Should virtual financial institutions be subject to real-world regulation?
Virtual World Second Life recently prohibited unlicensed real-world entities from providing in-world banking services after at least one high-profile in-world bank failure. As the proliferation (and legitimacy) of virtual worlds is on the rise, should real-world financial regulations apply in the metasphere, or will this be an inhibitor to innovation and growth?
Clarification added February 26, 2008:
FYI - For those who might be interested, the Virtual Law Conference is being held in NYC April 3-4, 2008. It's held concurrently with Virtual Worlds 2008.
http://www.virtuallawconference.com/
http://www.virtualworlds2008.com/
Good Answers (2)
Benjamin D
Attorney at Pillsbury Focusing Practice on Virtual Law, Internet Law, Intellectual Property Law, and Litigation
It isn't really a matter of that much debate. "Virtual transactions" are just shorthand for using something other than dollars to do business, and as such, actually are subject to real world regulation (at least to the degree the currency has value). If I were printing "Benbucks" on a photocopier and using the to run a "bank" in my garage while my buddy ran an exchange in my driveway where "Benbucks" could be converted to dollars, we'd not have much trouble saying me and my buddy were subject to regulation. No difference here.
(FYI - I'm one of the advisers for that conference. We've got a great line up of legal talent speaking, and I hope you can join us).
Frank G
Compliance Director at L-3 Communications Global Security & Engineering Solutions
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Dear David,
In a word -- YES! As someone who has to test the effectiveness of internal controls over financial reporting, I use both "real" documentation (paper) and "virtual" documentation (e-mail, scanned paper documents, programmed automated controls, etc.) to ensure compliance.
Virtual financial institutions have the very same duty to their customers as the bank that has been in the same location downtown for 100 years. One may argue, in fact, that virtual financial institutions are more likely to attempt fraud because one does not know where to go to find documentary evidence of compliance with banking laws and regulations. I know where to find bank statements for my company. I know whom to ask about investment strategies for my company. Where do I find the books and records for a virtual financial institution? Whom do I ask about the institution's investing strategies and risk assessments?
I might go so far, David, as to say that virtual financial institutions may require MORE regulation and scrutiny than "real" institutions.
Regards,
Frank
More Answers (8)
This is not a legal opinion or legal advice and should not be relied upon as such:
Any system -- whether a MMORPG or otherwise -- that permits financial transactions is at risk of being abused by money launderers and terrorist financiers. Systems that permit anonymous transactions are particularly vulnerable for abuse. Issues that needs to be examined in addressing this question include how to minimize the AML / CTF risks and address concerns about reporting (e.g. SARs).
Thomas P
Head of UK Hotel & Leisure Group at European Law Firm, CMS
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If virtual money equates to real money, then arguably virtual players are just at risk of being exploited by unlicensed deposit-takers as they would be in the real world.
But then, you could argue that anyone playing the game in an (almost) completely unregulated virtual world should know better than hand over virtual money with real value to an unknown and unaccountable virtual bank. At what point do we need legislation to protect individual's from themselves?
The big question though is which country's laws would apply, anyway?
John A
SAP Technical Team Lead
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There is an argument that the controller of the virtual world has a vested interest in ensuring that customers are not harmed and therefore continue to be customers. Therefore regulation is not required as this self interest is sufficient.
However this wouldn't nessesarily give any incentive to prevent money laundering. In fact if the virtual world controller was taking a percentage of transaction fees they could profit from it.
Therefore I see no way to avoid real-world regulation.
Besides if there are consequences in the real world then it's real isn't it? Putting a cute 3D virtual reality interface on it doesn't change the nature of the transaction.
Susan S
Commercial lawyer, Singletons, www.singlelaw.com
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I was just looking at this issue in a sense in something on line for children where they get points, not money. If there is real world value on Second Life then potentially it may already be or should be regulated. For example in the UK no one can call themselves a nurse or a solicitor (UK attorney) unless they are so qualified so if I were a non lawyer or not a nurse and I paid for a second life nursing or solicitor stall or whatever they are called (I don't play it) then subject to jurisdictional issues I could breach that rule perhaps if I were holding myself out as that.
In general though the less regulation the better and those running games/sites/worlds usually reserve themselves quite wide rights to bar people at their discretion and would therefore self police it.
Marc A
Product, Program and Project Manager
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No - The regulation should be virtual too.
David L
Financial Services and Bankruptcy Attorney - Chicago, Illinois and Wisconsin
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This is not a legal answer since this is not a legal question.
Given the fact that Second Life is an environment and essentially a massive multi player role playing environment, real world regulation does not apply to activities there. The "moderator" of the environment can essentially set the rules.
That's not to say that Linden can't use real world law to enforce their dealings with their participants, since those dealings are in the real world. And they do.
Joseph W
Quantitative Finance Research / Astrophysics
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Almost all money is virtual and if your goal is to prevent the "bad things" that led to regulations in the real world, then you are going to have to apply them to virtual communities.
Cathy C
Attorney, Mediator, & Conflict Management Consultant
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Should the goal of a virtual world be entertainment or imitating reality? There's a bigger question lurking out there. One of the first questions I ask a client is what is their goal. If the goal of the Second Life community is to enjoy the virtual experience as a form of entertainment, there are going to be problems associated with the ability to convert $Linden to $US. Bringing the taint of the real world into that equation creates potential necessity of real world regulation. (The answer to that question being a legal issue that is emerging and not fully answered by the courts.) If the real goal/purpose of virtual worlds is to imitate reality, all of the ugliness that goes with it will seep into the virtual world experience. The question, in my mind, is not about "innovation and growth" but about the ultimate goal of the experience. I think Linden has stepped away from this question and taken the attitude that it will eventually be answered by the virtual community and/or the legal system, but Linden forces the question by allowing currency conversion. An interesting process to watch!
