The Linden Dollar: token or currency? The US Treasury ponders …

secondlifeA 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
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 threat to Second Life?
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.

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With thanks to Mona Eberhardt and Trinity Dejavu

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13 thoughts on “The Linden Dollar: token or currency? The US Treasury ponders …

  1. European customers are already having to deal with having to pay VAT. And such operations as Paypal have formally set-up European subsidiaries registered as banks under EU law. If Second Life has to submit bank-like reports to the US Treasury, will the EU be far behind? Or will we have to get out L$ through a Europe-based third-party exchange? And what does that mean for Stipend?

    I was once told that every L$ can be tracked which seems a little wild: technically possible but still wild. Linden Labs seem able to distinguish the Stipend L$ from the rest, so that they will not convert those to real-world money, but I don’t know how many of my L$ have that taint.

    This all sounds like a can of worms. And wqhen will I be able to get a mug of Joe at Starbucks paying only with L$?

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    1. I’m not sure there is a requirement here for LL to submit to banking-style regulations per se; rather that they will have to comply with regulations dealing with criminal activities and virtual currencies – electronic crime seemingly being the remit of FinCEN. Hence my comments around the safeguards LL already having in place possibly going at least some way to misigating the impact.

      Whither the US goes, however, the EU is liable to follow – if it doesn’t actually get there first; so how big a knock-on this will have outside of any additional compliance actions LL may be forced to take within the US is an interesting one to ponder – I did actually spend time looking at the various EU documents on the matter and also looking at commentary from a few years ago (2011) whenall this last made major headlines – but frankly, I gave up when a headache threatened.

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      1. I remember the last time the L$/USD exchange rate spiked, a little while after M. Linden got booted out. That was spectacular, and I missed the chance to buy L$ at a good price. The rate has been very stable since then, though I can still be afflicted by real-world exchange rates.

        Maybe Linden Labs can avoid non-US regulation, but some of the stuff I see reported from the USA would likely get noticed, in a bad way, if it were tried in the EU. I am rather glad of the arms-length arrangements made by Mastercard, Visa, and Paypal. Though my bank seems to be getting suspicious about transactions made with US suppliers when I haven’t told them I am visiting the USA, Once or twice I have seen things in my dealings with US companies which seem a bit lax by UK standards.

        Off on a tangent here, but it may be worth using Paypal to put USD into your account at Linden Labs before they go to your card for Premium/Tier payments. More practical if you’re just paying Premium on a quarterly basis. The LL system is not very helpful if a card payment fails, and that section of the site is a bit picky over which browser you’re using.

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  2. As Tateru had pointed out, chances of large-scale money laundering or tax dodging through SL are slim, if not non-existent outright. We Europeans already pay VAT anyway and our credit card or Paypal transactions are perfectly traceable.

    FinCEN is not telling a convincing story here, because it was the US government that, instead of arresting the managers of HSBC for large scale drug money laundering, enabling funding of terrorist groups and wholesale tax dodging (heck, this ought to be enough for any decent authorities to lock everyone involved up and throw away the key), they imposed a $1.9bn fine (which I don’t think will ever be paid, even in part).

    So, rather than trying to find money laundering operations where they are unlikely to be found, perhaps FinCEN should turn its gunsights on the banksters. But wait, I forgot: it’s the banksters that sponsor every politician’s campaign.

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  3. It’s important to realize that this is not a ruling nor a new regulation.

    It is basically an opinion drawn up so there is background information for future regulations to be based on IF such regulation is ever considered. And “future” could be a long time from now.

    And even though the Treasury Dept. can make regulations, it is not a question of Treasury having the power, it is a question of politics. Something as far-reaching as the government getting involved in regulating the currency of virtual worlds will likely involve an act of Congress rather than a regulation instituted by a government department.

    And we all know how slowly Congress moves. Rather than running around with my hair on fire as I’ve seen some people doing elsewhere, I’m taking a “wake me when it’s over attitude” on this one. I think it will be a nice, long sleep. 🙂

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    1. Yup, it is only a set of guidelines, as stated in the piece – and hence why I’m not getting as worked up as some commentators out there :). It’s also something which has, outside of the FinCEN’s publication, been rattling around for a good few years now, brought back into the light by Bitcoin more than anything else.

      Even so, and leaving the hyperbole of others aside, it’s interesting to mull the possible ramifications, “good” and “bad” …

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    1. I’d missed that is scanning the finding. Will have to go back and have a re-read – thanks for pointing it out :).

      (Have corrected the post as per your follow-up.)

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