Law Technology

Second Life Welcomes Bank Regulators

By Ed Felten

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.

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Full post as published by Freedom to Tinker on January 11, 2008 (boomark / email).