April 19, 2014

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Second Life Welcomes Bank Regulators

Linden Lab, the company that runs the popular virtual world Second Life, announced Tuesday that all in-world “banks” must now be registered with real-world banking regulators:

As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter. We’re implementing this policy after reviewing Resident complaints, banking activities, and the law, and we’re doing it to protect our Residents and the integrity of our economy.

This is a significant step. Thus far Second Life, like other virtual worlds, has tried to avoid entanglement with heavyweight real-world regulatory agencies. Now they are welcoming banking regulation. The reason is simple: unregulated “banks” were out of control.

Since the collapse of Ginko Financial in August 2007, Linden Lab has received complaints about several in-world “banks” defaulting on their promises. These banks often promise unusually high rates of L$ return, reaching 20, 40, or even 60 percent annualized.

Usually, we don’t step in the middle of Resident-to-Resident conduct – letting Residents decide how to act, live, or play in Second Life.

But these “banks” have brought unique and substantial risks to Second Life, and we feel it’s our duty to step in. Offering unsustainably high interest rates, they are in most cases doomed to collapse – leaving upset “depositors” with nothing to show for their investments. As these activities grow, they become more likely to lead to destabilization of the virtual economy. At least as important, the legal and regulatory framework of these non-chartered, unregistered banks is unclear, i.e., what their duties are when they offer “interest” or “investments.”

This was inevitable, given the ever-growing connections between the virtual economy of Second Life and the real-world economy. In-world Linden Dollars are exchangeable for real-world dollars, so financial crime in Second Life can make you rich in the real world. Linden doesn’t have the processes in place to license “banks” or investigate problems. Nor does it have the enforcement muscle to put bad guys in jail.

Expect this trend to continue. As virtual world “games” are played for higher and higher stakes, the regulatory power of national governments will look more and more necessary.

Comments

  1. paul says:

    Interestingly, Linden doesn’t really give any indication of who the “applicable” regulators might be. One assumes it’s the registrant’s local meatspace government, but I wouldn’t be surprised to see a sudden run on banking and securities-trade registrations from various obscure and non-obscure countries (just as there were trademark registrations in interesting countries during the early days of domain-name dispute resolution).

  2. Crosbie Fitch says:

    The only solution to this madness is to create a virtual world that cannot be regulated, i.e. a decentralised one.

    Otherwise, I look forward to regulation of the umpteen fly by night banks (and their unscrupulous bankers) that crop up in thousands of multiplayer games of Monopoly every day.

    Either the system is a regulated market operating in the real world or it is a game simulating a virtual world. You can’t have it both ways.

    Some people might like to play a game in which the collapse of a virtual bank has no real world consequences. Are such games now to be prohibited?

  3. Alexis says:

    “Some people might like to play a game in which the collapse of a virtual bank has no real world consequences. Are such games now to be prohibited?”

    If the company running the game is providing a currency exchange to real world money, and marketing their game as a way to make real world money, then it doesn’t seem unreasonable to have regulation. We have regulations for gambling, investing, banking, etc.

    The tricky bit comes in when you have a company that doesn’t want to provide the currency exchange, and the chance to “make real money” isn’t what they intend to offer. Because third parties are providing a market for virtual goods in these games, there will be a temptation to apply regulations to them as well. As you say, this could put undesirable limitations on them. For now, the game companies seem to rely on the fact that these trades are against their terms of service for protection, but it’s not clear if that would be enough in the long run to avoid regulation.

    It seems like the best option in that case would be to regulate the third parties providing the market, but I suspect it won’t be that simple.

  4. Bob Jonkman says:

    If an online game that’s supposed to provide escapism from Real Life becomes just as onerous as Real Life itself, what’s the point of playing? Linden Labs may be shooting itself in its virtual foot — my money will go to a game that’s fun to play.

    Maybe I’d like to be able swing a sword to decapitate an online opponent — or will Government Regulators step in to impose Real Life rules in these games too?

    –Bob.

  5. Hal says:

    The big line that will be crossed someday is when you get taxed on your earnings in virtual worlds.

    I like Crosbie’s idea about a decentralized virtual world. The question is, can it still have an economy? Can there be an equivalent of cash, which somehow cannot be forged or created at will? And what would be bought and sold? In SL they have many measures to try to protect intellectual property in designs for clothing and object. But they really don’t work too well, as readers of this blog would predict. The one thing you might hope to protect, I think, would be the scripts that render active objects interesting and interactive, but even that would be a challenge.

    I have heard of various open-source virtual world projects such as http://www.opencroquet.org but I don’t know much about them. I wonder if they have answers to these problems.

  6. Jon Marcus says:

    It’s worth stressing that Linden Labs is prohibiting is the offering of interest on deposits. Obviously that’s tied pretty closely to banking, but they aren’t specifically prohibiting banking. If you want me to store your money for you, Linden Labs has no problem with that. (And neither do I!)

    Crosbie Fitch: “Some people might like to play a game in which the collapse of a virtual bank has no real world consequences. Are such games now to be prohibited?”

    Nope, not prohibited at all. Go start one up and have a great time. But be sure not to make the virtual currency convertable to real world currency.

    Bob Jonkman: “Maybe I’d like to be able swing a sword to decapitate an online opponent — or will Government Regulators step in to impose Real Life rules in these games too?”

