Virtual Currency Legal Analyst: Linden Lab Has to Comply With New US Treasury Guidelines or Face Criminal Penalties

Virtual currency legal analyst Alex Kadochnikov adds more context to Linden Lab's apparent move to comply with new US Treasury guidelines by forbidding the trading of Linden dollars (L$) on exchanges other than the official LindeX. As part of the guidelines, the company must register as a Money Services Business, and the penalties for not doing so are pretty steep:

Any company that issues or exchanges virtual currency must register with FinCEN, either by themselves or through their agent. Linden Lab will have to register. Linden Lab issues virtual currency. No surprises there... Once the statutory six month period for when virtual currency money transmitters must register, the government will be able to start prosecuting people who do not comply.

Here come the penalties, stated right in the regulations:

Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

So yeah, it would make sense Linden Lab wants to be absolutely tight with its Linden Dollars. Though it's still strange the company hasn't specified this is the reason for its policy change.

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Comments

[Tommy Rampal]

It's quite clear that it's time that LL has to revamp its business model entirely or move off-shore.

[Dartagan Shepherd]

"Though it's still strange the company hasn't specified this is the reason for its policy change."

Everything LL does, especially when it comes to their monetization bits and acquisitions are always:

1) Because people asked for it.

2) To provide a convenience or safety for their customers.

That isn't strange, it's the typical answer. This time to "protect us against fraud".

In reality it's government protecting people against companies who don't protect people "enough" from fraud.

There's still a long, long way to go with consumer protection which their TOS happily discards.

There are lots of merchants at this moment who can't cancel recurring billing on marketplace advertising and have no recourse.

This is but one step in the right direction when a company won't do it themselves.

Personally I think virtual currency is nothing but exploiting financial loopholes that the rest of the world has to abide by, especially when a company disclaims away every bit of liability.

The convenience of trading virtual currency without transaction fees among users is one thing, this is another that apparently isn't going to get done voluntarily by companies.

[Barney Sims]

It also makes sense that all the action is just Linden Lab bluff to show FinCEN that they did all they could and are free of responsibilty. "We asked third party echanges to stop, we changed the ToS, we posted it on blog so we are OK" they can say.
But deeply in heart LL believes that nobody will take them serious and people will still buy and sell LS, like they do with gambling which is officially forbidden but secretly accepted.
No material change in ToS, opposite to ToS but not legally binding posts on blog, Anshex and Podex still working supports this theory.

[Iggy]

The creaking wheels of the US Government groan with rust but manage to catch up with the online libertarian utopias, just as Julian Dibbell predicted, in Play Money.

The thought of a few Lindens in the slammer, however, would bring smiles to the faces of more than a few educators. Sadly, the ones who screwed us over are probably long gone.

[Ezra]

"But deeply in heart LL believes that nobody will take them serious and people will still buy and sell LS, like they do with gambling which is officially forbidden but secretly accepted."

Let's assume instead Linden Lab is a infact a responsible company and understands the danger of operating a 10-20 million USD a month user-to-user transactions virtual economy and how much real world crime can easily be fueled by such a fluid resource.

To me, arguing over exact FinCEN guidelines and rules make sense, but arguing whether convertible substitute money should be regulated the exact same as real money doesn't. Most the dangers inherent with real money are inherent with L$ given its relative stability and how easy its been to convert to and from thousands at a time.

[tabi]

The smartest thing LL could do, is stop doing payouts altogether. There could still be an in-world currency. As for sellers in the marketplace, they could use Amazon. LL already has some items there for sale. Maybe they have already considered this idea.

[ZZ Bottom]

Amazon for usa residents only?
nice 1, lol!

[ZZ Bottom]

The best solution as a world wide user base company would be to allow only Usa residents to trade? Well as Usa usr bvase is less then 10 pct of Sl i believe all other commercial grids would love that step!

[Ezra]

"The smartest thing LL could do, is stop doing payouts altogether."

Why? It's worth noting FinCEN adherence is something even gas stations that issue and cash money orders are obligated to. Certainly a multi-million dollar company can figure it out.

[Wolf Baginski]

I've been looking over what other US companies I deal with are doing. Most is just bog-standard retail: no problems. What I have noticed is far less hassle over setting up an account and making payments.

I suppose that Linden Labs can blame some of this hassle on the virtual money element of their business, but it does not look good that it is so difficult to pay money in, and the process is so poorly explained.

It has to be part of why they have this problem with converting sign-ups into paying customers. And it does seem that the third-party exchanges were better at letting people pay them.

And the sudden short notice on this, the instant shutdown, doesn't look good. If there was a six-month grace period in the legislation, surely they could have come to a decision in sufficient time that they could have given the affected customers better notice of the change.

I am glad I don't have huge monthly fees. And, looking at the price difference between the LindeX today, and VirWoX the last time I bought through them, there's something I am not feeling happy about. With no alternative to the LindeX, valuing the L$ is about as reliable as valuing the company.

[Ezra]

@Wolf "With no alternative to the LindeX, valuing the L$ is about as reliable as valuing the company."

That's always how it's been regardless of other exchanges. It's not like if Linden Lab went out of business tomorrow, L$ would still be around because there's third party exchanges.

I'm starting to think this reality check of Linden Lab's 100% control of L$ is better in the long run. It's best that everyone trading it knows that its not real money, that Linden Lab has zero obligations to ever redeem it for real money, or operate an exchange for it or keep Second Life's servers plugged in another day so that it's available and has any value.

As with every heavy abstraction in Second Life, it's best to keep one foot in and one foot out when it comes to things like "dollars", "land" and the rest. We have the exact same amount of legal recourse with our Linden Dollars that we do our World of Warcraft gold and hopefully not many people are sitting on piles of L$ they think is as good as being in a bank.

[Alberik]

I think you'd find there's no explanation for the TOS change because stating that it's to comply with FinCEN would drive a large truck through the claim that the L$ is just a virtual license. On the other hand, the company has abandoned any pretence at communicating with actual customers so it may just be their usual stony silence.

[JTW]

"but it does not look good that it is so difficult to pay money in, and the process is so poorly explained."

There's a button on the top bar of your viewer, clearly labeled "Buy L$".
If you press that without having a CC or PP account on file, you're forwarded to your web profile where you can enter those details.

How much more clear can you make it?

"It has to be part of why they have this problem with converting sign-ups into paying customers."

No, that's simply because unless you want to buy mainland property in SL there is no reason to become a paying customer (unless maybe you have a business and value the direct access to customer support).
People are cheap, the vast majority isn't going to pay for premium membership just on the off chance they might have a need to talk to a support tech in the future (and given the massive badmouthing of those on the support forums, that becomes even less likely, badmouthing that's largely unearned, I've had nothing but excellent experience with them).

"And the sudden short notice on this, the instant shutdown, doesn't look good"

I've more than a hunch that the exchanges were notified months in advance, with a deadline of last weekend, but chose to ignore that thinking it would blow over, or that they could force LL to backtrack because of the backlash over it (never mind that LL can't change it, they are legally required to do it).

"We have the exact same amount of legal recourse with our Linden Dollars that we do our World of Warcraft gold"

and nobody complains when Blizzard goes after goldsellers...