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IMVU has been a relatively quiet and unnoticed company in the online gaming and social media worlds. But the company did something recently that could benefit the whole industry: It received approval from the U.S. Securities and Exchange Commission to enable payments in its virtual world through a blockchain-based cryptocurrency dubbed VCoin.
With its ruling in November 2020, the SEC enabled IMVU to allow users to buy and sell goods with VCoin and also to cash out and convert it to Ethereum, a well-known cryptocurrency, or into U.S. dollars. The so-called “no-action letter” from the SEC lays the groundwork for other companies to do the same thing, and that’s one of foundations of the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. IMVU will be talking about this development at our GamesBeat Summit: Into the Metaverse event on January 27-28. IMVU will launch its VCoin cryptocurrency soon for its own users.
Other operators of virtual worlds — such as the game worlds of Roblox and Fortnite — could benefit from the ruling, so long as they follow the same guidelines that IMVU is, IMVU CEO Daren Tsui said in an interview with GamesBeat.
Having something like VCoin is important because the metaverse isn’t expected to be a single world operated by a single company. It will likely be a collection of virtual worlds, all interconnected in a way that makes travel between the worlds easy and seamless. If you buy something in a virtual world from a company or from another user, you want to be able to trust that transaction and take the object to another world. If you sell an item, you want to be able to get paid and then cash out. And from the viewpoint of companies, creating a marketplace where users can supply the digital items could be far easier than one company’s own developers trying to populate a metaverse full of digital items.
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The key to the metaverse
That’s what IMVU is doing with VCoin, a blockchain-based digital currency backed by a massive user base (Ethereum) and thriving economy, soon to be launched in the IMVU platform. Blockchain is the transparent and secure digital ledger that allows objects to be uniquely identified and ownership of those objects to be clear. Blockchain technology is the foundation of cryptocurrencies, which are digital forms of money that are being created by all sorts of companies. Ethereum has become popular in part because of its unique features (such as the ability to create smart contracts or set specific rules for the use of the currency) as well as its broad-based support.
“This news to us is way more about just VCoin and IMVU,” Tsui said. “It really is talking about a framework for the entire space. And this is how we believe digital currency will then move from this kind of a Wild Wild West type of environment where people are getting sued, or companies are getting sued, or people are losing their money. It will transform that into something that is much more of an infrastructure, where the transparency is well understood. And most importantly, people can trust the currency that they’re using. That we think is a game-changer, which will really boost the growth of metaverses.”
Like other virtual worlds like Second Life, over the past 16 years IMVU has built a flourishing economy, with a marketplace driven by creators. Users can exchange IMVU’s proprietary Credits for digital goods, like a skin for their avatar, or for visiting virtual rooms, such as a dance club. The economy has 7 million monthly active users who exchange 14 billion Credits a month and engage in 27.5 million monthly unique transactions. The market has more than 50 million products available today, with the catalog growing by 400,000 items a month.
Before VCoin, to get paid, users had to use third-party tools like PayPal or Venmo. But that’s not easy with users in different countries. With VCoin, paying will get easier, Tsui said. Users can send VCoin to anyone else on the platform, and earners will be able to convert it to real cash via Ethereum cryptocurrency wallets.
“One of the reasons why we picked Ethereum is that it’s pretty much ubiquitous,” Tsui said. “It’s a product that everybody uses. But there’s another feature that we really like, which is the ability to write smart contracts into these into the Ethereum tokens.”
One example is that it requires users to trust each other, particularly if someone is making textures for someone else’s project. One user can create a smart contract that limits how the texture can be used and how one user will have to pay another for it. And while this will work for IMVU, Tsui said any virtual world should be able to use it.
“We believe that creators and service providers are going to be pivotal in the growth of universes to be more than one metaverse,” Tsui said. “They’re the people who are going to be basically building the different experiences, the products, and so forth. I mean, you could have an Oasis, where one company does everything. But I feel it’s going to be multiple companies, or multiple millions of people, all getting together to create the various experiences.
“Most people are going to create and play for the fun of it. But the real serious creators and the people who are trying to create a business, they need to be able to get paid easily.”
Currently, numerous companies have their own proprietary payment systems, but those are limiting. Their currencies only work on their own platforms, and turning that currency into cash is quite difficult. Policies limit how often you can cash out currency or maximum amounts. To transmit money across states, service companies need to have licenses for each state, similar to a business like Western Union. The same goes for international money transfers.