    When swinging that sword starts causing Real Life damage, yes you can certainly expect Government Regulators. ‘Til then, swing away.

  7. paul says:

    As Jon Marcus points out, the prohibition is pretty narrowly tailored to things that walk and quack like banks. You can even, as I read it, engage in personal lending/borrowing with interest. (But if you store money for someone, you can’t establish a collection of machines at which they can, for a fee, take it out of storage unless you have some kind of accreditation as a bank somewhere…)

    And yeah, it makes sense to me that at least as soon as you convert virtual currency to the real thing you get hit with real tax consequences. Otherwise watch everyone taking a new job specifying that their pay shall be in L$…

  8. David Robarts says:

    “And yeah, it makes sense to me that at least as soon as you convert virtual currency to the real thing you get hit with real tax consequences. Otherwise watch everyone taking a new job specifying that their pay shall be in L$…”

    Perhaps you come to know quite a few people in RL and in SL. Perhaps you start exchanging L$ for RL goods and services. Have a business – make a purchase machine in SL. Give the user a receipt to print and exchange for the goods at your store. As long as you spend the L$ in SL (perhaps for RL goods & services) the tax man is not savvy to the transaction. Get a small but non-trivial fraction of the economy operating this way and governments will get involved.

  9. Joel Kahn says:

    I’m not very familiar with Second Life, so tell me:

    Are there firms in SL that offer stock?
    Are there full-fledged stock exchanges?
    Will publicly traded SL companies now be
    regulated by the Securities and Exchange Commission? Or is that development
    somewhere farther down the road?

  10. Hal says:

    A problem in SL with the kinds of long-term financial relationships that are necessary for banks, stocks etc, is that there is no mechanism to track people down who disappear. Anyone can quit the game and restart under a new name. The game’s owner/operators, Linden Labs, do not really attempt to prevent people from doing this; it’s not clear that they even could do so. So there have been no SL stock offerings or stock exchanges AFAIK. The banks were relatively new and were apparently all Ponzi schemes, as might be expected under the circumstances.

  11. Taran Rampersad says:

    Imagine my surprise seeing this here… I’ve been covering this and other stuff at http://www.your2ndplace.com as Nobody Fugazi…

    It *is* a small world. :-)

  12. Tel says:

    The only solution to this madness is to create a virtual world that cannot be regulated, i.e. a decentralised one.

    The trouble with a completely decentralised system is that it truely has no regulation, so anyone can do anything, which means that mechanisms such as money don’t work anymore. It’s a bit like playing tennis with no court, no net, no balls and some cardboard cutout rackets:

    A: “I serve and I win!”
    B: “But at the last possible minute, I manage to return serve.”
    A: “Your return goes way too long.”
    B: “Until a surprise gust of wind comes from nowhere.”

    Kind of gets a bit pointless after a while, but I’m told that it helps to be playing with the right sort of people. There used to be groups of online role-playing nerds who had long and involved conversations along these lines, I guess it beats reading pulp fiction, and might be a fraction more informative than watching Fox News.

    On the other hand, most players do actually prefer a bit of regulation, at least enough to keep some sort of consistent laws of physics and stuff like that.

    The one thing you might hope to protect, I think, would be the scripts that render active objects interesting and interactive, but even that would be a challenge.

    I have heard of various open-source virtual world projects such as http://www.opencroquet.org but I don’t know much about them. I wonder if they have answers to these problems.

    It’s not a new problem. People were talking about the concept of decentralised text-based MUDs at least 20 years ago, but I’ve yet to see one working with any more features than a very basic chatroom. My gut feeling about croquet is that if you can’t make a text-based demo then adding 3d graphics won’t move you closer to solving any fundamental issues (but it will make plenty of pretty pretty pictures, which look cool and maybe SETI will have to give up CPU cycles as people switch over to croquet screen savers instead).

    The croquet homepage uses the descriptive term “deeply efficient”, so I just had to google that phrase. Turns up an eclectic mix… apparantly even teeth bleaching can be deeply efficient.

  13. Crosbie Fitch says:

    Yup, I was talking about a decentralised approach five years ago:
    http://www.gamasutra.com/features/20020805/fitch_01.htm

    Mechanisms such as money do still work. The lack of regulation, especially when monopolies of copyright and patent are no longer tenable, just makes the bargaining process a tad different. http://www.contingencymarket.com

  14. Sepp Hasslberger says:

    Perhaps, instead of calling in the real world regulators to keep its banks from making trouble, Linden should lighten up on money and use a currency that is specific to Linden and not necessarily connected with real world $$$. Check out Openmoney.org.

  15. Spudz says:

    The Linden Dollar already is “a currency that is specific to Linden”, but has an exchange rate with “real” currencies like the USD. Any replacement would likewise develop an exchange rate with “real” currencies.

    Better is to ignore the whole issue. The Linden Dollar will be unstable and prone to fluctuate wildly. People would speculate in the currency at their own risk. Nobody *has* to do business in Linden Dollars or with Linden Labs if they don’t want to, so why regulate?

  16. Samantha says:

    We don’t need no stinkin government in Second Life. We get quite enough of that in 1st Life. The governments have totally screwed up 1st life economics and much of everything else. Why let them into 2nd life. Tell them to go to hell. I will not engage a “second life” that has government. I can get that in 1st life and with much better resolution.