Did Linden Lab Change Its Terms of Service Around Second Life Currency to Comply With US Treasury Guidelines?

Linden Lab has updated Second Life's Terms of Service regarding Linden Dollars, the world's official currency, in a way that will impact third party sites which exchange L$ for real money or other virtual currency, including Bitcoin. In the new Terms of Service, however:

[T]o better protect Second Life users against fraud, the updated Terms of Service make it clear that trading of Linden dollars (L$) on exchanges other than the LindeX, Second Life’s official L$ exchange, is not authorized or allowed.

The given reason seems strange on its face, because Second Life users have been able to exchange Linden Dollars for real currency on third party sites since 2004. (See Gaming Open Market.) If fraud was really the concern, why do so only now? According to SL blogger Vaki Zenovka (who describes herself as a lawyer IRL) Linden Lab is really doing this to comply with new guidelines on the regulation of virtual currencies by the United States Treasury department, which I blogged about last month. Here's the problem, as Vaki puts it:

Because of the very strict reporting, registration, and recordkeeping requirements placed on LL by the Bank Secrecy Act, LL has to distance itself from any exchangers it does not control. Those exchangers might not be paying attention to the new FinCEN laws. They might not be keeping records. They might not be reporting suspicious transactions. They might be permitting money laundering. LL has to make it very, very clear that those exchangers aren’t authorized; they’re not part of LL; and LL isn’t responsible for them.

Read more here. I've contacted Linden Lab to confirm is Vaki's theory is true, though it seems quite likely. If that's the case, however, the company should have said so -- it would mute angry SLers who use third party sites. (When Linden Lab made it against TOS to gamble in Second Life, they explicitly said it was to comply with conflicting real life government regulations.) It could also be one reason, with the other reason being this: To boost Second Life's eroding revenue base. Even if just 10% of the active user base regularly trade Linden Dollars on third party sites, forcing them to use the official exchange could mean additional commission rates perhaps in the six to seven figure range. Anyway, look for more updates as this story cashes out.

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Comments

[Issa Heckroth]

If they kill the exchanges, a lot of Europeans are going to quit IMHO. Paypal is not as ubiquitous as they would like to think, and just a cursory glance through the threads springing up today show that many perceive this to be a BIG problem for them. From Tax issues to not being able to accept payments on Mastercards. I have no way to fund Paypal in germany. We use instant banking here. If my preferred exchange goes under, LL don’t get a dime more from me, even if I WANT to give it to them. Simple as that.

And to make matters worse, even the Labbers at LL dont seem to know exactly what this terminology means. As I said in the G+ community. Typical. LL. Clusterf**ck.

[ZZ Bottom]

The only question is:
Any that will use any but Lindex wil be perm banned?

[Iggy]

Tim Wu and Lawrence Lessig appear to be correct about the trajectory of the Internet. Wu's theory of a grand "Cycle" for each new telecom tech includes a period of openness and a frontier that soon gets locked down by a few big entities, public or private. And didn't Lessig warn us that before too long, the Internet would be the most tightly regulated space of all?

Who's doing the tightening in America today? It's the telecos, working with the US and state governments, much as AT&T did under Theodore Vail's regulated monopoly. Everyone wants a cut and wants to keep the consumer-public safe from money launderers and presumptive terrorists.

Whatever the dreams of Libertarians online, I'd bet that in a few years, we'll use verified RL IDs to pay commissions and taxes on everything we do in the US and EU, or we'll be violating various laws. And it will mean just not seven figures for LL but many more decimal places in new revenue for government coffers.

If any cyberlibertarians have alternatives, let's here them, here. LL makes lots of bad decisions, bt this one seems both legally necessary and inevitable.

[Arcadia Codesmith]

I doubt they'll put themselves out to enforce it. It's not as if they're johnny-on-the-spot to enforce anything else. With no official recognition, third-party exchanges are just private transactions between individual users. Red-flag currency movement may be reported to various government agencies. Or it may not be. Whatever. Dude.

