SL ToS changes: Lab contacts TPEs; some get account suspensions

Update 17th May 18:45 BST: The Lab has launched an “Authorised Reseller of L$” programme. Initial report here.

Update: 17th May: Gwyneth Llewelwyn provides an interesting and thoughtful analysis on the entire situation. DXEchange has indicated it has received LL’s e-mail of a potential solution, and is considering the matter.

Update: 16:55 BST: The e-mail to TPEs is apparently light on details, but includes the following statement: “We have approached several organizations to discuss a potential solution that would allow them to serve their customers within the bounds of the updated Second Life Terms of Service. We will soon blog to share more information about this solution, which we plan to extend more broadly as well.” So it would appear that the “potential solution” may initially be made on a limited basis.

MBKash has also indicated it has received the e-mail from Linden Lab, as has Gyndex.

secondlifeThere appears to be new movement on the situation involving third-party exchanges dealing in Linden Dollars following the recent change to the Second Life Terms of Service, and movement of a most confusing kind.

On the one hand, blog posts have started appearing on various exchange websites noting that they have received further information from the Lab, and that matters may be resolved in a manner which would allow them to resume the provisioning and exchange of Linden Dollars to Second Life users.

ToS Change

On the other hand, some exchanges are indicating that the SL accounts they use to handle their in-world dealings have all been suspended by the Lab.

On May 7th 2013, Linden Lab updated section 5.3 of the Terms of Service, which deals with the buying / selling of Linden Dollars and third-party exchanges (TPEs). While the ToS appeared to indicate that while such exchanges were not “authorised” by the Lab, the re-wording gave the impression that users could still use such exchanges while re-emphasising that doing so was entirely at the user’s own risk.

However, a blog post announcing the updated ToS change stated the that use of third-party exchanges was “not allowed” under the new ToS, and shortly thereafter TPEs started to receive e-mails from Linden Lab ordering them to cease dealing in Linden Dollars and also to remove / disable all in-world ATMs from SL with immediate effect. Third-party viewer developers were also contacted and told to remove any links to TPEs within their viewers.

As well as leading to a lot of speculation as to the reasons behind the move, the combination of mis-matched ToS update and accompanying blog post, together with the e-mail to TPEs has led to a lot of confusion and upset.

The Good

However, a number of exchanges have indicated that they have had further communication from the Lab which may allow their to resume operations. These include, at the time of writing, VirWox, CrossWorlds and Virtuateq (the latter’s update is in Dutch).

The VirWox update reads in full:

Good News: Linden Lab has approached us with a potential solution that would allow us to serve our customers within the bounds of the updated Second Life Terms of Service. We are in discussions with them and look forward to being able to share more information very soon.

Similarly, CrossWorlds also  reported:

We have received an e-mail today with regards the problem from Linden Lab. It informs us that there may be a potential solution that would allow us to serve our customers within the bounds of the updated Second Life Terms of Service.

As soon as I hear more I will let you know… and fingers crossed we can fix this problem.

It is not currently clear how many other exchanges have received similar e-mails from Linden Lab, which appeared to start issuing them late on Wednesday the 15th May, PDT, and so it is possible that updates may be forthcoming from other exchanges as the day goes on.

Quite what the “potential solution” might be is unclear. There has already been some speculation that it could be for TPEs to register as MSBs with the US Treasury Department’s FinCEN or perhaps providing evidence that they are properly registered under / adhere to any corresponding requirements within their country of operation.

The Bad

Elsewhere the news is not so good. In the early hours of the morning on Thursday May 16th (European time), Jacek Shuftan reported on the Podex blog that:

Tonight  at 2.00 o’clock all my accounts related to Podex Exchange were put on hold by Linden Lab.

I really believed that the new ToS is meant to protect avatars from the risk of fraud.  That was my goal as well so I was looking forward to cooperate with Linden Lab. I could not imagine that over one night they would want to destroy our cooperation and everything what I built for 6 years of my virtual life. They did.

I believed that they would answer my requests to start discussion. They did not.

Similarly, DX Exchange are also reporting they have had accounts suspended:

Our avatars for our exchange activities are put on hold by Linden Lab, so there is no room for interpretation that Linden Lab wants to enforce the new TOS effective immediately.

