ToS changes, FinCEN and speculation


Update, May 10th: Alex Kadochnikov has posted a further piece on the recent FInCEN interpretive guidelines on virtual currencies.

The recent change in the ToS affecting the use of third-party exchanges for L$ transactions was apparently accompanied by an e-mail from the Lab to such exchanges asking them to cease trading / cease trading in Linden Dollars.

So far, and as reported on Hypergrid Business, around eight exchanges have suspended trading in Linden Dollars while seeking clarification from the Lab as to whether / how they can continue to provide a service to users. Whether the suspension turn into an outright cessation of trading / operation obviously depends on the response obtained from the Lab.

Additionally, Oz Linden contacted TPV developers via the Opensource Development mailing list, stating:

Linden Lab has made a change to the Terms of Service – see the blog post at

If you are a viewer developer, and your viewer includes use of a third-party exchange for functions like ‘buy L$,’ it will need to be changed to use the LindeX instead. 

Some are speculating that the move is as a result of the FinCEN issuing a set of interpretive guidelines on virtual currency (which I commented about in April), possibly related to limiting the Lab’s exposure where other exchanges are concerned. As I’ve stated in comments following-up on the news piece on the change – and while, inevitably, IANAL), I’m not altogether convinced by those arguments per se, because there is nothing in the FinCEN guidelines which appears to fundamentally impact LL’s exposure in this regard – rather, they and third-party exchanges appear to be in the same boat where FinCEN’s guidelines are concerned.

US Treasury's FinCEN: examining virtual currencies
US Treasury’s FinCEN: examining virtual currencies

However, this is not to say that I think LL’s move is entirely unrelated to the FinCEN guidelines being published in March. Again, as I’ve commented both in this blog and elsewhere:

I would add that where there is a potential overlap between the two (the FinCEN guidelines and the SL ToS change), inasmuch as by attempting to limit any exposure of L$ to third-party exchanges and confine trading to LL’s own mechanism (the LindeX), the Lab might be trying to strengthen their position that the L$ is a “gaming token” rather than a “virtual currency” – which cuts to the heart of the core difference in their interpretation of the Linden Dollar’s status, and how FinCEN might regard it.

Of course, even in doing this, the Lab doesn’t escape FinCEN’s view that they are effectively a Money Service Business (MSB) and as such, are required to register as such with the US Treasury and meet regulatory requirements and adhere to anti-money laundering and other periodic reports. Some have suggested that the Lab may as a result face escalating costs in attempting to meet these requirements which may render the Linden Dollar, as we know it today, unviable to the company. However, as I stated back in April:

… 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 … 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.

Thus, how much additional work and expense would be required on LL’s part should they have to become a registered MSB isn’t that easy to ascertain; so dismissing them as being unable to comply, or that cost of compliance would be something the company would be unable to bear would appear to be perhaps premature.

However, it is reasonable to suggest that if this move is related to FinCEN, then quite possibly it is just an initial step, one which may well be followed-up in the coming months by further changes as the Linden Dollar’s overall status is further clarified as a result of dialogue between LL and FinCEN. Whether such additional result in the Linden Dollar becoming a closed currency without “real” value is entirely open to debate and beyond the considerations of this piece.

There is another question to be asked here as well. Which is this: while it might be unwise to totally dismiss FinCEN as having nothing to do with LL’s change in policy, are there other reasons why LL would make this move?

Well, yes there are. Here’s a couple:

  • It could actually have arisen as a result of the discovery of a fraudulent activity or situation which simply could not be ignored, and the Lab had to take drastic steps in order to ensure the door was firmly slammed shut on the matter
  • It might simply be an attempt to ring-fence the buying and selling of L$ for direct revenue gain. As WolfBaginski Bearsfoot points out, LL are potentially missing out on around $500,000 in transaction commissions going through VirWoX alone. While this may sound trivial, it could go some way to offsetting declining revenue from tier (which in 2012 amounted to approximately $762,000).

