Seeking Economic Stability in Virtual Worlds

(Originally published on SLNN.COM)

Linden Lab’s banking ban causes business people to seek economic stability in a variety of ways.

One of the justifications for the very high interest rates charged by banks in Second Life is the vast levels of uncertainty and the speed at which things change, resulting in instability, business failures and bankruptcies. Many business people have been expressing frustration with Linden Lab, claiming that Linden Lab contributes to this uncertainty.

In their New Policy Regarding In-World “Banks”, Linden Lab states,

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.

Various business people have raised questions such as whether dividends paid by companies constitute a “direct return on an investment”. If so, are the exchanges must the exchanges be shut down if they allow companies to may dividends through the exchange? Are personal loans now forbidden? What constitutes “an applicable government registration”? Is forming an LLC sufficient? Must one form register with a banking regulatory commission? If so, how can this be, since banking regulatory commissions are responsible for real currencies, and not “a limited license right available for purchase or free distribution at Linden Lab's discretion, and is not redeemable for monetary value from Linden Lab” as the Second Life Terms of Service describes the Linden Dollar.

So far, various companies have attempted to get clarification from Linden Lab. When the Virtual Stock Exchange (VSTEX) contacted Linden Lab, Matt Linden responded, “Unfortunately, beyond what it says in these pages [The original statement and the FAQ], we cannot comment on whether your operations are legal.” Yet the question is not about what is legal, but what is permissible by Linden Lab.

When Tyrian Camilo of the SL Investors Bank asked for clarification, Matt Linden responded, “You have been given various answer here and there are further ones in the blog. I'm sorry if this is not clear. When and how we will apply our policy is detailed in the blog and FAQ and there will be no exception to this.”

When contacted by SLNN, the only comment Matt was able to make was the unhelpful, “Hi there, thanks for your contact, Any information on the Lab's position on such activities can be found here http://blog.secondlife.com/2008/01/08/new-policy-regarding-in-world-banks/ and here http://secondlife.com/community/support.php?questionID=4899 Thank you for your interest. Best Wishes.”

In each case, Linden Lab has been unable to clarify their positions about what activities they will and will not permit. Also, in the statement to Tyrian Camilo, Matt Linden states, “we will not apply the banking policy to companies who submit a registration statement, charter, or other applicable license from a governing regulatory authority.” This has led businesspeople to search around for government regulatory authorities whose cost of registration is minimal. Reports circulating in world are that Australian banking charters cost around US$ 500 and people are looking at charters from tax havens like the Lesser Antillies, Cayman Islands as well as from Nigerian banking authorities, although most reports are that the efforts to get a charter from Nigerian banking authorities are really guerilla theatre aimed at poking fun of Linden Lab’s new policy.

Perhaps some of the uncertainty comes from what lawyers at the Metanomics special sessions on the banking crisis in Second Life call the “God Paradox”. In the Terms and Services of Second Life, Linden Lab states, “You agree that Linden Lab has the absolute right to manage, regulate, control, modify and/or eliminate such Currency as it sees fit in its sole discretion” They seek to maintain complete, godlike, control over the currency, without any of the liability. Elsewhere in the terms and services, they state “Linden Lab is a service provider, which means, among other things, that Linden Lab does not control various aspects of the Service… As a result, Linden Lab has very limited control, if any, over the quality, safety, morality, legality, truthfulness or accuracy of various aspects of the Service.”

This is the sort of uncertainty that causes high interest rates and high business failures. In response, businessmen like Mike31 Dawes are looking at moving more of their business to alternative grids that they believe will better handle the God Paradox. Mike31’s Dawes Financial Corp issued a
Statement
about their agreement in principal to “provide DFC's lending power to customers” of Central Grid. Central Grid does not list its terms and services and it is not yet clear how they will resolve the God Paradox in their own offerings. However, they are expected to have a basic legal page up shortly and intend to have hands off approach to currency, similar to how standard internet service providers do not get involved with how companies they provide hosting for handle transactions.

Businesspeople in virtual worlds will continue to seek as safe and stable an environment as possible. They will charge their customers for the risk that any instability produces. At present, more companies are getting frustrated with Linden Lab and looking to other grid providers to find higher economic stability.

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