Virtual banking
Linden Lab has banned unofficial Second Life banks, basically saying that anyone running a banking operation has to actually be a financial institution.
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.
Part of the motive for this is the collapse of Ginko Financial, which perhaps fell victim to a run on the bank, or perhaps was, according to some, a pyramid scheme.
So here we have the second big intrusion of real world stuff into the virtual, after the gambling issue. Long ago, the dire threat was that virtual worlds would have to become banks. It’s still a bit of an open question, I think. Does this bring us closer to that or not? I don’t know. Linden is specifically saying they do not want to be in that position. But they still mint the money.
13 Responses to “Virtual banking”
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In other news, Second Life doesn’t stand for scamming like every other game (except EVE Online). Not a bad move to take considering the RL to L$ conversion possibilities.
Seems to me that Linden will eventually either have to register as a bank or other financial institution, or specifically prohibit the transfer of Linden Dollars into real-world currencies.
Or, register everyone playing in the game as an at-will, contract employee of Linden Labs, and register what people have “cashed out” during the year as commission income.
They have to do *something*, because (in my layman’s opinion) they are effectively operating as a Mint, making virtual currency that can be legally translated into real currency.
Though there’s another argument to be made, which is that Linden Labs is basically just operating the world’s first “Virtual Mall”, and the transactions in game are not actually generating money, they’re just moving money from one individual to another in the same way that someone shopping in a store at a mall.
I’m not a lawyer, and I’m not a financial regulator, but it strikes me that this will eventually be resolved by some precedent-setting lawsuit brought by one or more governments.
[…] Website: Virtual banking Author: Raph Posted: January 09 […]
Knowing what you are working on and having read your posts about ‘Metabucks’ elsewhere… I hope these comments will be helpful.
They (LL) ARE NOT a bank, because:
1. They (LL) are not offering interest on a deposit. This is a major indication of a banking activity in theory.
2. They (LL) PROBABLY have a ‘100% liquidity’ which means that the amount of money accepted in payments for LL is always available for the reverse operation/conversion. Banks DO NOT have ‘100% liquidity’ and that’s the second indicator of ‘banking’.
Also, had they not provided conversions of L$ to USD – they would be a simple pre-paid services provider, same as any telecom (you’ve seen the pre-paid phone cards, didn’t you? same thing). But the do. So, the closest model is PayPal’s P2P money transfer (when the PayPal balances are involved) and that’s the only type of regulation they can fall under in the forseable future. Also, the value of transactions in L$ is small, at the same time most of MSB (money services business, see MSB.org) regulations have a certain ‘threshold’ which in LL’s case hasn’t been reached yet (PROBABLY). 🙂
As we all know PayPal has ‘money transfer’ licences in every state and banking license in EU (Lichtenstein if I recall it right). Also, EU has a ‘Small e-Money Issuer’ directive sorta’ ‘regulating’ these issues, they could probably use it if it will be absolutely necessary (it costs money, not much though).
Basically… don’t worry too much about LL… and ‘Metabucks’ 🙂
HOWEVER, I personally think that payments to game providers as well as micropayments in VW and MMO will be a separate business of specialized payment service providers, more competent in combatting gazillions of types of fraud present on the Internet in nowadays.
Just thought I’d note that real banks are also virtual, in the sense that they create credit in computers through fractional lending, and provide capital that doesn’t really exist. You think that money is in your savings account, but its actually just a number.
Why would you have to make Linden a bank? They sell you property which they offer to buy back at a latter point in time. A real bank literally takes your money and then gives it back when you need it. In Second Life you get a mediatory currency, Linden dollars, technically making it a sale instead of a bank. They’re about as obligated to become a bank as say, eBay or Amazon. Their currency is still only a “product” not a currency, because creating a currency (at least in the US) is a federal crime.
At best, I would agree they act more as a broker than a bank, but even that’s stretching it IMHO.
What if I owned a shirt making business in Second Life. I promised a custom made “I invested in Ginko and all I got was this stupid T-Shirt” shirt for your avatar for XXX Lindens. The first few orders came out great and news spread about these totally cheap rockin shirts. So more and more orders came in and I tell everyone it will take 2-6 weeks for your shirts since I am so backlogged. After my orders rack up, I decide that real-life Tahiti is for me and take the Lindens and bail…the rest of the people lost their money and got no rockin shirt.
It is really a matter of “delayed gratification services/goods” when there is not trust in the provider (or no trust is mandated/regulated by a law or other institution). When these people put their money in Ginko, they received nothing in return at the point of the transaction.
Stopping people from running banks without being a bank wont stop these kinds of scams, the scam will just move to something besides the interest on your Lindens.
I thought your last sentence was most interesting. Since they mint the money, if they are asking for an ‘assurance of legitimacy’ of sorts from financial institutions, then what are those institutions going to ask of them in return?
Esp if these banks are to start doing L$ USD$ conversion, they’ll want an assurance that LL isn’t doing anything shady.
I agree that Linden Lab already acts in many ways as a bank. And I would also make the argument that they are doing a bad job at that. That is why Second Life should be open and residents should have multiple choices for regulated financial institutions to provide that same service.
Mmh, I’m sorry, but Linden Lab is not a bank… they’re not even a “payment gateway”, although they have all the technology to become one, ie. become an “interbank network” if they wished. PayPal, for instance, is not a bank either.