That means that we are closed permanently as of today.We expect Linden Lab to enforce the TOS on all other exchanges today.

Defying the ToS?

There has been some speculation that Podex accounts may have been blocked as a result of a decision by the exchange to continue to offer L$ in defiance of the ToS change  / e-mail, with Podex citing the 30-day “grace” period prior to changes to the ToS coming into force.

What is interesting here is that DX Exchange appears to have suffered the same fate as Podex (at least for the moment) after they had initially suspended operations, and then, according to Hypergrid Business, decided to follow suit alongside of Podex and others. This move apparently led to Bart Bockhoudt, co-owner of Gyndex indicting to Hypergrid Business that he would be objecting to the move by DX Exchange and seeking further clarification from the Lab. Whether this prompted some exchanges receiving account suspensions or not is also unclear.

However, one of the other exchanges which also opted, according the Hypergrid Business, to continue to offer Linden Dollars under the 30-day grace period cited in the ToS was CrossWorlds – who are one of the exchanges who have received the e-mail citing a “potential solution” from Linden Lab. Again, whether this is indicative that the likes of Podex and DX Exchange have / will also receive similar e-mails, and that the current account suspensions will be lifted / are the result of confused communications within the Lab, remains to be seen.

Still Confused

Overall, the result of these moves appears to leave the entire situation as confused as ever, and doubtless open to further interpretation and speculation. Expect further updates  as / when matters become clearer either via the Lab or through contact with the various exchanges.

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14 thoughts on “SL ToS changes: Lab contacts TPEs; some get account suspensions

  1. I sometimes get the feeling that Peter Ludlow is right when he says that LL follows the “Greek God” model of governance, i.e. a model where virtual world owners don’t follow a consistent systematic set of rules and policies to deal with issues, but rather intervene according to their mood of the moment on an ad hoc basis – and, sometimes, even when there is a set of rules (SL’s ToS and CS), they interpret and apply them rather arbitrarily.

    Of course, I don’t know the specifics of the Podex and DX Exchange cases, but I wonder if LL’s decision to suspend their accounts is fully justified. A little more transparency on LL’s behalf wouldn’t hurt, I think.

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  2. Looks like Linden Lab is playing “Roll the dice” with exchanges. it sounds so random.
    Also proof that LL not know whats going on inworld and what the users want and need.

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    1. It may not be “roll the dice” – merely a case that other exchanges haven’t publicly acknowledged the receipt of the Lab’s e-mail as yet, hence why I expect to be updating this report over time.

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    2. Recommended reading: FTW (For The Win) by Cory Doctorow. There are economies in “gamespace” that rival or exceed the GNP of some countries. Linden Labs is apparently ruthlessly exterminating the competition, to maximize their profits.

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      1. It’s been speculated in these pages (see ToS changes, FinCEN and speculation) that the Lab’s move might be motivated by a desire to secure additional revenue channels which currently flow through TPEs. However, if they are about to permit at least some TPEs, it’ll be interesting to see what strings are attached (if any), or whether it is simply a knee-jerk reaction to FinCEN’s eyes being cast across digital currencies and LL’s desire to make sure they are not indirectly left exposed as a result of the actions of others as a result.

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  3. Given the fed’s recent action again Bitcoin exchange Mt Gox and the warrant sent to Dwolla, no doubt LL is going to take the smart road and continue to halt or severely curtail the use of the exchanges regardless of the complaints of their users. Until the feds figure out the legal issues arising from digicurrency, LL would do well to keep Lindens in the ingame voucher category and not risk becoming the test case for digital currency.

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    1. The Mt. Gox / “Mutum Sigillum LLC” / Dwolla situation is interesting, as it appears to be a matter of what might be read as frauduent activity – or at least a possible attempt to decive – inasmuch as the warrant refers directly to the failure of “Mutum Sigillum LLC” (a subsidiary of Mt Gox, although both appear to be owned by the same individual) to correctly itentify itself as a Money Service Business (MSB) in 2011, while engaged in the transmission of real-world funds resulting from bitcoin trading.

