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New Bank PolicyLinden Lab has announced a new policy regarding banking, essentially shutting down dozens of largely insolvent self-styled “banks” in Second Life.

There are open questions regarding the impact on other institutions, and undoubtedly, one or two legitimate operations will be caught in this net. That is undeniably unfortunate, but the vast majority of “banks” in Second Life are nothing more than fraudulent ponzi schemes, and this is positive step that will save a lot of people a lot of unhappiness in the long run. It is a smart move from both a business and legal perspective, and it stands as further evidence that Linden Lab is growing up and focusing on the long-term health of the grid. From the notice:

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.

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.”

My only complaint with this policy is that it has been too long in coming; it is clear and concise, and it undeniably makes the grid a better place. In the long run, policies like this, which acknowledge the obligations facing a company that offers users the chance to “make real money in a virtual world, that’s right, real money” (emphasis in original), will keep Second Life, and the grid in general, healthy and relatively free of regulation.

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43 Responses to “Commentary: Linden Lab Bans Unlicensed “Banks””

  1. on 08 Jan 2008 at 1:59 pmcyn vandeverre

    It is interesting, reading the comments to the LL blog entry, how many people do not understand that handing money to an anonymous person in SL isn’t much different than handing it to an anonymous person in real life.

    I don’t know how LL should be communicating this sort of thing to residents, more than they are already. I know they tell people to be cautious, and yet, there are oodles of posters asking LL to find their $L and reimburse the resident, either for “banks,” “securities,” or other scams.

  2. on 08 Jan 2008 at 2:26 pmBenjamin Duranske

    I wonder to what degree this article, “The Fleecing of the Avatars” (from MIT’s Technology Review) motivated the timing of the move?

  3. on 08 Jan 2008 at 3:12 pmTony

    I was thinking the same thing Ben. I’m also wondering how this will play into the SL “securities exchanges”. It’s one thing to be a pretend bank and try to get actual “bank status” (probably extremely difficult at best), but it’s a totally different story to try and get someone like NYSE or SEC to sign off on your inworld exchange.

    Maybe they aren’t that different, though.

  4. on 08 Jan 2008 at 3:16 pmFlipperPA Peregrine

    These recent policy changes really should have happened a few years back. All of these issues were raised on the old forums when Gaming Open Market launched and the L$ achieved undeniable value.

  5. on 08 Jan 2008 at 3:17 pmRobert Bloomfield/ Beyers Sellers

    Are you contradicting yourself in your closing statement? It seems as if you are saying that the policy of forcing financial institutions to subject themselves to real-world regulation will keep the grid free of regulation. This might be true in some technical sense, but if all of the businesses in SL were subject to RL regulation, in what substantive sense would the grid be “relatively free of regulation?”

    My complete take, as of today, is here:

  6. on 08 Jan 2008 at 3:18 pmAshcroft Burnham

    It is a very great pity that systems of in-world regulation were not set up in time to prevent the unprecedented intervention by Linden Lab in resident to resident financial transactions.

    Of course, it is only a short-term move: the ultimate future of the metaverse is undoubtedly an open-sourced environment where no one company will control the whole of the online 3d environment. At that stage, the need for workable internal regulation will be even greater.

  7. on 08 Jan 2008 at 3:25 pmBenjamin Duranske

    Flip is right, of course; I think what motivates the change now rather than then is pretty easy to identify as a whole ton of publicity (both on legal issues specifically, and on Second Life generally) due to a vastly larger user base.

    I’m not even really an old-timer (first logged on to SL in early ’06, and didn’t create ‘Benjamin Noble’ until June of that year) and even I remember it being a huge deal to hit 1,000,000 sign-ups. That’s less than 1/10th of the number now, and hitting just 100,000 — only 1% of the current base — happened what, 25 months ago? It’s a bigger world, with more journalists, more professors, more lawyers, and more people generally. That’s going to bring more scrutiny, and, I think, better policies in the long run.

  8. on 08 Jan 2008 at 3:25 pmAshcroft Burnham

    Addendum: I had written the following comment for the official SL forums, but the rather arbitrary comment limit had been filled between the time that I loaded the page and the time that I had finished writing the comment, so I shall post it here instead:

    It is extremely unfortunate that an institution that sets out to provide a framework for virtual worlds yet again feels compelled to step in and regulate the minutia of inter-user conduct. Setting aside for the moment questions about how Linden Lab will determine what counts as a valid registration in every possible foreign jurisdiction, let alone how it will determine whether a registration in that particular jurisdiction is sufficient for the activities that the organisation is undertaking, it undermines the principle that SecondLife is aiming to be the 3d web.

