Linden Lab Rolls Up the Banking Scams of SL

Linden Lab has finally stepped up to the plate and answered thousands of residents' concerns and complaints about inworld "banks" and "stock exchanges" and is now shutting them down as of January 22, 2008, and making them a punishable offense under the TOS afterwards, unless they can show real-life governmental charters authorizing them to operate.

Before the Morally Blind like Benjamin Duranske begin rubbing their hands with glee for being earlybirds in calling these operations "illegal" and in fact helping to cause runs on the bank that depleted their users' savings, let me point out a few very salient facts:

o No real-life authority has investigated -- or at least publicized any investigation -- of any fraud or violation of securities law in any country in real life. And that's important to point out. No *real* lawyers have started lawsuits, as opposed to the non-practicing Internet attorneys like Duranske. No *real* FBI -- as far as we can tell -- came in and took a look at this situation or pressured Linden Lab -- at least as far as we know. So no actual finding of illegal activity has been made. Repeat: *no findings were made*. So while armchair virtual lawyers can speculate and gloat to their heart's content, we do not have the facts here.

o Instead, Linden Lab itself, pre-emptively, with an eye to its reputation and its bottom line, has moved as a matter of *policy* to deal with what seems a gray area. It may look very clear to a Duranske hammer, for whom every contract he didn't negotiate personally for a fee may look like a nail. But it's unclear. Linden Lab has absolutely done the right thing, given that it simply cannot afford to jeopardize

o Lawyers may see a new area for themselves growing in virtual worlds warning their clients of various activities that they determine themselves to be illegal, but none of the existing court cases (which all ended in settlements and NOT precedents, despite Duranske's mistaken claims) and none of the existing actions by Linden Lab have helped to create law -- real law -- over virtuality. So the old adage about "buyer beware" and "if it looks too good to be true it probably is" -- which you don't need a lawyer to tell you -- are the most important form of "law". And once again, we're persuaded that not real-life law, not real-life government, and not real-life law-enforcement is creating law in virtual worlds: non-state actors are. These are the people who felt they were defrauded, brought their claims to Linden Lab, and demanded action simply because the servers belong to Linden Lab and all "truth resides server-side" as far as identities and chat-logs. Linden Lab is a non-state actor. So pay attention please: *Non-state actors, not governments, are making law, and that's a good and a bad thing to contemplate*.

o For once, Linden Lab has given notice about a huge blow to the economy -- or at least the economy of some people. People have about 14 days to clean up their operations and delete their terminals. Of course, that gives plenty of time for the deposits and stocks to devalue terribly.

o Luke of the World Stock Exchange looks particularly bad here, because he had already announced the closure of his exchange 2 days ago ostensibly to "upgrade software" -- for a curious 30 days. Did he get early warning of this impending Linden-organized doom? That question needs to be asked.

Is the era of experimentation with various forms of loans and credits and such over? I'm not certain. The regulation LL is putting in talks about interest-bearing instruments -- and that means that loan-giving agencies might still operate with no interest, by taking land or buildings as collateral and receiving *more* land or some kind of in-kind barter in exchange.

Real-life organizations like kiva.org, which has just moved into the Second Life non-profit commons, may still gather donations to help provide small loans to people in developing countries -- these are interest-free loans as far as I gather but it needs more study.

And so ends the geek dream of a vast international space where money would never become an option...which made it possible for money everywhere to become an option growing out of every prim with a dollar sign hover-text. Money *is* needed to finance this Wild West world. Where will it come from now?

I suspect that now that it is driven undergrown, banking, like gambling, won't go away, but will become more sinister, more hidden, and more cut-throat. While nobody can break your virtual kneecap, some virtual thugs have shown a scary propensity for finding out where you really live and what your name is in RL.

Comments

[IYan Writer]

It's much easier to ban activities than to make them work properly..

[Land Shepherd]

I oppose this on principle but there could be legal problems for LL. I don't know. Generally though SL should have a free economy. I don't like bringing all these RL regulations into SL.

I wonder if prostitution is next. That's illegal where I live.

[John Lopez]

The money will come from where it comes from in the real world. Private investing, corporate banking and old fashioned "talk to a banker" banking.

It seemed odd to me that people were putting real world funds into virtual trusts that stated right on the tin "this is a game, you might learn something about investing but we aren't actually backed, licensed or authorized by anyone".

I'm really ambivalent about this decision. On one side, it indicates that big economic blowouts are on the Linden radar and they are trying to avoid another round of the same.

The other half of me really feels that if people want to trust an alt-account backed only by "I promise", that is their choice. Especially since not *all* of the arrangements fell through; sometimes trust was earned and actually repaid.

