US Treasury initial ruling on virtual currencies

[Ada Radius]

http://www.fincen.gov/statutes_regs/gui ... 3-G001.pdf
with excellent commentary from Alex Kadochnikov at Hypergrid Biz:
http://www.hypergridbusiness.com/2013/0 ... eal-money/

I've been waiting for this for um 7 years, lol. Has it really been that long? Yes it has.

[Bladyblue Bommerang]

The change that effects all virtual currency is

FinCEN now considers [in-world money] as a convertible centralized virtual currency. The guidelines define virtual currency as one that either has value in real currency or one that can be used to buy goods and services. Additionally, a centralized virtual currency is one that has a central repository.

Here is how it effects KCs

Kitely Worlds are now both an administrator and an exchanger of virtual currency. Both of these are a Money Services Business (“MSB”) under the treasury regulation. An MSB must register with the Treasury Department and make Anti-Money Laundering and periodic reports. These reports are not little one page chores a trained monkey can do. There is a reason corporate compliance departments are stacked with lawyers and accountants. As you can imagine both of these items cost a lot of money.

[Bladyblue Bommerang]

Kitely Ltd. is not a US-based company. Our only connection to the US is using third-party service providers that have a presence in the US so it isn't clear yet how this ruling will effect us.

[Ada Radius]

Exactly, so it's going to be interesting. FIN-2013-G001 comes from the Treasury Financial Crimes Enforcement Network, so it's not about civil banking law, as it is defining terms and responsibilities for virtual currency providers re U.S. and (almost certainly ultimately) international banking criminal law. U.S. and Israel do have a tax treaty, a trade agreement, both countries take a very dim view of banks and currencies that don't act to prevent money laundering, and the U.S. is Israel's biggest trading partner.
So no one in the virtual currency business can safely ignore this paper. I would think that virtual transactions would start to fade, as dealing in actual currencies would be safer. But no. Wired just posted a few hours ago, about a new Trojan virus that criminals are using to get infected computers to do BitCoin mining, and BitCoin is in an absurd valuation bubble, so there ya go.

[Ada Radius]

It's too early to tell what filing requirements international companies will have due to this new regulation but I completely agree that any entity that issues a virtual currency should have the proper systems and policies in place to avoid enabling money laundering using that virtual currency.

Kitely's terms of service where written by one of Israel's top corporate law firms to ensure that they will prohibit the de-facto exchange of real money and real money equivalents via our virtual currency. We adamantly enforce those provisions to make sure we don't become a channel for money laundering.

We've also proactively designed our system so that every Kitely Credit transaction is tracked and logged with as much detail available to us. We log enough information to know what PayPal transaction was used to pay for each particular Kitely Credit, and all the transactions that KC is involved in until it is redeemed by Kitely. This information, in conjunction with other information we hold and information held by PayPal can provide full transparency and accurate records of all the parties involved with each transaction enabled by our system. You can see a censured and limited version of that transaction information in your account History page.

In cases where real money needs to exchange hands, such as our upcoming Kitely Market, merchants will be able to choose whether they wish to accept payment via PayPal and/or via Kitely Credits. If a merchant decides to accept Kitely Credits then the value received from such transactions can only be used inside Kitely for Kitely related services and digital goods (it can't be refunded, traded, exchanged, transferred, or sold to anyone without violating our terms of service). Merchants who wish to get real money for what they sell via the Kitely Market will need to connect a PayPal account to their Kitely Market account and then have buyers use PayPal when they buy those items from the Kitely Market. Those proceeds will then be deposited directly into the merchant's PayPal account minus Kitely's revenue share (Kitely will use a PayPal API to get a revenue share without holding and transferring real money itself).

[Danko Whitfield]

It's important to realize that this is not a ruling nor a new regulation.

It is basically an opinion drawn up so there is background info for future regulations to be based on IF such regulation is ever considered. And "future" could be a long time from now.

And even though the Treasury Dept. can make regulations, something as far-reaching as the government getting involved in regulating the currency of virtual worlds will likely involve an act of Congress rather than a regulation instituted by a government department.

And we all know how slowly Congress moves.

[Ada Radius]

Thank you Ilan, for giving more detail on this. And especially for paying attention to these issues in the first place.

Thinking about the Paypal part of the earlier Kitely Market descriptions. WOOOT. It'll change the way we're used to doing business. I'll have to set up a separate micropayment account with Paypal, looks like, and think more about pricing and bundling - no point in selling anything below the equivalent of 300KC/$1, where Kitely takes $.10 plus 100KC setup fee, and Paypal takes another $.10. Will we be able have listings for KC as well as listings for real currencies?



