Linden Lab Official:FAQs on Policy Regarding Inworld "Banking"

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This article is part of the Extended Second Life Knowledge Base that includes advanced and specialized information. This information was originally provided by Linden Lab, but is not actively maintained nor guaranteed to be accurate. Linden Lab does not certify nor assume any responsibility for this information.

See the official Second Life Knowledge Base for the most current information.

What is the policy?

Please see the policy regarding inworld banks. In effect, the policy prohibits unlicensed virtual "banks" or other persons, groups or entities from offering interest or direct returns on L$ (or other) investments.

When did this policy go into effect?

The policy regarding inworld banking went into effect on January 22, 2008.

What is the reason for implementing this policy?

There are several reasons that make an inworld banking policy necessary: the legal risks raised by such activity; the fact that several of these "banks" have defaulted on their obligations; the unsustainably high interest rates offered by many of these banks, which make it likely that others will default as well; and the very negative effect that these continued defaults may have on Second Life's virtual economy.

By "legal risks," do you mean virtual "banks" may be illegal?

There's no guiding law or precedent we know of that tells us whether these practices are legal. Depending on what statements each "bank" makes, and what depositors' expectations are, banking or securities laws may apply. If so, they would need to be chartered or registered with applicable real world regulators.

Are any of these "banks" really banks? Who runs them?

We're aware of no chartered banks doing banking business in Second Life at this time. Most of the ATMs into which L$ are transferred are merely run by other Residents. This is usually apparent to Residents when they conduct a L$ transfer, usually to the owner of the ATM at issue. A bank "deposit" thus operates no differently from other transfers of L$ inworld - it's just a transfer of L$ from one Resident to another. And as in the real world, if you do not know or trust another person, you should not ask that person to safeguard your L$.

Why not "virtually regulate" these "banks," instead of banning them?

Linden Lab can't and won't become a virtual banking regulator. Banking regulation, whether in the real or virtual world, is complex and intensive, and is a government activity. Linden Lab is not empowered to regulate the businesses of banking or securities. We can and will take steps, however, to ensure the stability of the Second Life economy, and that is what we are doing.

Will Residents whose L$ are in these banks get their L$ back?

We urge inworld "banks" to live up to any promises they have made, to settle up with depositors, and of course to honor valid withdrawals. To the extent they do not, we will cooperate with law enforcement and other third parties seeking to prosecute or take other action against them. However, as Linden Lab has made clear in the past, we play no role in overseeing or operating these "banks," which are run by individual Second Life Residents. (We've also warned Residents to be wary of these risks.) Thus, the transfer of L$ that one Resident has made to another Resident is ultimately an issue between those Residents. Linden Lab therefore can't enforce obligations that might relate to those transfers. We have no right to do so and we have no way to do so, especially where such a large volume of transactions are at issue. All we can do is to try to make Second Life safer by eliminating behavior that's likely to lead to fraud, harm or illegality. Thus, Residents who believe that a "bank" has not made good on what may have been promised must seek to enforce any such obligations on their own.

Do the inworld "banks" have enough L$ deposits on hand to pay us back?

We have tried to determine whether inworld "banks" have the resources to repay all deposits, and cannot make an accurate judgment. There have been a huge volume of micro-transactions between Residents and "bankers," and it's simply impossible in many cases to (1) reconcile what's owed, (2) reconcile what transactions were related to "banking" and which weren't, and (3) separate these out from unrelated transactions. It's possible that Residents who have transferred L$ to "banks" expecting unusually high rates of interest will be disappointed. Several "banks" that have offered unsustainably high rates of interest have defaulted recently, and this suggests that others using the same business model may do the same.

If these banks can't pay us back before the policy goes into effect, then are you just making this bad situation worse?

No. If inworld "banks" can't live up to their obligations, or if their business models are fundamentally flawed, then we believe the responsible thing to do is stop the activity. This will prevent Residents in the future from losing their L$.

Will you freeze the funds of these "banks" to prevent them from cashing out?

Freezing the accounts of inworld bankers is not an option. Given the sheer volume of transactions among numerous "banks", the apparent cross-dealing within and among banks' various, numerous, and alternative accounts, and the fact that the individual "bankers" also engaged in other, unrelated activities, we could not effectively or fairly distribute these funds, even were we to identify and freeze them.

My bank has defaulted. What can I do about this, and how will Linden Lab help?

If you think you've been defrauded by another Resident, you may of course seek legal recourse. We're preserving records relating to inworld banking activity and (upon proper legal process) will cooperate with attorneys, regulators, or prosecutors to redress fraud and punish "bankers" who have acted in bad faith.

Will this cause a "run on the banks"?

The inworld banking policy may create a "run" on the various inworld banks. We unfortunately have no control over this. If in fact there are insufficient funds to cover what's owed, it would confirm that this type of "banking" activity is inherently risky and flawed, and should be shut down.

Will the individuals running inworld "banks" simply cash out their L$? Will this destabilize the LindeX?

While some imbalance may occur if inworld bankers decide to cash out their L$, we believe any disruption will be minor and temporary.

Are any other inworld businesses, such as stock exchanges, covered by this policy?

As of today, this policy is focused on objects and schemes that involve real-time transfers of L$ and payment of interest or rates of return. Exchanges may or may not do this, so they may or may not be covered. In addition, we reserve the right to remove any objects and take action against any Residents who are violating U.S. or other laws. If you are unsure whether a business you're operating abides by applicable laws (e.g., banking, securities laws), you should get a formal legal opinion, from a personal lawyer acting on your behalf.

What steps will Linden Lab take to implement this policy?

As of January 22, 2008, we will begin removing objects that facilitate these prohibited practices (e.g., ATM machines). We will take action against offenders, which may include suspension or loss of access to land. We will also cooperate with law enforcement, in the event of any fraudulent or illegal behavior by inworld "bankers."