International Law

In an article FindLaw's Writ, Anita Ramasastry considers the consequences of banning banks in Second Life:

Just last week, Second Life, an online virtual world, banned unregulated banks from its cyber-realm. Linden Labs, the operator of Second Life, announced that only banks or other financial institutions (such as investment companies and credit unions) that have a real-world presence and are licensed and regulated by real governments (U.S. or foreign, apparently) would be allowed.

 

Second Life has said it will verify this status by requiring "an applicable government registration statement or financial institution charter."

Previously, banks could exist solely within Second Life. Thus, in theory at least, a customer's deposits or investments were governed only by their agreements with Second Life and with their cyber bank there.

Banks on Second Life accept deposits of Linden dollars, Second Life's currency, which is convertible into real U.S. dollars. As I discussed in a previous column, bank failures and frauds on Second Life have caused its citizens to lose some funds. . According to Linden Labs, it has also received complaints about several in-world "banks" defaulting on their promises of very high interest rates. .

Plainly, Second Life's hope regarding the ban is that banks with real-world presences will operate safely and not defraud consumers. And in theory, Second Life's ban is a good idea. But in practice, as I will explain in this column, it may be unnecessary at this stage; will surely cause more confusion for regulators and Second Life citizens alike; and may not stop fraud.

 

Moreover, there was an interesting alternative that might instead have been employed: Linden Labs might have allowed its participants to create their own regulatory schemes - tailored to the geographies and customs of Second Life.

Read more here.