[/quote]In cases where real money needs to exchange hands, such as our upcoming Kitely Market, merchants will be able to choose whether they wish to accept payment via PayPal and/or via Kitely Credits. If a merchant decides to accept Kitely Credits then the value received from such transactions can only be used inside Kitely for Kitely related services and digital goods (it can't be refunded, traded, exchanged, transferred, or sold to anyone without violating our terms of service). Merchants who wish to get real money for what they sell via the Kitely Market will need to connect a PayPal account to their Kitely Market account and then have buyers use PayPal when they buy those items from the Kitely Market. Those proceeds will then be deposited directly into the merchant's PayPal account minus Kitely's revenue share (Kitely will use a PayPal API to get a revenue share without holding and transferring real money itself).[/quote]

[Bladyblue Bommerang]

In cases where real money needs to exchange hands, such as our upcoming Kitely Market, merchants will be able to choose whether they wish to accept payment via PayPal and/or via Kitely Credits. If a merchant decides to accept Kitely Credits then the value received from such transactions can only be used inside Kitely for Kitely related services and digital goods (it can't be refunded, traded, exchanged, transferred, or sold to anyone without violating our terms of service). Merchants who wish to get real money for what they sell via the Kitely Market will need to connect a PayPal account to their Kitely Market account and then have buyers use PayPal when they buy those items from the Kitely Market. Those proceeds will then be deposited directly into the merchant's PayPal account minus Kitely's revenue share (Kitely will use a PayPal API to get a revenue share without holding and transferring real money itself).

Like we discussed, this is fine for people that sell actual items in virtual worlds, but for those of us that provide a service in-world or 'live' off of tips, this won't create a real currency income for us. We need a way to accept real money micro-payments in-world.

I found out that if we up-grade to a free business account through Paypal, that there is a micropayment system that can be established through websites we own https://www.paypalobjects.com/webstatic ... ide_dg.pdf. Now the trick is to get that to work in objects like tip jars rezzed in-world.

This is the only solution I can think of that will allow DJs, Live Musicians and dancers to move over from Second Life and continue to work here in Kitely Worlds.

[Ilan Tochner]

Hi Ada,

As you brought this up, I'd like to remind people of what was agreed in previous Kitely Mentors Group meetings (a few months ago) when we discussed the marketplace:

1) There will be a minimum sale price for items sold in the Kitely Market:
- Items sold using PayPal will have a minimum sale price of $1.
- Items sold using KC only will have a minimum sale price of 10 KC.

Minimum prices will help ensure that merchants won't have to compete with free content in the marketplace. The relatively high $1 minimum price for items sold using PayPal is intended to prevent competition between merchants from creating a dynamic which will push prices down to the point where PayPal's transaction fees will eliminate merchants profits.

2) There is a one-time listing cost for adding new products (100 KC) and new variations (25 KC) to the Kitely Market. This isn't charged multiple times for the same products and variations so this setup cost will quickly become insubstantial for items that sell well.

3) Kitely will charge merchants a 10% transaction fee from the sale price regardless of whether the items are bought using KC or PayPal.

4) Kitely will add a fixed $0.30 transaction fee to shoppers' carts when they checkout items sold using PayPal, similar to what Linden Lab does in the Second Life Marketplace when items are paid for using PayPal. This fee is per checkout not per item bought so buying more items at a time will help reduce its effect on the overall price of the shopping cart. Without this additional transaction fee added to buyers bills we would need to charge merchants a much higher percentage of their sales revenue to ensures that we remain profitable after PayPal has deducted their transaction fees from our share of the marketplace transactions. Another reason for this fee is to encourage buyers to aggregate their sales so that merchants will be less effected by the fixed portion of the fees PayPal charges them.

[Ada Radius]

Thank you Ilan, I did miss some of that information from the meeting notes, and it's great to now have it all in one place (I copy-pasted your post to a text doc on my desktop so I can refer to it as I set up my merchandise folders). Question: will we be able to charge KC for some items and use Paypal for others, or will we need to set up separate accounts for each type of sale?

With PayPal Micropayments we'll pay 5 percent plus 5 cents per transaction (for U.S. accounts) versus 2.9 percent plus 30 cents per transaction at the usual PayPal rate, and it's either/or. Or set up two Paypal accounts, with separate bank accounts attached.

And Blady's right - we'll have to come up with workarounds and new methods for shows and clubs. Tip jars may become less of a revenue producer, in favor of selling tickets, along with maybe not providing free access to sims for theater and club goers, so that the sim owners can cover costs. That's more like the RL model of cover charges and ticket sales at club venues, but a very big change in thinking for those of us who have been entertaining iSL for years. For Avatar Repertory Theater, we sold tickets to our big shows, for L$500, around US$2, selling out nearly every show, plus tip jars that added another 50% or so to revenue. Limited severely by the numbers of avatars we could bring into a sim.