“It’s very complicated. Our product today does not allow you to pay users peer-to-peer and then convert those payments over to cash,” Tsui said. “Healthy economies require currencies that are trusted, easy to use, stable, and liquid. That’s what we’re trying to do. For the first time, the SEC has publicly provided guidance regarding what a digital currency should look like, and behave like, in virtual economies. This is huge. In a virtual economy, we come together, we work on a product that we can sell, like clothing, and people need to be able to have a currency to be able to exchange value in that regard.”
A year in the making
It took about a year for IMVU to get approval from the SEC.
“The SEC is very picky on who they work with,” Tsui said. “They liked us because we’re a real company. It’s not a crypto play where it will be three years before you see the first application. They liked that we were open. The big thing here is you’re actually able to have this token leave the ecosystem and go out into the wild. That was the really big ask here.”
IMVU has promotional credits that it creates those for new users so that they can get started, and those credits cannot get converted to cash.
“We also have another Credit system, which you use when you’re buying a digital good, like when you’re buying a shirt,” Tsui said. “You use Credits, and you can actually cash out for that particular transaction.”
IMVU checks out the clients to meet anti-money laundering regulations, where the service provider is required to follow rules dubbed Know Your Customer, or KYC, and collect full tax information on the user. If a user gives those ordinary credits to another user, then that second user cannot cash it out. To enable that second user to cash out with credits, IMVU would have to collect licenses from states and other countries.
“With VCoin, IMVU has created a new cryptocurrency that is fully transferable,” IMVU chief strategy officer John Burris said in an interview with GamesBeat. “Users will purchase the VCoin. But with VCoin, they can do a peer-to-peer transfer with other users, like pay other users, send a gift to users, pay for access to a room, pay for their avatar to be styled and dressed up, pay for a friend to show them around to cool rooms all night. And then people who have the coins can exit the platform with the coin, and then have an option either to change that into fiat, or U.S. dollars, like any other crypto token, and take it off our platform completely.”
IMVU is partnering with a third party that it will announce shortly to run that part of its infrastructure, Tsui said.
“It will be seamless to our users, as they move around inside our applications and our desktop applications,” he said. “We think this will be one of the most user-friendly crypto implementations anywhere, where users aren’t going to have to know how to save private keys, or hold passphrases, or know about Ethereum. They can move their VCoin off our platform and it ends up in a fully compliant Ethereum wallet. And just like every other token and asset, they own it and we can’t pull it back. If they want to convert it into cash, we’ll do that on their behalf.”
The SEC had to decide whether VCoin was a security, like a stock sale. If it had classified it as such, it would have required a lot of disclosures as required of public companies, such as selling only to accredited investors who are knowledgeable about what they are doing and have a certain net worth. But for the third time in its history, the SEC issued a “no-action letter,” which meant that it won’t take regulatory action against IMVU for the VCoin currency.
“This sets a new standard for what’s allowed in the industry,” Tsui said. “We needed the SEC to bless our token and our approach so we can feel confident launching it in the U.S. that we’re not going to get in trouble. The SEC knew we already had an economy. We think adoption will be real and meaningful. And we said we are going to be open.”
Second Life, which was created in 2003, went to the trouble of getting money services licenses, and they did it in the era before cryptocurrencies. It’s proprietary to Second Life’s owner, Linden Lab. With IMVU, any Ethereum wallet will be able to hold VCoin.
“That’s what we’re leveraging,” Tsui said. “Most gaming companies wouldn’t go out and secure all those licenses because it’s not their core business. Secondly, if IMVU were ever to go out of business, you could still have the Ethereum. If Second Life were to go out of business, with their proprietary platform, the tokens are gone.”
Tsui added, “We do use Worldpay. They allow you to collect and sell stuff. They support credit cards, they support SMS, they support payment cards — all sorts of different types of money solutions. But that is just more for transacting, like buying and selling credits. When we pay our creators, they don’t help us with that. For outgoing transactions, we pay with products like PayPal. We figure out how much tax to withhold. We have to tie the transaction to a product.”
“All the other parties that want to leverage our letter, they don’t need to go get approved by the SEC,” Burris said. “They need to follow the guidelines and the framework that is in the no-action letter. We didn’t do this for the broader industry, but that’s an awesome outcome.
“From a broader perspective, as an analogy, if you are a real-world clothing designer, you go to a mall and sell your clothing to Bloomingdale’s. They pay you in dollars. But then when you sell it to Nordstrom, they pay you in yen. And JC Penney pays you in pesos. How do you do business that way? Now it’s possible to have a unification of the currency. This is going to have big and good ramifications for the entire industry.”
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