Then there is the way in which the change has been announced. If the reason behind it is purely a response to FinCEN setting out its stall in relation to virtual currencies, why couldn’t the Lab have indicated this to be the case? At the very least, and with more considered up-front communication blog-wise, it would have avoided the current levels of confusion, angst and speculation. And why the need to act in such an abrupt manner? It seems odd that if this course of action has arisen from the moves by FinCEN, the Lab explain the situation to users and third-party exchanges alike and give both X number of days to prepare for the changes to come into effect. Were they perhaps afraid that doing so would lead to a run on demand for L$ through third-party exchanges?

It is possible that whatever prompted the change to the ToS may never be known – particularly if it was, as mentioned above, related to a specific fraud-related situation or activity which the Lab could not afford to ignore.As such, this one change –  allowing for the current confusion and speculation it has created – is liable to be the end of things,

However, if it is as a result of the rumblings coming out of FinCEN as they cast their eyes across virtual currencies, then this might just be a foretaste of further changes to come.

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25 thoughts on “ToS changes, FinCEN and speculation

  1. If FinCEN has anything to do with it (a possibility we should not dismiss), I think LL would have every reason to point out that the Linden Dollar is far less an opportunity for tax evasion or money laundering than BitCoin, not least because of the exchange rates:

    $1 = L$235 (approx.)
    1BitCoin = $104 or thereabouts

    And there are also other reasons why the Linden Dollar shouldn’t “worry” FinCEN (BTW, what did US authorities do recently when HSBC, Wachovia and other “respectable” banks were proven to be involved in massive tax evasion, drug money laundering and even funding of rogue states and terrorist groups?). For instance, people with payment information on file are not “anonymous”; we have registered credit cards, bank accounts, Paypal accounts. Therefore, everything can be traced whenever the authorities want.


  2. The suddeness of the action and quality of the silence from LL suggest that it may be more of a tactical legal matter than strategic corporate policy change.


    1. Indeed, it’s the suddenness of the action which caused me to point to this possibly being the case in the article; as you say, it does smack of being more tactical that strategic – and that’s a good differentiation between the two :).


      1. The thing is, where does the Linden Dollar and SL’s virtual economy go from here? Will people still be allowed to convert L$ to “real” currencies? One of the factors that made SL a lot more successful than any other virtual world is exactly this – it allows people to actually have a professional or semi-professional presence within SL and support themselves by making and selling virtual goods.


        1. they definitely could not afford to disallow conversion to outside currencies. a lot of us would be gone just as suddenly as the policy change. for my part, i didn’t read the new TOS as necessarily any great policy change. there are a number of statements that limit LL’s liability in the event of a problem or dispute, so might be nothing more than a sparky new member of the legal team pointing out some Ts were left uncrossed. could be LL’s own anxiety over the FinCEN strictures, could be some awesome internal embezzlement scandal, could be the winner of the how can we plug the income leaks idea contest. maybe we never get to know. as for anything the lab does avoiding confusion or angst on the grid, um doubtful. regular angst is as much a mainstay and raison d’etre of many SLers’ experience as is eeking out and cashing out a few Lindens of others.


  3. We speculate too much. Re-reading the TOS makes the point clear. Clarify: There is just one point where L$ can become us$ and vice versa. Warning: Other operators where you can do the same are not supported by Linden Lab and Linden Lab is not liable when they go poofta. That’s it, and all, and no more. The Real Interesting Part ™ is, Linden Lab is not liable for their own exchange (!) and when they go poofta or cancel your account for “a reason or non at all” (since they can) your L$ *and* us$ are gone, but We all fail to read that part and don’t get upset about that.


    1. If you really want to speculate on what motivates this change…. how reliable are the other exchanges? And could they fall over in the nearby future? Or perhaps they are already falling… Speculating is fun:)


    2. That’s not it all at all. The exchanges have been told to remove their ATM’s, we are not allowed to use other exchanges and if we are found doing so, we are breaching the terms of service. That was the issue with the blog post stating this but the TOS not, but the actions of LL since, especially in terms of telling the exchanges they must cease and withdraw their scripted items to enable use of their exchanges, suggests they are a breach of the terms of service, not a tough titty if you use them issue.


  4. Still what is valid is what is written in the Tos not on a blog! and I bet some lawyers are already aware that there is at least 1 month warning before any has a legal effect and i can only wonder what will happen to the big landlords is LL decides to go on the path of the close currency, what will be the reason to own more sims that you really need if you can’t convert L into real currency?