There is the question of the *need* for these kinds of virtual banks and stock markets. Second Life isn't so far removed from reality that people can't kick in money from the real world. While I can easily imagine that some of the big winners with in-world business found the lower friction nature of virtual banking desirable, I know enough people who bootstrapped themselves from a single rented vendor up to a full sim and beyond without such loans to think that is falls under "nice" not "required". Thus, appealing to the real world funding sources shouldn't be a huge hardship. Most seem to bootstrap just fine and the bigger projects can justify real world backing/loan/risk anyway. That seems an acceptable trade off to lowering the risk of more funds lost to those who would either scam people or simply be clueless enough about how financing works to accidentally put people's money at risk.

It is true that some percentage of this activity will go underground. I think that the normal risk/reward evaluation of working outside the system should be enough to keep most people from going there... and clearly Linden Lab is putting up a shield against claims by making it a TOS violation. I don't blame them there; there was plenty of hands out looking for the Lab to make up the losses caused by lapses in judgment to incentivise them to do so.

Interestingly, this also puts an incentive in front of real world financial institutions to consider tipping a toe into the water. Their higher overheads and legal requirements made them uncompetitive in the past (although only uncompetitive if one ignored the risks involved with in world transactions). That combined with the natural risk aversion such organization have for novel things kept them out... but the opportunity is here now.

An opportunity most likely to be squandered, but it is still interesting.

"some virtual thugs have shown a scary propensity for finding out where you really live and what your name is in RL."

Virtual goons?! (shock) O _ O

[Tyffany Flintoff]

---> "There is the question of the *need* for these kinds of virtual banks and stock markets. Second Life isn't so far removed from reality that people can't kick in money from the real world."

Precisely Prok.

In it's simplest sense a bank takes in deposits from people with excess cash, pools it and extends credit to those who need it (from which it earns a return and pays interest back to depositors). As you correctly point out; in Second Life there seems to be very little, if any, demand for credit.

Which begs the question where did these "banks" generate income from? The answer being they paid early depositors with later depositor's money. There was no "bank run" because there never was a bank. Just numerous schemes all doomed to failure.

As ever, the only thing which seems to spur the kiddies at LL into action is covering their own asses. But of course we're fed the pablum in the Blog of "we’re doing it to protect our Residents and the integrity of our economy".

I'm amazed it took them so long.

[Aleister Kronos]

I've always been confused (no, concerned) about the concept of "money" in SL. I know I sound like a worn record on this, but the ToS has always made it abundantly clear that the L$ is not a true currency, in that it has "no value" and is not subject to the same fiscal rules and controls as, say, the dollar or indeed any true currency.

It is, for want of a better term, a "game token" that can be swapped for real currency - and vice versa. Or like the uncontrolled barter that occurs in immature and rapidly changing environments like... oooh... the Klondike gold rush.

This definition thus puts inworld-only banks, stock exchanges and indeed any other SL finacial institutions in a strange twilit world. Accepting the strict word of the ToS, such institutions are, in effect, just a bit of fun - and not subject to, say, annual audits, submission of accounts and so on, as they are not "real" financial institutions.

It strikes me as right and proper that any institution that sets out to offer financial services should be subject to some form of fiscal governance and control. I say "some form" as I'm not sure if that should be "as per US law" or some other instrument of fiscal probity.

I dunno what this means for SL... but I would be far happier using a bank like ABN Amro or ING, than First FlybyNight Virtual Bank of Whereversim. I hope this cull actually helps our fledgeling virtual world take yet another step towards true maturity.

End of rambling...

Let me tell ya how it works people.
It's your standard robbing Peter to pay Paul. They take the investors money and use it to buy and flip land. Paul wants to take his money out, the bank robs Peter. By the time Peter wants his money out, the bank folds up. That's to put it in layman's terms and is exactly what happened to Ginko bastards that they are.

[Ann Otoole]

does it really take so many rocket scientists to figure this out:

make alt sets 1 through 10.
alt sets 1 through 10 create 10 "banks and stock exchanges"
alt sets carry on dialogs and arguments amongst one another on forums and blogs to prop up the facade.
fools buy in depositing money.
as certain thresholds are crossed banks or exchange vanishes and that associated alt set vanishes with it. in the meantime a new alt set pops up with a new bank or exchange.

theres well over a million USD lost in this scam and most of the identifiers look very much like your typical nigerian con artist scam. most of which have the appearance of operating out of australia, the UK, or indonesia.

the locust swarm will simply move more into the "buy island land and then the sim is sold and the tenants get booted" scam, etc.

oh and no problem with them verifying identities. they have no shortage. probably your (whoever reads this) identity as well. so id verification is no solution.

its the pattern of the operations involved and those patterns are what LL needs to be acting on much faster.

[Prokofy Neva]

Here's a commentary I made to a lawyer's concerns expressed about the banking -- it's a good piece:]

http://writ.news.findlaw.com/ramasastry/20071231.html

http://boards.lp.findlaw.com/cgi-bin/WebX.fcgi?229@247.bDmbgJ1eitQ%5E0@.ef272cd/1710

[Prokofy Neva]

Tyffany, that wasn't me making the comment about the "need", you mixed up the posts.

