Second Life Self-Regulates Virtual Financial Services

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Benjamin 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, “It has been too long in coming.”

Calls were made for regulation to be imposed on banks and other financial institutions within Second Life way back in August 2007. This was a reaction to the failure of Ginko Financial, which Wired comprehensively covered.

Benjamin is otherwise extremely positive about Linden Lab’s announcement that:

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.

Benjamin’s view is that policies like this one not only acknowledge the obligations that should be imposed on all companies who choose to enable others to make real money in virtual worlds, but also serve to keep the collective virtual world grid healthy and free from externally imposed regulation.

He believes this will lead to the shutting down of “dozens of largely insolvent self-styled ‘banks’ in Second Life.” He does, however, fear that some legitimate operations may be caught in the net.

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One such legitimate operation is First Meta, a Singapore-based start up, which offers a full range of financial services focusing on credit products such as the MetaCard. This credit card does not offer interest or a rate of return on L$ invested or deposited.

I spoke with First Meta’s CEO, Douglas Abrams, and he fully supports the regulation of financial services activity in the virtual economy.

Douglas says, “We agree with the statement by Linden Lab that in-world banks…offering unsustainably high interest rates…are in most cases doomed to collapse – leaving upset ‘depositors’ with nothing to show for their investments.

“We believe that the removal of non-credible players from the financial services sector of Second Life’s economy will benefit all of its participants.”

Others remain on the fence about Linden Labs decision. CNet’s Daniel Terdiman comments:

Whether the move will stabilize the economy, or at least perception of the economy remains to be seen. But it’s pretty clear Linden Lab had to do something to stave off criticism related to banks that have folded, taking residents’ money with them.

But only time will tell whether the decision will have any meaningful impact. And for those residents who have used the banks for various financial purposes, it will be very interesting to see what alternatives they have available in the months to come.

Mashable’s Kristen Nicole has an interesting social media take:

Just as Facebook’s open platform lent itself to a flurry of advertising networks specific to the application train, Second Life’s money-making opportunities have made it more attractive to a wider array of people. More people means more diverse behavior, and that’s not always good. Second Life’s parent company Linden Lab insists that it’s not acting as a banking regulator, but it is a very important step to take for the legal securities of Second Life itself.

Personally, I second the views put forward by Douglas and tip my hat to Linden Lab for a good move.

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