  5. I see this as a beginning tactical move on LL’s part. The lack of clarity is (IMHO) due to the lack of clarity regarding how FinCEN’s mandates affect Linden Dollars. My prediction is that we will see a more concrete and definitive follow-up, most likely before the end of 2013, as LL’s lawyers get a more concrete grip on the full measure of impact. Remember that a lot of what LL does is very intimately connected to the assertion that the Linden Dollar is a worthless token, so these changes can be seen to further insure that premise by restricting all trading in the L$ to their exchange. Time will tell, but I’m on record now. We all just have to bide our time and see whether it comes up heads or tails.


  6. The problem is that i really doubt that All that make some rl revenue will wait as long!
    I do not doubt that soon we will see trade of goods or services whrere Linden will not be used but instead any outside SL transaction wil be aplied!
    I do believe some work or build and sell stuff only to get money to pay tiers or spend in world, my soulmate is on that category as many others!
    But where big brands or landlords do with the L they win?


  7. What leaves me worrying is that the Lindens seem to have ignore their own 30-day rule. They could have claimed immediate action was needed, and possibly with some cause, but they didn’t.

    Looking that the TOS, there are so many ways in which they disclaim responsibility, that I am starting to find it hard to trust them. For me, with just Premium membership, if they shut down tomorrow, I can write off the money I have tied up. With those clauses in the TOS, it’s not worth the hassle. If it were Linden Lab going into bankruptcy I doubt they would need those clauses: if would be an unsecured debt, and just about everyone would come after the tax system, and the employees and the venture capitalists. Oh, and don’t forget the fees of the big accountancy company who shares out the loot.

    But they’re pissing off a few hundred residents who get large amounts of money out of SL. Half a million a year for VirWox. and possibly damaging their reputation since they trade other virtual currencies: that looks worth the cost of a lawyer. Do you want somebody such as Anshe Chung wondering if you can be trusted?

    What happens to the SL economy if people stop trusting Linden Labs?

    At least accountants have ways of putting a value on a company’s reputation. You want to buy a retail business, that’s part of what you pay for. Goodwill and stock at valuation.

    And if you’re a competent businessman you know this.

    Pick up on that, and you might start seeing Linden Labs in a new light. Worse, whatever fancy footwork your lawyers might use to define a L$, it depends on your reputation. If you act in a way that doesn’t look honest, it doesn’t matter what the law, or your contract, says.

    It doesn’t quite make sense to stop selling things on the Marketplace. They’re there, and some people might still buy them. You’ve already spent the resources to put them there. I know of a couple of never-ending closing-down sales. But how many people will still make things to sell?

    And if the supply of new goods shrinks, what will it do to the demand for L$?

    That’s what can happen to a Linden Labs that suffers a reputation-fail.


  8. In the comments of the relevant post that was published here on April 4, Adromaw Lupindo pointed at the Amaretto v. Ozimals case, where Judge Charles R. Breyer in the United States District Court for the Northern District of California declared in summary judgement that the Linden Dollar is a currency (line 11 of the second page of the summary judgement): (ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR SUMMARY JUDGMENT). I wonder what impact this could have, in conjunction with FinCEN’s “draft” or however else it may be called.

    Also, I’ll agree with Wolf; communication cock-ups like this can cost LL dearly. One must remember that one of the factors that made SL so attractive compared to other virtual worlds is the possibility it gives for someone to make an income in-world. And, since LindeX is rather slow and offers very few payment options, it left a huge, gaping hole for third-party services to enter. I don’t know exactly what LL’s management is thinking – communication has never been a skill mastered by Lindens. Are they trying to monopolise the L$ market? If yes, they need to become at least as good and as fast as the best third-party services. Are they trying to stay on the government’s good side? Then they have a lot of work to do trying to keep Uncle Sam’s sights away from them, not least by pointing out that L$ poses very little risk of tax evasion and money laundering compared to other virtual currencies.


