A recent set of interpretive guidelines (PDF) issued by the US Department of the Treasury’s Financial Crimes Enforcement network (FinCEN) is starting to see questions asked as to the possible future status of the Linden Dollar.
In short, since April 30th, 2010 the Linden Dollar has, under the Lab’s Terms of Service (ToS), been classified as a “token” rather than (as was previously the case, a “currency”). Section 5 of the ToS states:
5.1 Each Linden dollar is a virtual token representing contractual permission from Linden Lab to access features of the Service. Linden dollars are available for Purchase or distribution at Linden Lab’s discretion, and are not redeemable for monetary value from Linden Lab.
However, under the guidelines issued by FinCEN, the Linden Dollar actually meets criteria specified for being recognised as a virtual currency in that: it operates through an “official” exchange, the Lindex (as well as some third-party exchanges); Linden Lab falls under FinCEN’s view that they are both “an administrator and an exchanger of virtual currency”; and Linden Dollars effectively have a real world exchange rate (around L$260 to the USD).
US Treasury’s FinCEN: examining virtual currencies
Alex Kadochnikov, who has been looking into virtual currencies and the FinCEN guidelines as they might affect them, has blogged on the possible ramifications for the Lab should FinCEN’s view move beyond guidelines. He notes that while the guidelines should not have any significant impact on casual SL users (i.e. you and me), the situation may not be the same for LL:
Linden Lab does not want to consider the Linden Dollar as a virtual currency. Second LIfe’s terms of service refer to Linden Dollar as a transferable license. Also according to Linden Lab, when a player “sells” the Linden Dollar, that player transfers a license, not currency. However, Linden Lab terms of service will play no role in FinCEN’s decision to classify Linden Dollar as virtual currency.
FinCEN goes by the approach “If it looks like a duck, and quacks like a duck, it is a duck.” And Linden Dollar sure does “quack” like one. Linden dollar is a virtual currency because it has value in real currency.
As such, should the guidelines result in a more regulatory stance being taken by the US Treasury towards virtual currencies, then it is unlikely the Linden Dollar (and Linden Lab) will be entirely unaffected. Again, Alex Kadochnikov comments:
It matters for Linden Lab because they are now both an administrator and an exchanger of virtual currency. Both of these are a Money Services Business (“MSB”) under the treasury regulation. An MSB must register with the Treasury Department and make Anti-Money Laundering and periodic reports. These reports are not little one page chores a trained monkey can do. There is a reason corporate compliance departments are stacked with lawyers and accountants. As you can imagine both of these items cost a lot of money.
This has led some commentators to the opinion that it’ll set the Lab back a pretty penny, while others speculate it is the reason behind “rumours” of a possible sell-out to Amazon.
Money laundering – a significant regulatory threat to Second Life?
But 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; I’m certainly not conversant with the details and therefore not in a position to comment reliably. 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.
As such, the potential impact on the Lab may not be as great as imagined. There are also arguments to suggest that despite the apparent size of the SL economy, the safeguards the Lab have already put in place make the platform unsuitable for “serious” money-laundering operations.
There is another aspect to these guidelines as well, which hasn’t been really touched upon – the flip side of the coin, if you will pardon the expression – and which is perhaps more positive.
Were the Linden Dollar to become a recognised digital currency, it could encourage further transparency in terms of how the Lab manages the SL economy, and make it and the Linden Dollar more trustworthy. In turn, both of these factors could in turn make SL a more viable proposition for potential investors and / or those wishing to utilise the platform as a business enabler.
However one looks at the FinCEN document, it is evident that virtual currencies are very much in the US Treasury’s sights, possibly more so now due to the meteoric rise of Bitcoin over the last few years. Doubtless, they are also going to be the subject of more detailed thinking on the part of the EU and others. As such, this isn’t a matter which is liable to go away. Whether this is a good or bad thing for Second Life is still very open to debate.
With thanks to Mona Eberhardt and Trinity Dejavu