US Treasury Issues Guidelines on Virtual Currency Regulation Likely Leading to Regulation of Bitcoin -- and Lawyer Headaches for Linden Lab

The Financial Crimes Enforcement Network division of the United States Treasury department (you know, the folks Americans send their taxes to) has issued extensive guidelines on the regulation of virtual currencies -- .pdf link here -- and according to a law school graduate who blogs about the topic, it strongly suggests the US government is planning to impose more regulations on Bitcoin, and that Linden Lab is going to need more lawyers. With Bitcoin, writes Alex Kadochnikov:

Keep in mind that this document is a guideline. It is not a rule. Most likely FinCEN will not prosecute a Bitcoin miner for not reporting all the Bitcoin he generated. At least not based on a guideline statement alone. FinCEN will gather more information about virtual currencies and develop more specific regulations based on the gathered information. This was probably the intended outcome of the guidelines.

Emphasis moi. I'm not a lawyer or even a law school graduate, but that sounds right -- and inevitable. As an academic expert in virtual currency told me, Bitcoin is already unable to be free from governmnent regulation, since it depends on the rails of the powers that be.

As for Linden Lab, Kadochnikov thinks the regulations won't affect Second Life users one way or the other, but Linden Lab will likely need to lawyer up:

FinCEN now considers Linden Dollar as a convertible centralized virtual currency. The guidelines define virtual currency as one that either has value in real currency or one that can be used to buy goods and services. Additionally, a centralized virtual currency is one that has a central repository. 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... 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.

Read more here. Kadochnikov says it's possible for Linden Lab to avoid this bureaucratic nightmare by killing the Linden Dollar, and just dealing with US dollars for transactions of virtual goods, but "[t]he downside of that is that is like turning off a printing press that prints money." So it sounds to me that Linden Lab will have to hire 2-3 full-time lawyers/accountants to handle these new guidelines, and spend something like a half million dollars a year to do so. Which would be a manageable expense, but if Linden Lab is ever planning to sell Second Life -- a fairly likely possibility, I'd say -- potential buyers would probably blanch at having to absorb this regulatory obligation.

Hat tip: Second Life's Reddit group, which is full of interesting things and you should probably follow.

Comments

[Iggy]

This has been on the radar for a looooong time, ever since Julian Dibbell wrote Play Money. There's a hilarious moment in the book, when Dibbell finally is able to explain to an IRS employee how he made money via Ultima.

The employee told Dibbell not to worry, but that once the IRS figured out how to tax virtual goods and other exchanges, it would change everything for gamers.

Of course, is a Linden Dollar even a taxable form of income, until it gets cashed out? For most SLers, that's the issue. I'm guessing our land-barons already report their SL income.

But when we buy Linden Dollars from the Lab, then the Lab should worry. That's a source of taxable income for the Lab.

[Danielle]

One problem with thinking L$ are money is Linden Lab retains the right to cancel your account and keep your balance at any time for any reason.

When you send funds via Western Union, who really is a money service business, they cannot just arbitrarily take the funds. You have paid them a fee to deliver money to someone else, and they have to honor that.

[ZZ Bottom]

Woild not be that emough evidence to sue LL in a civil court?

[Alberik]

The only time the TOS claims about the nature of the Linden virtual currency were tested in court, in Bragg v Linden Labs the TOS did not prove entirely bullet-proof and the company settled. After the Treasury guideline it's almost impossible to imagine a court accepting the TOS claims about the nature of the Linden dollar. It is actually very, very common for TOS claims to be drawn with extraordinary breadth and to be set aside by the courts.

[elizabeth (16)]

the main difference between bitcoins and L$ is that L$ are not transferable or redeemable outside of the linden SL walled garden

i think that be the representation to IRS if/when it comes up

[Geo Meek]

You are welcome to send me any or all L$