  9. 1) Very interesting point about being a tactical move vs. a strategic one. It makes so much more sense, knowing how LL reacts in a panic to pretty much everything. It should have been obvious from the first that “something” happened which made LL’s heart jump and suddenly throw all procedures out of the window and take drastic measures without thinking five minutes about the consequences. That’s their usual modus operandi. Well spotted!
    2) Pfft on the whole currency debate. Look, nobody can stop me from accepting US$10 from a complete stranger to send L$ to another complete stranger. It can all happen off-world. What this means is that somewhere, someone will just do a website to automate the procedure. Remember, the LindeX was not even a Linden Lab invention; they came relatively late to the concept, and only after the business of enterprising residents collapsed. Now, of course, it’s a revenue stream for them. But, seriously, it’s not as if we “have” to have the LindeX. It’s just way easier to have it all integrated in the same viewer and user’s web-based control panel.

    I mean, look at all those MMORPGs out there where money exchanges are strictly forbidden and have always been so. People still exchange their virtual currency in spite of everything — they just do it on, say, eBay. If all else fails…
    3) The more long-term consequences are for me way more interesting. Can SL survive without buying and selling content, good and services? In my mind, “no”. Sure, there are thousands who couldn’t care less about the virtual economy — but they are well served by OpenSim, which just has a marginal economy anyway. So, if LL has to shut down the L$ and turn it into “game money”, without any way to allow content creators to earn hard currency for their work, then one of two things will happen:
    i) Everybody will simply start to use PayPal Micropayments or similar payment gateways to buy and sell content in SL. The problem is that these are very visible and will reveal a lot of your personal details to the merchants you do business with; and this will shrink the economy dramatically. The beauty of virtual currency is that it’s like cash: anonymous enough so that you can safely spend your money without the seller needing your ID card, address, phone number, and spending habits.
    ii) SL will collapse. Seriously. It stops being feasible as a platform if there are no way for content creators to make money; and if they leave, it means no content to buy, no shops — which means nobody to pay for tier for them — and a desolate, empty grid. Just like most OpenSim grids, in fact: isolated spots of enthusiasts who are willing to pay out of their pockets to have some fun building nice things together and not expecting any return for their work.

    But that niche market — a grid where there are little opportunities to make lots of money, but plenty of chances to have fun together — is already covered. It’s called OpenSim. And it’s far cheaper than SL 🙂


    1. Without merchants being able to cash out Second Life would loose one of it’s major strong points that is for sure. I don’t think that will happen though. The only difference is that there will be only one official point where we could cash out and that would be the LindeX. LL will have to hire additional staff to upgrade that service. Or their poker partner (red dragon?) could step in to provide better service and more diverse.


    2. I’d tend to suggest that there is a third alternative to (3) – which is something no-one has really touched upon (although I mentioned potential benefits in closing my first piece on the publication of FinCEN’s guidelines. It’s this:

      (iii) LL register as an MSB, and from the perspective of the majority of users, nothing changes outside of the loss of third-party exchanges (TPEs). People either continue to use the available LL-supplied mechanisms for obtaining L$ and cashing-out or switch to using PayPal.

      There has been a lot written around this subject which seems to take it as read that LL “cannot” become a registered MSB for this or that reason. Having rifled through the FinCEN website – and admitting up front I’m not financial legal expert, I can actually find no reason why this should be the case. Some have commented that registration would involve LL in a lot of additional red tape and report-filing which they could not comfortably afford – again, I can’t find anything to substantively support this. So unless and until we actually see it is the case, then it remains so much speculation, particularly given – as I’ve pointed-out here – LL appear to have a lot of checks and balances in place vis-a-vis migitating risks such as fraud and money-laundering. Even if these checks and balances don’t meet the regulatory requirements which might arise from MSB registration, there is nothing to say that they might go some way to helping LL ensure compliance can be achieved.

      Assuming LL absolutely must go down the road of compliance and registration (there are actually a couple of “get-out” clauses in MSB registration, one of which (to my untutored eye) appears to suggest they might side-step registration and so barring TPEs might be an attempt for LL to meet this critera), then it may actually work to the betterment of SL and the L$. Again, this is something I pointed to back in April:

      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.

      So just because FinCEN has spoken, and assuming the change is driven out of FinCEN’s actions, it doesn’t automatically add-up to a bleak future for the L$.