    Of course, such a policy can only have real effect for as long as the servers are entirely under the control of one company. Open-sourcing of the servers on a large scale may not come for a few years, but, when it does, the only way to regulate inter-user conduct will be by internal means. There are already too many blunt instruments of regulation in SecondLife.

  9. on 08 Jan 2008 at 4:03 pmsilos g

    Maybe this will finally indicate that it seems that Linden Labs has only been roleplaying “the 3dinternet=metaverse” for the last 5 years.

    Its always been one ponzi on the other, and at last count according to LL owns numbers…

    Have maybe 200 people become wealthy within the entire SL pyramid? That LL and Meta Pundits, as well as SIM-land- renter speculators( who are getting out now)?

    Are the ethics of sl banks asking for your money for instant wealth much different than the hyberbole and the minions of blog writers or Linden Corporate yacking out the same “proposition” for all of the last year and a half?

    PR is one thing. PT Barnum was another:)

    ASK yourselves WHO profited and lost during the LONG overdue behaviour of LL to admit and behave like an actual company with a few private owners?

    ASK yourself what does the web2.0 user generated MYTH really mean if THEY excercise all control over your content?

    ASK yourself how METAPLACE or any of the other recently birthed private /vc vested Companies from the metahype will do things any different as they look to mass up on users…. yes users, not community…. there is a difference…

    ASK yourselves.

  10. on 08 Jan 2008 at 4:08 pmBenjamin Duranske

    @5 – I see what you’re saying, Robert. Bad phrasing on my part. What I meant there is that by voluntarily accepting the responsibility to manage the grid in light of current law, Linden Lab does a lot to avoid the possibility of further legislation targeted directly at virtual worlds, and specific regulatory action (with the associated bad press) directed against Second Life.

    @Ashcroft – I know you’re a big advocate of in-world justice systems, but do you really think Linden Lab should let users defraud each other and force them to sort it out afterward using in-world tools? Both from a business perspective and a legal one, that seems like a terrible idea to me, and a policy that gets rid of a sector that was, you’ve got to admit, rife with blatant fraud, is a good idea.

  11. on 08 Jan 2008 at 4:11 pmTony

    I think it would boil down to how likely LL thought they are at risk of getting sued or going to jail when a user is injured from something like Ginko.

    At that point, I believe self-preservation likely kicks in and whatever response occurs, stems from that.

    It is nice that LL stays out as often as possible, but until the grid is open and islands can be hosted separately from LL, they are likely responsible for things that can occur.

    What would happen to a website like GoDaddy, if they knowingly were allowing people to host and invest in unregistered ‘banks’ run by individuals. Especially if one of them had closed and taken all the money and ran.

    Does that analogy hold up from a legal perspective?

  12. on 08 Jan 2008 at 4:18 pmBenjamin Duranske

    Tony, it does hold up from a legal perspective, and it’s precisely what I’ve been saying for a while now. Take whatever you’re analyzing in Second Life and put it on a web page. Is it legal? Should the host be concerned? Those are the questions Linden Lab is dealing with, and they’re acting more and more like a responsible part of the community, and less and less like a watchmaker-god.

  13. on 08 Jan 2008 at 4:23 pmAshcroft Burnham

    I don’t think that a communications service provider should be making any decisions about whether what its users, when using that medium of communication, constitutes fraud or not any more than a telephone company should have to listen in to all conversations and make sure that people are not using the telephone network to defraud people, or the post office should have to open all the letters to make sure that no correspondence in furtherance of fraud is exchanged.

    The model of one company running the whole show is in any event, in the long-term, highly undesirable: just as the web and e-mail is better than CompuServe by many orders of magnitude, so is a fully open-protocol virtual world better than the current arrangement. In such a setup, there is no room for single-provider “policies” about how individual users make use of the systems.

  14. on 08 Jan 2008 at 4:23 pmAshcroft Burnham

    I missed the word “do” from the first sentence of that last remark.

  15. on 08 Jan 2008 at 4:34 pmBenjamin Duranske

    I agree that the “one company, one world” model is a problem. It’ll be gone by 2009 though, one way or another.

