To many, the very idea is preposterous: Spend real money to buy things you can't use, eat, or even touch in the real world? The idea has some companies laughing all the way to the bank.

Facebook

Social networking mega-giant Facebook launched its version of virtual currency early in 2010. Since then, its credit program has made millions of dollars for it and some of its partners. It stands to make billions in 2011.

How It Works

It's ingeniously simple. Facebook users buy credits by using a credit card or PayPal account. You can get 15 credits for $1.50, for example. You then use those credits while playing your favorite games or using your favorite apps on Facebook.

That's right, you can buy some miracle seeds and become King Farmer on FarmVille. You can even use credits to make charitable donations.

Where's the Profit?

How does fake credit and fake seeds turn into millions of real dollars. Well, Facebook takes a 30 percent cut from each transaction where credits are used. So each time you buy those magic FarmVille seeds, Facebook gets 30 percent of what you spent.

Also, with retail giants like Wal-Mart, Target, and Best Buy selling Facebook Credit gift cards for the 2010 holiday season, Facebook looks to increase its profits.

Not New

Virtual credit isn't a new idea. For instance:

  • Kwedit debuted a few months before Facebook Credit. Targeting teenagers and others who don't have credit cards, it lets people buy credits to use in online games by prepaying at a store or by simply making a promise to repay. Its creators have declared it a success
  • Two online companies are joining forces to offer virtual money to teenagers to take online surveys to help the companies make their online games and social sites more attractive

These and other efforts at making a go of virtual currency haven't had nearly the success Facebook is enjoying, however.

Is it Worth It?

To Facebook and others, virtual currency is well worth it. They're making money without keeping any inventory on the shelves, dealing with shipping and handling, and without many other costs and expenses that typically go with selling items online.

For consumers, it's a personal decision. Do you really want to spend your money for, essentially, nothing? Does it teach your kids how to handle money, budget, and keep credit under control? Only you can answer that.

Is it Legal?

As long a few rules are followed, virtual currency and credit is legal. In fact, there aren't many US rules and laws on it at all. However:

  • If the virtual money or credit is used to play gambling games, and the virtual money can be cashed-in for or converted to real money, the Unlawful Internet Gambling Enforcement Act is probably being broken
  • If you can go to Western Union or some other wire transfer service and get real cash for virtual credits, state and federal laws on reporting the transaction to state and federal government agencies and privacy laws apply
  • If the virtual credit or currency tools are used to launder money, it's a criminal offense

Using virtual credit and currency may be fun and convenient, and if Facebook's success continues, it may be the wave of the future. We may be able to buy real things with it. Until then, have fun with it, but buyer beware still rules. Keep in mind what your getting and not getting with that currency.

Questions for Your Attorney

  • If I use Facebook Credits to make a charitable donation, can I still take a tax deduction?
  • Is there anything I can do if Facebook refuses to refund my credit for unused Credits?
  • Does Facebook have to follow the laws and rules that apply to credit reporting agencies?

Tagged as: Business Law, eCommerce, virtual currency, ecommerce lawyer