      1. It’s obvious LL has to register and comply with the rules. 99% of their actions already comply. They won’t need to put much effort for full compliance. The only escape there is, would be to make it impossible to transfer L$ towards us$ and that’s a path that would kill SL for sure so that won’t happen. With defining the LindeX as the only exchange it takes away the power third party exchanges have. Also important is to note that there is only one place where the L$ is created. With this move they can make 100% sure that it is 100% impossible that other parties can create false L$. Proceeds that now go to third parties will now go to LL, and in a way to us users.


      2. The hitch is that even if they manage to jump through the FinCen hoops, they may not be the only regulatory hoops they have to jump through if they’re considered to be in the money transmitting business. For example, from the FaceCash lawsuit I linked earlier:

        “California is one of forty-six states (plus the District of Columbia and certain U.S.territories) that enforces MTLs related to domestic money transmission and stored value (see attached Schedule B). Each MTL requires the entity wishing to transmit money in that jurisdiction to fill out completely different forms; pay different application fees on differing bases; raise surety bonds of differing amounts in the absence of a federal insurance program for money transmitters similar to the Federal Deposit Insurance Corporation (FDIC); meet different minimum net worth and/or asset size requirements; provide fingerprints and data for criminal background checks in differing formats; register with different state agencies unrelated to finance for differing purposes; wait different lengths of time for approval; and post-licensure, to provide different reports at different frequencies containing different data to different agencies…”

        And that’s before they get started on all the other countries in the world…


  10. I’m not sure if this is related or a just coincidence, but a couple of days ago FaceCash announced that they’re suing pretty much everybody in the online payment space in California. This includes all the big names directly related to online payment like Dwolla, Facebook, Coinlab and Gumroad, but also people who temporarily hold onto money for you like Airbnb and ActBlue.

    Basically their beef is that they tried to follow the regulations and got shut down, while everybody else is acting as a money transmitter and hoping to get away with it. You can see how Linden could have been included in this – maybe they saw this stuff happening and got scared…


  11. One element has changed.
    Lindex, you have to deposit a 25 USD minimum with Linden Labs before you can buy L$. I’ve never tried buying goods in the Marketplace using the USD option: it’s a poor rate, and it doesn’t give you access to L$ in-world.

    When I was able to use a TPE I could buy much smaller sums. The last such transaction I made was about 7.50 USD.

    I don’t have any sort of figures on what people spend, but if you’re a new player (and the common question is “How can I get money?”) you now have to put up 25 USD. What I recall of my early days, it wasn’t like that. Though I may have fallen in with some rather shady types who were handing out gifts of dubious provenance.

    Last week I could ask if a newcomer had a Paypal account, and point them at a VirWoX terminal, and tell them they could pay the price of a cinema ticket. They’d see what they were getting, up front. They wouldn’t be exposing their card info to anyone new. And a couple of thousand Lindens will go a long way.

    Incidentally, it looks as though the shift on the Marketplace from Magic Boxes to Direct Delivery has taken out a lot of free stuff. If a dormant account had a lot of free stuff on the Marketplace–maybe a friend agreed to let somebody park one prim on the land they control–it is gone now. Yes, there’s some badly-made stuff out amongst the freebies, or just sadly out of date, but there was some quite good texture-only clothing. Anyway, do a search on Merchants, and you will find a lot of empty accounts.

    Unintended consequences? But how do you sell the game to a new player who can’t buy one of those packages from Amazon in the USA?


    1. I raised this point on the Linden forums, and had several people telling me I was wrong. But they haven’t yet clearly explained what better method there is. If it’s the in-viewer Buy L$ function, it still seems to come up against payment-method problems, and official info seems to think there is the minimum-payment effect.

      Anyway, it’s the weekend now. Getting a straight answer out of Linden Labs isn’t very likely before Monday afternoon in California.


  12. One more thought on what may be happening here: We’ve all been focusing on regulation and/or commission fees, but could it be that Linden are having a hard time maintaining the value of their currency? If users are slowly bleeding away from SL, people may not want to hold L$ much any more.

    If Linden Lab control the only exchange, they can do what the Soviet Union did in its dying days and maintain an “official rate” much higher than what people would pay for their currency in a free market.


    1. The exchange rates still visible on the VirWox homepage appear to be somewhat different to the market rate on the Lindex. And the difference is consistent with this theory.


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