      Certainly one to watch in general.

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  4. Linden Labs does seem to have a history of ignoring their own 30-day rule when it suits them, and with no real explanation.

    The new interpretation of the FinCEN regulations included a 6-month grace period, which still has roughly four months to run, so it is not obvious how it might have forced Linden Labs into hasty actions.

    Ongoing fraud is a possible motive for immediate action. I can even imagine a situation where those investigating the fraud don’t want to publicise the existence of the investigation.

    I don’t know how big a business these exchanges are, individually, but some of them certainly turn over enough money that unleashing the lawyers is an option. Following the 30-day rule would have been much less questionable.

    1: Linden Labs say the L$ is not money. The US Government say that in some ways it is. Now accounts are being suspended, is Linden Labs unlawfully cutting of access to somebody’s money?

    2: We had to click on an “accept” link to be able to get at our in-world resources, which for some people have significant value. This is getting into the territory of a “Contract of Adhesion”. Is the TOS an enforceable contract as a consequence?

    3: This is a novel case. And even with the sort of case which a competent lawyer has seen many times, the details still matter. You can boiler-plate a contract, you cannot so easily boiler-plate a legal opinion on a contract. Finding a lawyer competent to advise you takes time. Getting the good advice from the lawyer takes more time. This may explain why it took a couple of months after the FinCEN reinterpretation to be issued for Linden Labs to take action.

    4: As long as Linden Labs allow customers to get money out of SL, they may be FinCEN liable. Amazon, who also advertise, sell, and deliver goods for third parties, are registed as an MSB. Does the operation of the Marketplace still make Linden Labs an MSB? Is the Second Life economy compatible with avoiding registration?

    5: All of these questions can only be answered by lawyers, who may tell me that I don’t know jack. And Linden Labs may be scared getting a formal answer to the questions in a court. Giving the TPEs their 30 days might keep it out of court, but a company which is turning over over 9 billion L$ a year needs time to close down its operations. You think lawyers are slow? Add accountants to the mix.

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    1. Your point on FinCEN’s grace period for MSB registration is one I’d noted, and it is the one that keeps me coming back to the thought that there was more here than “just” the matter of the publication of FinCEN’s guidelines. Given that LL are now seemingly rolling-back on the move, it would appear there may have been something of a knee-jerk reaction to a situation beyond FinCEN that purely concerns over where FinCEN are heading. It’ll be interesting to see what comes out of further communications from the Lab and what hurdles (regulatory or otherwise) they point to for TPEs to clear in order to resume trading – if any at all.

      Neverthless, one cannot escape the view that whatever happens, the entire situation has been badly handled on the Lab’s part. Why no clear, more informative communications with TPEs if that issue is with the FinCEN guidelines?

      As to the contract of adhesion, LL may feel that that are on safe ground here, were it to be cited in court. In the Bragg v. Linden Lab case of 2006/7, while Judge Eduardo Robeno agreed and held that the Terms of Service was a contract of adhesion at the time, he also ceveated it as being so by noting that a claim that a contract is one of adhesion can be defeated if there are “reasonably available market alternatives” available to the weaker party. In 2006/7, this was hardly the case. However, in 2013, there a numerous over virtual worlds available, and many of them operate on more-or-less the same lines as Second Life. Of course, Rboeno’s rulings were in terms of virtual property ownership, but (and allowing for IANAL), LL’s attorneys might feel confident in pointing to the caveat Robeno placed on the ToS as a contract of adhesion and arging this is no longer the case.

      What was it Confucious said about interesting times? Could almost be the new tagline for involvement in SL…

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      1. “Reasonably available market alternatives” is one of those phrases which would be applied to every case where the issue comes up. It’s something to be used in coming to a decision. I’m not in the USA, so I could easily be wrong on this, but if you’re already involved with SL and using the L$, I find it hard to see how there is an alternative.

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        1. It doesn’t matter if you are involved in SL and using L$. The fact is that a reasonable argument can be made that there are alternatives available, and as no-one is pro-actively forcing you to remain in SL and the L$, there is absolutely nothing preventing you from seeking-out and using those alternatives. Judge Robeno added no strings to his findings in this regard.

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