The major reason for not being a bank is that although they certainly provide both L$ and US$ accounts, and allow easy transfer of L$ between accounts, avatars, and objects, they’re not different than, say, a mobile operator that allows pre-charging of accounts with currency that gets converted into minutes of phone calls and allows people to send “minutes” to their friends. This doesn’t make mobile operators “banks”. You can expand the concept to several online services that allow you to “upload” money via a credit card to spend it on online products and services.
They certainly are a “virtual mint“, since they indeed “create” more virtual currency if there are not enough L$ available on their own currency exchange (LindeX) to cover the demand on open orders.
Alex Fedotov has it almost right, except for a small detail: Linden Lab does not “convert” L$ into US$ or vice-versa. They just run one (albeit the largest) currency exchange as a service, but there is no “conversion” happening there — it’s just a FOREX, where people place orders to buy X L$ for Y US$, or, basically, saying they’re willing to pay a certain amount of US$ to have L$ exchange hands. LL only provides the service that allows this operation to happen smoothly, handles credit ratings based on an individual’s real life credit, prevents the L$ to fluctuate a lot by injecting freshly minted L$ if the demand exceeds the supply, and adds a few “money sinks” in the economy to get rid of excess L$ (ie. texture uploads, or paying for classifieds, or selling some virtual land).
In fact, anyone can create their own L$ currency exchange (like the Dutch Exchange which works with Euros and has far more payment options).
Like Alex, I believe that the most “regulation” that might apply to Linden Lab is the same that applies to PayPal and similar money-transfer mechanisms on the Internet.
As I understand it (and it is WAY beyond me) PayPal was ALMOST a bank, and managed to avoid it by among other things not trying to earn interest off of the “float” of the monies they held or transferred.
Gwyn, there are significant differences between LL and a mobile operator. You cannot withdraw your money from the latter and, also, the mobile operator does not “mint” money. A mobile operator also holds that money as payment for services rendered in the future. LL holds the money to potentially transfer it to another account or even out of SL.
A FOREX does not “inject” money and also does not “add money sinks”. As I understand it, every Linden dollar that exists in our accounts must have been created at some point in time by LL “minting” it, even if once it is created by LL it changes hands freely in-world or on the LindEx. My only doubts are whether LL is also responsible for covering all the Linden dollars if there is a run on the “LL bank” where a large number of residents try to convert their Linden dollars to RL money.
Raph’s point about PayPal makes sense though and I wonder whether LL uses the cash (that should be used to cover withdrawals) to draw interest on it. Even though I suspect that mobile operators may do that.
I don’t think it’s a clearcut conclusion either way, but it’s probably bad enough that it is questionable. They may not match the model of a bank exactly, but they are close and they cannot claim they are something else because they don’t match those models either. Heck, I’ve heard arguments just as good from those unregulated, in-world banks.
Ah, you’re right on that. The big problem here is that Linden Lab is providing two distinct services, but mixing and matching them together so that they become one!
For me it’s easy to separate them because I was used to the days when LL ran a 3D hosting provider, and third parties like the GamingOpenMarket (GOM) ran the currency exchange.
Here is how it worked: Linden Lab had two running accounts with their customers, one in US$, one in L$. You could use either to pay for the hosting services. There was no “conversion” between both (very very early — in or around 2004 — you could indeed use L$ to pay for hosting, ie. “land monthly fees”, at a ludicrous exchange rate).
In these days, both accounts were “separate”. You sent US$ to LL to pay for hosting services; your L$ account was a micropayment currency unit for in-world transfers. There was no direct connection between both, although a paying customer (Premium account) got a weekly stipend ten times as larger as a non-paying one (Basic account). There was no way to “remove” US$ from your account, since LL had a policy of “no refunds”. LL obviously manipulated the supply of in-world L$; on those days, it increased in the direct proportion of new accounts.
To “convert” L$ and US$, you used GOM (or IGE). It was an almost-pure currency exchange. It was not affiliated with LL. So things were quite easy to formulate: neither LL nor GOM were “banks”. LL was a simple hosting provider, using US$ held into an account for payment for services, and working just like an ISP or mobile provider.
Then LL “absorbed” the GOM’s currency exchange. Things started to get more tricky, specially because GOM was not “bought”, but their ideas were reverse-engineered and assimilated under LL’s umbrella. So now people could indeed start withdrawing US$ from their US$ account, or use the US$ to exchange for L$. From a 2008 perspective of what LL is providing as services, it’s now much less clear what their business is. When they allow the withdrawal of US$, are they a “bank” (since they allow US$ be “stored” with them for an indefinite amount of time)? Since you can click on a button in-world and buy L$ directly — which most people have no clue that actually an order is placed for exchanging L$ on the LindeX — are they “minting L$ on demand”? (which actually happens if there are not enough open orders on the LindeX for that)
However, what is NOT possible to do is a “bank run”. If everybody tried to convert their L$ into US$, by placing a huge number of orders on the LindeX, the automatic mechanism which prevents a drop of the L$ of over 15% in a session would shut the LindeX down. What this effectively means is that LL would act just like a central bank ordering all banks to close down immediately to prevent bank runs. No transactions would occur at the LindeX, and so no “bank run” would happen. Sure, a few people would manage to sell their L$ on other exchanges, but as soon as these would figure out that the LindeX was closed, they’d close as well. This mimicks very closely what modern central banks actually do to prevent a crisis. People would have to “weather the storm”… until LL feels it’s safe to open it again (and very likely, severely limiting the transactions).