[CronoCloud Creeggan]

The actual TOS itself doesn't say "not allowed" it only says "unauthorized" It makes it pretty clear that you CAN use third party exchanges but do so at your own risk:

#############
5.3 There are other exchanges that are operated by third parties on which Linden dollars are exchanged.

Third party exchanges are not authorized by Linden Lab and Buying or Selling Linden dollars on third party exchanges are not authorized transactions. Third party exchanges are wholly distinct from both the LindeX exchange and Linden Lab and they have no affiliation with Linden Lab. We do not endorse or otherwise guarantee the legitimacy of the Linden dollar transfers offered on them, and we are not liable for purchases of such Linden dollars. Buying or Selling Linden dollars anywhere other than the LindeX is done so solely at your own risk. If you Buy Linden dollars that are traced to unauthorized credit card activity or other fraudulent activity, we will recoup these Linden dollars from your Account. The only authorized exchange is the LindeX.
########

Maybe the Linden who did the posting was minsinformed?

[Wolf Baginski]

In this context, "authorized" may have some quite specific meaning. We're talking about how the courts interpret legislation.

The third-party exchanges I know of are all in Europe, and subject to a European system of laws that is quite strict (Geekery: the EU issues Directives which tell the national governments what national law must do, and the national governments create the actual laws. One reason is the specific meanings of words in a legal context. Uk courts don't use quite the same meanings as US courts, and that is nominally the same language. Do courts in Germany use exactly the same meanings as courts in Austria?)

Mastercard, Visa, and Paypal are all run as European companies distinct from the US company using the same name.

There were reports that one of the card companies in the USA was threatening to charge Paypal-mediated transactions a higher rate, because of inadequate details. I wonder if that's about the new rules, rather than about selling info to advertisers, or actual security.

Linden Research are a company based in the USA. They have to work within that system of law and regulation. But they do sometimes seem to be forgetting that they have customers all around the world.

[Tommy Rampal]

They've killed off the Risk API, forcing exchanges to cease accepting L$ deposits and making those who still accept more vulnerable to fraud.

[Ciaran Laval]

A couple of Exchanges have reported they have been told to cease trading and remove their ATM's.

Others have simply ceased trading whilst they seek clarification.

Whatever the reasons for the TOS change, Linden Lab's communication is awful, yet again, from the TOS and the blog post contradicting each other to the lack of proper communication with the third party exchanges. Why on earth do Linden Lab have so much difficulty with communications?

[Dartagan Shepherd]

The vague bits are temporary. Because there's quite a bit of money involved passing through third party exchanges I think it's in LL's best interest to buffer the transition somewhat to avoid legal hassles with exchange operators and those vested on a larger scale.

Shades of the Marketplace, put it in place and see if you can squeeze out the third party marketplaces more or less voluntarily or by lack of "official" support and features that third parties cannot provide (in this case registration with FinCEN and fraud assurances).

If all else fails, TOS it again and make it crystal clear and assume the full responsibility of changing the rules.

Clarity comes when lack of clarity fails.

[Nathan Adored]

What if one of the bigger exchanges sues LL for conflict of interest or unfair business practices or some such? They could rightly point out that LL's Lindex is now trying to behave as a monopoly, which could well be illegal.

[leal choche]

Not to change the subject too much, but I noticed that LL is not responsible for "termination of service." I couldn't find a copy of previous TOS but that phrase seemed a bit jaring....how long has it been in TOS that LL says it can terminate Second Life? Just wondering.

[Eshi Otawara]

They jerked off on top of our pizza again.

[Nathan Adored]

Well, there is one other complication to this matter: there are apparently a number of users in countries that don't have PayPal, and maybe never will, making it hard or even impossible to cash out, perhaps even making it hard to BUY L$ in the first place. What if LL loses a TON of customers over this? I've already seen at least one post online from someone saying they're gonna pull completely out of SL over this. oO

[Ciaran Laval]

I think the issue Nathan highlights about people in countries where Paypal is a problem paints the Lindex in a poor light.

People went to third party exchanges because they have more payment options and when it comes to cashing out, a much faster service?

Why is the LindeX not comepetitive in these areas, it absolutely should be.