  16. on 08 Jan 2008 at 4:38 pmTony

    Extend the analogy then to a (physical world) Mall. I don’t think a mall owner couldn’t allow a “bank” to be located in the mall if they weren’t registered to take deposits.

    If a communications provider thinks that it could be held liable for something a user is doing, then they WILL take actions to prevent that. You can’t expect them to do anything else, just like you can’t expect a company to NOT maximize its profits. Its basically survival instincts since only business that take those actions will survive.

    Telephone and mail are considered private communications (as I think email should as well), so I’m not sure that falls into the same category as an open to the public ‘business’ front.

    I do know that some content providers are protected and there is the Fair Housing case that was mentioned here before on how (?) violated the Fair Housing Act, so I wonder how far something like that can extend. I believe, though, that once LL started regulating, they become required to continue regulated based on that case.

  17. on 08 Jan 2008 at 4:40 pmTony

    Oops typo – should be “I don’t think a mall owner could allow a “bank”…”

    Also, I am not a lawyer so I could be wrong on plenty. It’s just my business opinion.

  18. on 08 Jan 2008 at 4:51 pmAshcroft Burnham

    It really oughtn’t be for the mall owner to investigate the credentials of each and every business that opens in her/his/its mall. In so far as US law requires communication companies to do the same, it is grossly defective and needs urgent remedy, although it is far from clear that US law does require that.

    The point is that virtual worlds are international: users of virtual worlds in countries other than the US oughtn’t have to comply with US law. That is why an open-protocol model is far preferable to the current arrangement.

  19. on 08 Jan 2008 at 5:15 pmBenjamin Duranske

    One of the oddest things about this is that a few people still express the idea that everything that happens in virtual worlds is legal until there is a formal decision otherwise. That’s absurd — it’s like saying that murder by blue laser beam is legal, because there’s nothing saying specifically it is not. Fraud is illegal, whether you commit it by mail, by fax, by email, or in a virtual world. I’m not sure if it’s something some people fundamentally misunderstand about the law, or just crotchety grumpiness on the part of a few very early residents who wish the world had remained as it was in early-2005, as if suspended in amber. Either way, it’s a pretty ridiculous position.

  20. [...] I saw this story first via Virtually Blind. [...]

  21. on 08 Jan 2008 at 5:24 pmcyn vandeverre

    LL keeps saying that it is a “communications service provider” and uses that as a reason not to police illegality. I can understand that they don’t want the job of being the police, or the government, but I think it is wishful thinking on LL’s part. Eventually, maybe the folks who own the servers for virtual worlds will be just service providers, but we’re not there yet.

    Meanwhile, they are straddling the line, and we users are understandably confused about it, because there isn’t a clear hands-on or hands-off policy.

  22. [...] world financial institutions may generally be nothing more than ponzi schemes, but real world financial institutions cheat too. Take the story from today’s NY Times about [...]

  23. on 08 Jan 2008 at 8:56 pmR X

    Well I have ten thousand lindens in one account
    and the royal bank of whitfield has shut off the ATM’s
    they were a good solid bank that I felt comfortable with and they were offering 0.24 % interest which is pennies.
    But for them to just shut off all operations and cease communication leaves trouble for people. All sorts of people.
    men, women, furries, alien etc
    I also have 900 lindens in my World stock exchange account
    and they were tipped off cause two days ago they froze all trading
    The way LL is handling this is unreasonable
    makes me feel like a few 18 year olds are running the show
    They roll around in their rolls royces laughing at us all.
    Well i will not deposit any lindens for some time now.
    They have lost my business.
    this place is becoming kanvea or there a PG right wing christian fundamentalist institution.
    so many people applaud the actions of LL
    But I for one do not. They could have offered more reasonable time allowance allowing banks to liqudate their assets Whitfield claimed to have all our lindens in servers outside of SL and that every linden was insured and able to be taken out . Land will be really cheap now hehe
    and business has been booming today in my store ,
    i am in awe
    I may have lost 10900 lindens but it’s only $44 real life US dollars I’ll manage.
    I’ll make it all back in sales in no time.
    BANKS STOCKS Perpetual bonds are going down the drain.
    This will crash the Sl economy
    cause many people to leave because they have millions of lindens invested in banks and stocks.
    anshe chung is heavily invested in WSE
    This has caused wide spread panic. now.
    mass protests and many people are watching sadley as many avatars run with their lindens and cash out.
    and make new accounts with different names and transfer lindens and take off and nothing will be done to protect people.
    it’s like oh too bad it’s not real currency.
    I am glad I withdrew 30,000 lindens from my bank account a week and a half ago I just thought like whats up?
    what if they go down.
    But I do feel sorry for the many people that are working hard and long hours to achieve a certain level of success and just to see it all vanish in a heartbeat.
    has me wondering about the actual progressive success of Second Life. good thing I dont own land I only rent everywhere. because if everything collapses I am not heavily invested as some people.
    anyways hang in there…’s rough out there.

