I suspect that rather than generating a spirit realm and stuffing souls into it, that instead Kayaba created a VI space mundanely (well, we know he did that), and then switched paradigms to a mystic definition of "your world is what you can perceive" and adapted messing-with-spirit-realm spells to a virtual space. Subtle distinction, but a somewhat important one in that the resulting space is still running on hardware that can be mundanely debugged (if behaving in ways not indicated by its specs), which is useful.