But actually, I've always said there is a need. I can recall getting mortgages myself to buy land for a very simple reason: the idiocy of Second Life mainland means that if you don't jump up a property that suddenly comes up for sale, you will lose it possibly to clubs, ugly builds, griefers, extortionists. In the era before 2006 before there were plenty of full sims on the auction, you had to agonizingly make up your full sim by waiting to pounce on land as it came available. That's why it has been so frustrating that the Lindens have held some of this stuff for an entire year, and why it's even more annoying that now they've finally got around to ridding it up of the junk, ban lines, etc. on it LONG after it was abandoned, they've put it back on the auction where we now have to fight bot-runners to get the last 512 on our sims for prims. Insane.

I wonder if land mortgages might continue in some fashion without interest or buried as a kind of "fee for services". There's no reason why it couldn't. I don't think there can be that rigourous an attempt to monitor how people decide to trade land with one another.

I don't think we'll be seeing real life banks start making loans to avatars any time soon. If they did, they'd have to hold control over the land group.

I do want to point out once again with all the piling on and I-told-you-so and smug idiocy going on now that Ginko's did not merely rob Peter to pay Paul. If it merely did that, it wouldn't have lasted more than 2 years. It paid Paul and Peter by investing in Tom and Dick. But then Dick's casino was banned. I think that's more reliably the story. It might have gone on functioning if Tom was an investment outside of SL, which supposedly it was, but who knows?

I was interested to hear Beyers Sellers (Robert Bloomfield) say in Robin's office hour that now all securities need to be regulated by the SEC ( see here:
http://slrecord.typepad.com/the_second_life_record/2008/01/we-made-a-mista.html)]

Morally Blind Duranske is claiming about a law firm that wanted to set up in SL by IPO'ing that they were engaging in "illegal activity". Of course, more than likely, he was jealous that they were doing this and not himself. I think all IPOs sound dodgy in SL. But I frankly don't believe he's in a position to judge all this *knowledgeably* -- he is not a practicing attorney but an Internet blogger.

Beyers isn't a practicing attorney, either, but a scholar. He says that the stock exchanges don't quite seem to fit under the new Linden Edict.

However, I would like all of this to be interpreted by REAL authorities and not pundits, and I won't be satisfied with this or that blogger or pundit, whatever their credentials, sounding off about what is legal or illegal in SL.

[Ann Otoole]

there is no place for "banks" or "stock exchanges" in secondlife or other virtual worlds. anyone who is legitimate enough to get a bank loan is legitimate enough to get a credit card. and they can use the credit card (a loan) to buy all the L$ their limit allows.

whats the argument? the scammers are being driven out the second sector. (the first scam was gambling) LL needs to act faster to block fraud and deceptive practices in secondlife. to do so will require a serious investment in data warehousing technology and data analysts to scour the data for fraud related patterns of abuse. this is rather unlikely unless LL alters it's hiring practices to accommodate $100 USD per hour (minimum bill rate) expertise to handle this problem.

[Tyffany Flintoff]

Yes Prokofy, I did mix the posts up. I noticed the moment I posted mine *slaps unruly typing fingers*.

I still doubt that the source of income for the "banks" was investments outside of SL. I mean, in order to pay 40% interest to depositors in SL, those investments would have to be earning, say 45% in the real world (for upwards of 2 years as you point out Ginko lasted). Further, if they were real investments in the real world, they would have been able to be liquidated and paid back to depositors in here.

As you say; who knows?

[Land Shepherd]

"There is no place for "banks" or "stock exchanges" in secondlife or other virtual worlds."

I don't see the problem in principle. If someone wants to open a SL "bank" and can find people who wish to make an investment, I don't see the problem. It's certainly not infringing on my right *not* to open a "bank", take loans from a "bank", or invest in a "bank".

Obviously there have been problems with how it has worked out in many cases and often it turns out scam artist are running these businesses. Though even the scams offer a sort of a life lesson for the victims. Better to lose L$50,000 in SL than $50,000 in RL to learn that lesson.

I thought about opening a bank in SL once but to me didn't seem worth the effort and hassle. Not by a long shot. Basically I would of had to find some place to put the investors money that would have offered a really good return on investment. Probably mainland but I already invest in the best deals I can find. So I'd be hustling after less than ideal investments to meet daily interest rate requirements. I didn't see the point, really.

"whats the argument? the scammers are being driven out the second sector. (the first scam was gambling)"

Gambling isn't a "scam". If it is, then just about every state *government* in the USA is involved in scamming its own citizens out of billions of dollars every year. Gambling is certainly a vice though, much in the way many things are. The reality is a lot of people like the *fun* of putting quarters into slot machines. They rarely win (occasionally they do though) but don't seem to care.