  24. [...] Duranske, the founder of the Second Life Bar Association, has only one criticism of Linden Lab’s move to self-regulate financial services within their virtual world, [...]

  25. [...] Virtually Blind (commentaries in virtual law) [...]

  26. on 09 Jan 2008 at 4:12 amDomiziano

    What abt a Banking license (fictional?) aslike in Entropia Universe?

  27. [...] Right now, a controversy is brewing over a decision by Linden Labs (creators of Second Life) to shut down in-world “banks” offering participants interest on virtual currency deposit accounts. Many fear that the decision [...]

  28. on 09 Jan 2008 at 9:25 amBenjamin Duranske

    @26 – Entropia is basically running its own regulatory system in issuing those. In essence, they vet bank owners by getting a ton of personal data, and also by making sure bank owners have so much money tied up in the license, and the license is so valuable, that it isn’t worth killing the goose for a couple of quick eggs (recall, the licenses sold for amounts pushing $90k, and only a handful were issued). It’s an interesting idea, but it runs pretty contrary to what remains of Linden Lab’s policy of non-intervention. My guess is that it is just too intrusive for LL’s tastes; they’d rather deep-six the whole industry than do day-to-day monitoring.

  29. on 09 Jan 2008 at 11:05 amMontana Corleone

    Indeed, and that was an interesting move by Entropia. Many people in SL are sick and tired for the frauds, the scams, and the griefers, because LL essentially does nothing.

    Entropia has those, but does not have freedom of content creation, and that is one of the key issues.

    In truth, none of these are the next internet or Web 3, they are just experiments along the way, and none will be here in a few years I think. You will not be able to do global business in virtual worlds without confidence and international agreement on handling defaulters and fraudsters, and that probably needs a global electronic ID. he vast majority of the planet will not trust it. That’s born out by the “user” numbers. 12 million odd have tried Second Life, but only 500K regularly use it. That says that basically there is a big, big problem with the entire model.

    The first world that allows free creating, has governance and laws that bite without being over regulatory, good performance that doesn’t require state of the art kit, has trusted financial systems and the ability to safely transfer money in and out, and has customer support that works will be the winner. So far, it’s yet to surface.

  30. on 09 Jan 2008 at 2:19 pmAshcroft Burnham

    Montana: the only way to achieve that is to have open-protocol systems not controlled by one organisation. It will come – eventually.

  31. on 09 Jan 2008 at 4:33 pmMixedRealities :: A rough start

    [...] Duranske on Virtually Blind does not exclude that one or two legitimate operations will suffer because of these decisions, but [...]

  32. on 09 Jan 2008 at 4:34 pmAldon Hynes

    I’ve been away and am only starting to read through all that has been written about this already. However, I must say that I believe that LL is only further fumbling this.

    I’ve written up some of my thoughts at
    The Future of the Second Life Economy

    Beyond the issue of whether they are a neutral service provider or are attempting to control content, there is also the issue of what Second Life currency really is. If it is a ‘limited license right’ as their TOS states, then that begs the question about what regulatory agency is responsible for trading ‘limited license rights’. It also raises interesting jurisdictional issues. Will the Nigerian Banking Commission be able to vet banks in Second Life? How about investment commissions from tax havens?

    Beyond that, I am told that they consider dividends from companies trading in Second Life to be subject to this regulation, but that companies can still make loans and collect interest on the loans.

    It appears to me that they have not thought out any of this and are making a poorly considered knee-jerk reaction.

  33. on 10 Jan 2008 at 8:04 amSecond Life Closes Banks

    [...] yesterday posted this blog entry praising the bank ban as a "positive step that will save a lot of people a lot of unhappiness [...]

