their sweats.

Even the Metropolitan Museum and the Los Angeles Getty museums are allowing users to decorate their virtual Animal Crossing homes with art from their famous collections. Some interior design companies are even offering their services online for Animal Crossing players that want to upgrade their virtual cribs.

 

But the attainment of things is not the only thing you can pursue on Animal Crossing. Last month, a tech conference, that was aiming for a different feel than the standard Zoom meeting, took place inside the Animal Crossing game universe.

 

There have also been recent reports of Chinese government dissidents promoting anti-government sentiment on the game, copies of which have been illicitly imported into the country, as Animal Crossing has yet to be approved by the local government censors.

 

For all of its spotlight, Nintendo is not the only gaming company to enjoy an uptick in sales due to the pandemic, as previously demonstrated in the surge in interest in e-sports. In fact, according to official numbers, video game sales, which are projected to hit $200 billion by 2023, were 35% higher in March than during the same month last year.

 

But all this gaming good news is moot if users cannot afford to stay online in order to play. Fortunately, a bill has just been presented to the U.S. Congress that seeks to put a national moratorium on cutting people’s phone and internet access for lack of payment, in addition to the Federal Communications Commission’s continuing requests not to cut off the poor from broadband access.

 

So, now, in addition to worldwide efforts to hold-off on repossessions during these times, you can hopefully also count on continued access to your Animal Crossing island and its inhabitants, which are likely far better designed and dressed than you and your physical home anyway.

Greenbaum is a director at the Zvi Meitar Institute for Legal Implications of Emerging Technologies, at Israeli academic institute IDC Herzliya.