[Prokofy Neva]

Tyffany, actually, no. Given the higher value of Lindens on the GOM until its closure in 2005; given the greater fluctuations of the Linden before it was stabilized by the appearance of Supply Linden's sales in 2006; given that premium accounts used to have stipends of $2000 and free first land that you could sell for as much as $10,000 -- it's possible to have even substantial inworld cash around. Add to that the gambling business, and you'd have more cash then you knew what to do with.

Then take an outworld investment say, on e-gold or Internet search engines or something and you wouldn't need 40 percent, you might well do it for less. That indeed was the case for more than 2 years. That's exactly how it was done.

In fact those real-life investments probably were liquidated in part, but I think the casinos were so lucrative that they over-extended. But...I'm speculating like anyone. I don't know.

I agree that gambling isn't a scam. Many states pay their education budgets out of lottery tickets. Casinos aren't banned; they are regulated. It's merely the case that they found it too hard to regulate on the Internet. I have a feeling Internet gambling will be back some day, there is a demand for it.

[Prokofy Neva]

I keep reading the blog and comments, and you know, I'm not 100 percent sure they mean to shut down stock exchanges, too. They don't mention them per se. But of course, they are saying that any object inworld that you pay that offers a return on investment, an interest payment, is what they are prohibiting. and that's what the stock exchanges do.

[Robert Bloomfield/ Beyers Sellers]

Prok writes: "I was interested to hear Beyers Sellers (Robert Bloomfield) say in Robin's office hour that now all securities need to be regulated by the SEC ( see here:
http://slrecord.typepad.com/the_second_life_record/2008/01/we-m"

I couldn't get the link to work, so I don't know if this is your typo or mine, but just to clarify: my point was that *not* all securities need to be regulated by the SEC. (Prok cites me as saying "now all securities"). The company "Pinksheets.com" handles most of the public trading of these securities.

Prok is right to note that I am not a lawyer, so a lot of the details are unclear to me. But my understanding is that small companies with little stock outstanding and relatively few investors are exempt from SEC regulation. So, when it comes to the firms that list on SL exchanges, there may not be any appropriate regulatory body for the company to go to.

Bottom line: I can't tell if the ban applies to exchanges or to the companies that list on them, but if it does, I am not sure who the companies are supposed to turn to in order to show that they being regulated appropriately.

I should point out that the companies that list on the exchange are rarely true corporations, so it also isn't clear what investors are getting in return for their Lindens when they "invest" in SL stocks.

[Ciaran Laval]

"there is no place for "banks" or "stock exchanges" in secondlife or other virtual worlds. "

Well I think there is a place for banks and stock exchanges in virtual worlds and I'd like to see regulated business running them.

LL are right to intervene on this issue, they have caused chaos with this announcement but it was an announcement that would always cause chaos, but it's the right thing to do.

Long term surely all traders will need to be licensced anyway, or at the very least have some sort of verification back to our real identities.

[Prokofy Neva]

It's my typo and should say "NOT all securities".

The correct URL is here:
http://slrecord.typepad.com/the_second_life_record/2008/01/we-made-a-mista.html#more

[Ric Mollor]

I haven't seen anyone mention the possibility that Linden Labs is clearing the banking landscape before allowing only a select few to offer banking services. Certainly they are aware of the "banking licenses" which were auctioned off by MindArk for Entropia Universe and the revenue generated by that.

http://www.entropiauniverse.com/en/rich/6357.html

It would be very interesting to see how MindArk views the legalities of virtual banking under differing international laws as their product (Entropia) resembles Second Life in many ways.

[Prokofy Neva]

Ric, the reason it is not mentioned is that Linden Lab has stated numerous times, and says again in this blog post, that they do not wish to be in the bank regulation business and will not regulate banks, so they are not issuing licenses. I have no idea how valid these Entropia "licenses" are as they are licenses to access content basically, just as Lindens are. Perhaps in Europe they were able to find some looser set up for banking but I doubt they have what amounts to a real banking license.

[Ric Mollor]

Linden Labs has already entered the banking regulation business when they changed their policy on in-world banking. Additionally the new policy states

"We will not apply this policy to companies who submit a registration statement, charter, or other applicable license from a governing regulatory authority"

Do they intend to review all documentation submitted and verify that it's correct and valid for the issuing country or agency? Or that the country or agency actually exists? *And* keep track of expiry dates and conditions for each submission? It would seem crucial that they evaluate and archive all documentation to reduce their liability in the event of legal action.

By allowing 'banking' from only an approved group LL has taken on the task (and exposure) of selecting the members of that group.

Given the multinational aspect of SL this seems to be as thorny of a situation as IDV.

It will be interesting how these issues are addressed.