  34. on 12 Jan 2008 at 12:22 pmJames

    LL in their infinate wisdom of attempting to remove the possability of people getting ripped off. They gave the in game banks a means to do just that. These so called banks where not folding most where not in danger of folding and well over 10,000 players used them.

    In attempting to prevent people from getting ripped off, they caused a situation where people will definalty get ripped off.

    Why did they not address it in a more resonable manor is beyond me, but thousands of people have no way to get their money back thanks to LL slap happy policy that they never concidered for one second just how wide the impact is.

    People will leave the game over it i am sure. But hey i am not LL so .. what do i care.

  35. [...] This has been hailed, or at least acknowledged as inevitable, by observers as diverse as Benjamin Duranske, Prokofy Neva, Nobody Fugazi, Tateru Nino and Dusan Writer; dissenters have been few and in [...]

  36. on 13 Jan 2008 at 9:46 pmLem Skall

    Is LL guaranteeing and responsible for the entire amount of Linden dollars that is available in SL? I am referring to all the money that lies idle in our accounts. In other words, is a run on LL possible if all the residents decide to withdraw their money from SL? Is LL responsible and able to cover all those withdrawals?

    Even if not legally responsible, I assume that good business sense makes them so anyway. They may not have promised ANY interest, let alone the high interest that some of the in-world banks have promised. But LL has given residents similar hopes for riches through the media hype and sometimes through their own statements.

    It strikes me that LL itself acts in many ways as a bank by issuing money that is convertable to RL money and by managing our accounts that contain this money. And therefore it is somewhat hypocritical to ban in-world banks for something LL is not regulated to do themselves.

    Yes, I trust LL more than I trust any of the present in-world banks and I am for having only regulated financial institutions providing these services. But LL’s move is commendable only if they also make the effort to bring in such institutions to replace even themselves as a “virtual bank”.

  37. on 13 Jan 2008 at 9:50 pmBenjamin Duranske

    @36 – LL is not liable for your Linden Dollar balance (assuming the TOS is enforceable on this point). That’s the reason for the TOS clause that says currency is just a limited license right. It’s so you have no claim against LL for your balance. If they go bankrupt, you don’t get to get in line with the electric company to collect. At least, that’s the theory. I am absolutely certain that they have nothing close to sufficient cash reserves to cover everyone’s Linden balance — when you sell on the LindeX, you are selling to other users, not LL.

  38. [...] orbiting HQ plays Second Life any more”. Elsewhere, the legal-focused Virtually Blind blog approves of the decision, even if some legitimate operations suffer as a result: “The vast majority of “banks” in [...]

  39. on 14 Jan 2008 at 3:29 pmAshcroft Burnham

    To reply further to Lem, what Linden Lab offer when it sells Linden dollars is conceptually distinct to what the banks offer when they offer to take Linden dollars as a deposit: Linden Lab sells, but never buys Linden dollars – this much it makes abundantly clear. The value of the currency that one is purchasing, therefore, is inherently linked only to (1) the value of the in-world goods and services that one can buy with it; and (2) what other people are willing to pay in real money for it.

    Conversely, when one invests in a bank, the bank is promising to repay what one has invested in the same currency that one has invested it with interest either on demand or within a fixed period after a request.

  40. on 14 Jan 2008 at 6:19 pmLem Skall

    Thanks, Ben and Ashcroft. It had also occurred to me since posting that comment that LL cannot cover all the float of Linden dollars if its value goes through the roof so they probably would never take responsibility for covering it anyway. That also means that if there is a run on the Linden dollar and LL cannot or will not control it, then the value of the Linden dollar will tank. I wonder how many people realize that, considering that its value has been traditionally so stable.

  41. [...] [EDIT] Virtually Blind has some excellent commentary (as usual) on the issue at "Commentary: Linden Labs Bans Unlicensed ‘Banks’" [...]

  42. on 08 Jan 2009 at 6:00 pmLinden Lab en route to Hell, at last

    [...] This has been hailed, or at least acknowledged as inevitable, by observers as diverse as Benjamin Duranske, Prokofy Neva, Nobody Fugazi, Tateru Nino and Dusan Writer; dissenters have been few and in [...]

  43. [...] Duranske says Linden Labs’ decision is ultimately a positive step, one that will save a lot of people a lot of unhappiness in the long run. [...]

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