Linden's New Policy
At the start of January, Linden Lab unveiled a new policy on virtual institutions who offer "interest or other kinds of monetary return." In short, Linden Lab now requires virtual financial institutions to have a real-life financial license in order to keep operating in it's Second Life virtual world. The Second Life financial community feels that Linden Lab points to lawyers to explain how the new system would work out for them, as has happened many times before.
Failure of the Second Life Financial System
Linden Lab itself had quite a large package of reasons to introduce the new banking policy: The failure of virtual banking giant Ginko Financial in August last year - costing the Second Life committee an estimated $ 700,000 to $ 900,000 real-world dollars, as the ATMs where just closed and Ginko bonds declined in value and are now worth about 2-3% of their original value - and the failure of Midas Bank - which cost the community an estimated $ 25,000 - and the failure of many other banks, which cost the Second Life community somewhere between $ 1.2 million and $ 1.5 million.
And it's not just banks: there currently are about five active stock exchanges in Second Life. One has already failed, with no one getting their investments back, costing the community about $ 5,000 to $ 6,000. Many other failures have not been documented, and estimated on the number of failing financial virtual institutions vary a lot, as there is no sound measurement system of business activity in Second Life.
There is no official financial authority regulating Second Life's financial industry; the only official authority is Linden Lab, which usually does not interfere with the activity of residents. There are several unofficial authorities, such as the Second Life Securities and Exchange Commission, better known as the "SLEC" within Second Life, which was supported by the majority of the big virtual financial institutions in Second Life, until it's founder started an exchange himself.
The lack of having a regulated financial industry has resulted in an extraordinary amount of failures and very high interest rates, with several banks offering an interest rate in excess of 50% per annum. Most CEO's of virtual banks do not possess any kind of experience in the financial industry and they do not comply to real-world laws.
Linden Lab Speaks: It's becoming too bad
Linden Lab, Second Life's developer, usually does not interfere with the actions of residents. However, exactly that is happening more frequently than ever, as Linden Lab acknowledges the legal risks an unregulated financial industry and illegal gambling are to them. Linden Lab now seems to ban industries which are a legal nuisance or are close to becoming that for them, which is a good thing as most of these industries are either illegal in the real world - and that has it's reasons - are not properly managed or are unregulated and therefore are a risk - not only to Linden Lab itself, but also to the community.
The Countdown to a Regulated Financial System
By now, most virtual banks have shut down operations. However, some, such as L&L Bank and Trust, are in the process of applying for a real-world banking license. With a capital of less then $ 100,000 in most cases, there's little chance that these organizations will be approved as owners of a real-life financial services license. The rules to get such a license are too strict to be able to comply with them in most cases, and the minimum capital requirement is too high. Some banks take the creative approach: They apply for a banking license in a country with not-so-strict financial services regulation, such as Nigeria and Australia.
If Linden Lab is able to control the activity of the financial services providers that still exist, there's a good chance that the virtual world of Second Life will have a regulated financial industry within a year.
