Fraud an increasing problem in the virtual goods trade

Converting real money into fake, virtual items is a common practice among social gamers. But an increasing number of fraudsters are turning that process on its head, converting ill-gotten virtual items into real money.

A recent Wall Street Journal story investigates the presence of fraud in the virtual goods trade, which increased last year to represent 1.9 percent of all virtual goods transactions, according to credit card processor CyberSource Corp. Many fraudsters use the virtual goods market as a form of money laundering, buying up virtual currency or items with stolen credit cards then selling them for cash on third-party sites, for instance.

Sniffing out this fraud can be costly for developers, who might not want to pay high fees for fraud detection services on smaller purchases. But letting fraud go undetected can be even costlier, as virtual goods reseller Chris Condon learned when he found a full 20% of transactions on his site were fraudulent at one point.

While virtual currency providers themselves have less to fear from fraud than resellers (it's not like it costs Facebook anything to create those extra fraudulent Credits, after all), anything that erodes consumer trust in a virtual market can be harmful. "A bad experience won't just turn users off of Credits but it will turn them off to Facebook," Joe Sullivan, Facebook's chief security officer, told the Journal. That, and "Facebook Credit inflation" are three words that no self-respecting social gamer wants to hear.