Update, May 10th: Alex Kadochnikov has posted a further piece on the recent FInCEN interpretive guidelines on virtual currencies.
The recent change in the ToS affecting the use of third-party exchanges for L$ transactions was apparently accompanied by an e-mail from the Lab to such exchanges asking them to cease trading / cease trading in Linden Dollars.
So far, and as reported on Hypergrid Business, around eight exchanges have suspended trading in Linden Dollars while seeking clarification from the Lab as to whether / how they can continue to provide a service to users. Whether the suspension turn into an outright cessation of trading / operation obviously depends on the response obtained from the Lab.
Additionally, Oz Linden contacted TPV developers via the Opensource Development mailing list, stating:
Linden Lab has made a change to the Terms of Service – see the blog post at
If you are a viewer developer, and your viewer includes use of a third-party exchange for functions like ‘buy L$,’ it will need to be changed to use the LindeX instead.
Some are speculating that the move is as a result of the FinCEN issuing a set of interpretive guidelines on virtual currency (which I commented about in April), possibly related to limiting the Lab’s exposure where other exchanges are concerned. As I’ve stated in comments following-up on the news piece on the change – and while, inevitably, IANAL), I’m not altogether convinced by those arguments per se, because there is nothing in the FinCEN guidelines which appears to fundamentally impact LL’s exposure in this regard – rather, they and third-party exchanges appear to be in the same boat where FinCEN’s guidelines are concerned.
However, this is not to say that I think LL’s move is entirely unrelated to the FinCEN guidelines being published in March. Again, as I’ve commented both in this blog and elsewhere:
I would add that where there is a potential overlap between the two (the FinCEN guidelines and the SL ToS change), inasmuch as by attempting to limit any exposure of L$ to third-party exchanges and confine trading to LL’s own mechanism (the LindeX), the Lab might be trying to strengthen their position that the L$ is a “gaming token” rather than a “virtual currency” – which cuts to the heart of the core difference in their interpretation of the Linden Dollar’s status, and how FinCEN might regard it.
Of course, even in doing this, the Lab doesn’t escape FinCEN’s view that they are effectively a Money Service Business (MSB) and as such, are required to register as such with the US Treasury and meet regulatory requirements and adhere to anti-money laundering and other periodic reports. Some have suggested that the Lab may as a result face escalating costs in attempting to meet these requirements which may render the Linden Dollar, as we know it today, unviable to the company. However, as I stated back in April:
… there would appear to be questions as to how justified concerns over compliance (and the cost thereto faced by the Lab) actually are.
When it comes to money laundering in particular, Linden Lab already has a number of safeguards in place. Whether these are compliant with any requirements specified by the US Treasury is open to debate … However, it would seem unlikely that such safeguards would be without reference to any legal / regulatory compliance, even if they only meet the bare minimum required.
Thus, how much additional work and expense would be required on LL’s part should they have to become a registered MSB isn’t that easy to ascertain; so dismissing them as being unable to comply, or that cost of compliance would be something the company would be unable to bear would appear to be perhaps premature.
However, it is reasonable to suggest that if this move is related to FinCEN, then quite possibly it is just an initial step, one which may well be followed-up in the coming months by further changes as the Linden Dollar’s overall status is further clarified as a result of dialogue between LL and FinCEN. Whether such additional result in the Linden Dollar becoming a closed currency without “real” value is entirely open to debate and beyond the considerations of this piece.
There is another question to be asked here as well. Which is this: while it might be unwise to totally dismiss FinCEN as having nothing to do with LL’s change in policy, are there other reasons why LL would make this move?
Well, yes there are. Here’s a couple:
- It could actually have arisen as a result of the discovery of a fraudulent activity or situation which simply could not be ignored, and the Lab had to take drastic steps in order to ensure the door was firmly slammed shut on the matter
- It might simply be an attempt to ring-fence the buying and selling of L$ for direct revenue gain. As WolfBaginski Bearsfoot points out, LL are potentially missing out on around $500,000 in transaction commissions going through VirWoX alone. While this may sound trivial, it could go some way to offsetting declining revenue from tier (which in 2012 amounted to approximately $762,000).
Then there is the way in which the change has been announced. If the reason behind it is purely a response to FinCEN setting out its stall in relation to virtual currencies, why couldn’t the Lab have indicated this to be the case? At the very least, and with more considered up-front communication blog-wise, it would have avoided the current levels of confusion, angst and speculation. And why the need to act in such an abrupt manner? It seems odd that if this course of action has arisen from the moves by FinCEN, the Lab explain the situation to users and third-party exchanges alike and give both X number of days to prepare for the changes to come into effect. Were they perhaps afraid that doing so would lead to a run on demand for L$ through third-party exchanges?
It is possible that whatever prompted the change to the ToS may never be known – particularly if it was, as mentioned above, related to a specific fraud-related situation or activity which the Lab could not afford to ignore.As such, this one change - allowing for the current confusion and speculation it has created – is liable to be the end of things,
However, if it is as a result of the rumblings coming out of FinCEN as they cast their eyes across virtual currencies, then this might just be a foretaste of further changes to come.
- Lab updates SL’s Terms of Service
- The Linden Dollar: token or currency? The US Treasury ponders … (April 2013)
- Linden Dollar. Another Virtual Currency Affected by FinCEN – Alex Kadochnikov (April 2013)
- Lindens: No outside currency trading - Hypergrid Business
- Linden Lab’s New ToS, the Bank Secrecy Act, and You – Vaki Zenovka
Application of FinCEN’s Regulations to PersonsAdministering, Exchanging, or Using Virtual Currencies – Department of the Treasury Financial Crimes Enforcement Network (PDF, March 2013).