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Shawn Foust is head of the video game industry team at law firm Sheppard Mullin Richter & Hampton LLP.

Facebook Credits are here, and they’re sparking quite a bit of debate. Credits are the virtual currency that Facebook hopes third-party game makers will use so that there’s a single, consistent currency across all the games in the Facebook community. But if you’re going to use Credits, you not only have to pay Facebook a 30 percent cut of any transaction you make with the currency, you also have to keep to some pretty stringent terms dictated by Facebook.

The terms are simultaneously very broad and very narrow. They’re broad in the sense that they establish a comprehensive set of regulations governing the implementation of Facebook Credits but narrow in the sense that those regulations only apply to Facebook Credits. The terms do not provide a comprehensive framework for all forms of in-game currency.

That’s an important distinction.

The terms only have power so long as Facebook Credits are in play. If you take the Credits out of the equation by exchanging them for your own currency, many of the rules and restrictions are no longer applicable. So the solution for game developers is to accept Facebook Credits but not abandon your own currency.

Specifically, here are a few select things the terms explicitly prohibit you from doing with Facebook Credits:

  • You will not (and you will not enable or allow any third party to) sell Credits to, or trade or otherwise exchange Credits with, any third party.
  • You may not accept Credits as payment for tangible goods, except in the Facebook Gift Shop.
  • You may not accept Credits as payment for a currency or other stored value item that can be used outside of the application.

Further, you as the game developer are not the Facebook Credits mint. That means you lose a lot of practical control:

  • You do not control the supply of Credits.  That means you cannot offer a sale or giveaway of Facebook Credits (the Terms prohibit you from transferring or trading Credits to a third party).  You cannot summarily issue 1000 Facebook Credits to your users to spark interest in your game.  You cannot distribute Facebook Credits to the masses and live in a post-currency narco-syndicalist commune.  Facebook controls the generation and distribution of Facebook Credits, not you.
  • You cannot lock in value.  Facebook Credits are a fungible good that can be used in any application that accepts credits.  If a person purchases $100 in Facebook Credits with the intention of purchasing things in your application, if they only spend $80, the remaining $20 is free to go elsewhere.
  • Credits can abandon you.  Facebook retains the right to “revoke your eligibility to accept Credits at any time in [its] sole discretion.”  That means your economy can get up and walk away in an instant.

So why not walk away from Facebook Credits?  Well, it’s a payment option that resides natively on your lifeline platform. I’m not going out on a limb in guessing that Facebook Credits will quickly develop into a robust and flexible payment services option that will play an important role in the social game ecosystem. You probably don’t want to walk away from that.

So why your own currency?
As mentioned previously, the current terms don’t extend beyond Facebook Credits. So creating your own in-game currency frees the game developer from constraints while still permitting them access to an important option for payment services.

Since your currency is not subject to the terms, you have full control over its use (subject to Facebook’s Developer Policies and Statement of Rights of course). For example, you can permit trading of your currency between players within an application, which is prohibited for Credits. That means Little Jill Jellybean can send Disaster Dollars to her friend so the friend can buy spent fuel rods in Uranium Enrichment City.  Perhaps that inspires the friend to play more and convert into a paid user later on.

More importantly, you have control over your in-game economy.  If you want to give away Disaster Dollars to a loyal user, you can. If you want to run a contest with an award of Disaster Dollars, there’s no problem. None of this is possible if you implement Facebook Credits directly into your game since the only source for Facebook Credits is Facebook.

You also can build in a safeguard from having the plug pulled. If you implement your own in-game currency you can offer your users a variety of options for the purchase of that currency other than Facebook (such as Paypal or Offerpal). Thus, if Facebook decides you are unworthy of Facebook Credits your game still has a viable means for monetization. If you rely solely on Facebook Credits you’re at the mercy of the eligibility clause.

Further, offering multiple options creates a greater possibility that a particular user will find one that appeals to him or her.  Users with a preference for Facebook Credits may use that option. Alternatively, if a user has a pre-existing relationship with another payment services provider and would prefer to use that provider, they can. Help them help you make money.  It’s not asking too much.

How do I set up my own currency?
You permit the user to purchase only one thing with Facebook Credits: your currency. Once the users have exchanged Facebook Credits for your currency, they can participate in the broader game economy. There should be no direct purchase of any items or anything other than your currency with Facebook Credits.

Once the exchange is made, you’ve locked up the value of those Credits in your own currency, ensuring it won’t move off to another application. You also introduced the user to an economy where you control the rules. And, as most game developers will tell you, few things are more important to a game than a well structured economy. The economy can dictate the tempo of the game and can have dramatic effects on a user’s interaction with the content. Normally it wouldn’t be something a developer would consider ceding control over.

So there’s the case for your own currency. There are arguments against, of course. Some argue that creating a separate currency is confusing and creates additional friction. Others argue that implementing Facebook Credits directly is good for the reputation of the game. I’m sympathetic to these arguments, but I find them unpersuasive in light of the root issue: direct implementation of Facebook Credits without a buffer currency effectively shifts control of a critical aspect of your game (which is often the main source of monetization) to a third party with potentially different incentives. Not good.

A buffer currency allows you to leverage a powerful new player in the payment services space while retaining control and flexibility.

Shawn Foust is an attorney with Sheppard Mullin Richter & Hampton‘s Silicon Valley and Century City offices and head of the firm’s video game industry team. He focuses on tackling the cutting edge legal issues facing businesses in the entertainment, new media, and technology industries. He handles a blend of intellectual property licensing/litigation and emerging growth finance work.

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