How do virtual currencies in apps and games work

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How do virtual currencies in apps and games work

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How much time would it take you to earn $77 billion? If one could save $10,000 daily, it would only take 21,096 years to have $77 billion in their bank account. It is also how much revenue the global mobile games market generated in 2020. In 3 years, the number is forecasted to exceed the $100 billion mark.

Mobile gaming sees the most significant year-over-year growth than PC and console gaming. The market is attractive for entrepreneurs due to the lowest entry barrier, as the mobile development process is usually less complex. Moreover, over two-fifths of the global population owns smartphones, making the potential audience for apps and mobile games very wide. In fact, there were around 2,6 billion mobile gamers in 2020.

Today's article focuses on one of the fascinating aspects of mobile gaming — virtual economies and virtual currencies in games and apps. We will learn more about in-app virtual currencies and answer your why's and how's.

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Why do in-app currencies exist?

One of the main reasons developers add virtual currencies to their mobile apps is to enable in-app purchases, which is a great way to monetise the app.

Different app monetisation strategies allow developers to generate revenue from their apps, thus turning this activity into a viable business. These strategies are often mixed into omnifarious hybrids, but we can also use them separately. To name a few:

  • Paid download
  • Subscriptions
  • Advertising
  • Virtual economy
  • In-app purchases.

The first type implies a user has to pay for the mobile app before downloading it. This pricing model is not in demand, with most developers preferring subscriptions or a free-to-play model. Customers are more likely to back these models, too, as they allow them to try playing a game before deciding whether they want to commit time or money.

Despite the chosen pricing model, developers tend to accrue higher revenues using three other monetisation strategies. While most customers consider advertising annoying, they usually don't mind or even appreciate smartly-crafted virtual economies and an opportunity to buy additional game items or premium content.

What kinds of virtual currencies are used in apps and games?

The classification of virtual currencies in games depends on the types of virtual economies. If the economic activity occurs solely in the virtual setting, such a virtual economy is called closed. If the economic activity occurs in both the virtual environment and the real economy, it is called open.

In any case, virtual currency is a digital unit of exchange within the virtual economy. Depending on the interaction with the real economy, we can separate three types of virtual currency systems:

  • Closed flow. The virtual currency in apps can be used for purchases only within the app. All the virtual goods and services a user can buy with a closed-flow currency represent no value outside the app and can not be exchanged for traditional currency. The best example is Monopoly Money or Simoleons from The Sims.
  • Hybrid. Usually, a hybrid currency can be earned virtually by completing tasks or watching ads and purchased with traditional money but not exchanged for real cash. Such a virtual currency only has value to the issuer (app developer) and its customers (players). The issuer is also liable for taxes on profits from selling a hybrid currency for real money. Most mobile apps and games use this type of virtual currency. For instance, World of Warcraft and many other MMORPGs.
  • Open flow. Virtual currencies used in open-flow systems are called convertible virtual currencies (CVCs). They can be used to purchase both real and virtual goods and services and be exchanged for traditional currency. Second Life's Linden dollars are the most prominent example of convertible virtual currency. The developers of this virtual world allow residents to trade their Linden dollars for real dollars on the LindeX exchange, which uses third-party payment networks. Open-flow virtual currencies are taxable in most jurisdictions.

Are in-app currencies regulated?

As one could have guessed from the previous mentions of taxes, virtual currency in apps and games may be regulated. Watchdogs often take a similar regulation approach to virtual currencies as to cryptocurrencies. In-app currencies may as well be subject to anti-money laundering laws.

For instance, the virtual currency issuer can be considered a money transmitter in the US. It means they accept funds or other value substitutes for currency from one person and transmit another value that substitutes for currency to another person or location. Money transmitters must register with FinCEN.

To avoid triggering strict regulatory obligations, developers should create virtual currencies for in-app use only and state this fact clearly in the app's Terms of Use. To avoid misunderstandings, experts from Venable LLP suggest stating that:

The virtual currency represents a limited, non-transferable, non-exclusive license to use the features of the game or app for personal use and does not represent a property interest of any kind.
Venable LLP

How to create your own in-app purchase currency?

If you opt for closed-flow virtual currency for your mobile app, you won't even have to deal with actual payment processing. If you're interested in an open-flow currency, consult taxation specialists and lawyers to avoid facing unexpected consequences. The most popular solution is a hybrid currency, allowing you to make real money by treating your virtual currency as a digital good.

In most cases, the scenario for launching a hybrid in-app currency for your game is similar to launching a regular e-commerce app. It means you'll have to use the In-app Billing API of Android SDK for Android devices or StoreKit for in-app billing on iOS.

Regardless of the virtual currency path you've chosen, if you run a successful mobile app and don't feel confident about your payment processes due to the scale, fees, complexity, or processing issues, get in touch with our payment experts.

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