[GeneVincent Tigerpaw]

Well Virwox has suspended Linden transactions. I'm concerned that this may cause the value of Lindens to fall dramatically. Bad news for those of us struggling to exchange Lindens to rl money to pay our tier.

[Barney Sims]

I see that independent LS exchanges have different reactions on the new LL policy. Some work normally with no dramatic changes like Podex or Anshex, some blocked buying LS, some closed at all.
Does it mean that some of them are braver or maybe it depends on their place of registration?

[Will Szymborska]

Another step further towards what seems to be a much more controlled, commercialized game rather then a more open service. Given, Linden Lab can do whatever it wants to do, I don't know if this was a really good idea considering European Linden Dollar purchasing issues.

I'm suprized there was not an in-depth email to all these exchanges explaining EXACTLY what this meant for them, instead waiting for the exchanges to contact them, suspend operations and post messages on their websites asking for further clairification. These exchanges have been around for years and probably consitute a sizable portion of L$ trading, so why not give them a heads up? That would have spared a bunch of negative PR and probably kept people much cooler regardless of what the TOS changes were.

The fact exchanges are all suspending operations and still trying to figure out the vauge language of the TOS change only makes people angry and confused, causing a bigger customer service headache for LL.

In my opinion, with the end of the SLCC in 2012 (and lack of desire to help assist residents in setting up such an event again), the bland and financially useless Amazon.com 'starter packs' and the censorship of the JIRA, I'm feeling the EA-ization of a company which had for so long felt like a community within reach of its own users.

[Wolf Baginski]

One issue is whether the 30-day rule in the TOS on changes taking effect will be respected. There has been at least one occasion when the change was applied immediately. With people living in places where cashing out through the LindeX may not be practical, the apparent immediate change may amount to a contract of adhesion.

But I am not a lawyer.

[ZZ Bottom]

Guess We soon see who are the lawyers but one thing is granted, the lack of faith In Linden lab reach levels that nobody wuld dare to think and i ageee that Ea-ization of Second Life is at full speed!

[2013]

Typical doom and gloomer talk, since Vaki is the only lawyer I know in SL, the rest of you are just speculating. How about we see how this plays out and we get clarification, everyone is in panic mode.

[Kim Anubis]

Those most likely to panic already left.

[joker]

regulation bad..lol yeah cause all the " do no evil" cyber wanks who ripped off most of you around SL and the web in the last 7 years were all Lessigs pals.

[Will Szymborska]

Regulation was not at the center of my argument. Infact, anything concerning the well being of the currency used inworld would seem appropriate and they have every right to do so. However, communication and dis-interest in consoling with those persons/ organizations affected is somewhat disheartening.

I can't assume they didn't send any notice to those effected but if all these exchanges are just suspending operations now and stating their confusion and uncertainty over the decision, perhaps they had no prior notice.

[Marx Dudek]

I'm glad I cashed out my disposable income already.
I'm glad I tiered down to basic.
I'm glad my sim still manages to pay for itself.

[Eddy]

They're just trying to get in a monopoly position with their Lindex. But, as mentioned by CroneCloud, the new TOS doesn't clearly state 3rd party exchanges as illegal or not allowed; it merely says they're not authorized exchanges by LindenLab and should be used at your own risk.

Their entire article 5.3 would suggest that exchanges will still continue and you are ALLOWED to use them (be it at your own risk - but that's no different from what it used to be).

[Mark Parker]

Money laundering on SL? what a stupid idea I mean seriously who is going to play SL to money launder. A truly laughable excuse by Linden Labs

[Plinker]

hi nat! ran just told me about this. he is gonna close all the stores and go ghetto soon cause he is not making money anymore and this dont help. glad i got out when i did.

[damiana]

LL, great! thx!we are happy now! we europeans.. the most... they luv us too. wooow ;-)

[christianlouboutindiscounty]

Articles are very nice…

[dongpubio]

Im so excited while I read all the comments

[timothysfinejewelry]

Keep posting the articles,usefull to every one.

[timothysfinejewelry]

Keep posting the articles,usefull to every one.