Could Linden Dollars become real money?

Linden Dollar: Another Virtual Currency Affected by FinCEN.

Bitcoin has been in the news recently. But bitcoin is not the only virtual currency. Virtual currencies, in one form or another are here to stay.

When U.S. Treasury Department’s enforcement arm, FinCEN, issued its interpretive statement, it recognized this much. The scope of this document covers all virtual currencies, centralized and de-centralized alike.

In an earlier article, I discussed the new regulatory reality faced by bitcoin and its operators. By way of quick summary, FinCEN now differentiates between user, administrator, and exchanger. This categorization for decentralized virtual currencies is imprecise because there is no clear boundary where user ends and administrator begins.

On the contrary, for centralized virtual currencies, such as Linden Dollars, these distinctions nicely track the existing framework.



Linden Dollar is a virtual currency used in Second Life. Second Life is an online virtual world created by Linden Lab. Essentially, it is a game where players interact with their world through “avatars.” What makes this game special is its vibrant virtual economy. Players can buy and sell virtual real estate, claim intellectual property, etc.

At the center of this economy stands the Linden Dollar. The only way to buy or sell anything inside the game is with this currency. Players can convert their real world currency to Linden dollars either at Lindex – an official currency exchange; or at several third party exchanges.

Before FinCEN issued this guidance, the only rules that applied to Linden Dollar were those promulgated by Lind Lab through its Terms of Service. This is no longer the case. Terms of service still apply, but not to the relationship between Linden Lab and the government.

What, If Anything, Changed for a Casual Second-Lifer?

Probably nothing. Absent further clarification from the Treasury Department, existing terms of service still control the legal relationship between the user and the issuer of Linden Dollars. Section 5 of Linden Lab company’s Terms of Service emphasizes that Linden Dollar is a license token as opposed to currency. “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.”

An average user probably does not care about all this legal jargon, so long as he is able to buy and sell his Linden Dollars at will.

Linden Lab’s Terms of Service however, will not prevent the government from classifying Linden Dollars as a virtual currency. That classification carries significant consequences.

What Changed for Linden Lab?

1. Government’s Definition of a Linden Dollar.

FinCEN now considers Linden Dollar as a convertible centralized virtual currency. The guidelines define virtual currency as one that either has value in real currency or one that can be used to buy goods and services. Additionally, a centralized virtual currency is one that has a central repository.

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 (a buck will buy you about 270 linden bucks); and people buy good and services with it.

2. Why does it Even Matter if Linden Dollar is a Virtual Currency or not?

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.

At this point Linden Lab must be considering their options. One option is to abandon the Linden Dollar altogether and just deal in cold hard cash. The upside of that decision is that it would spare them a lot of grief in the form of FinCEN reports. The downside of that is that is like turning off a printing press that prints money. And who in their right mind wants to do that?

(This column reprinted with permission from the Modern Payment Systems blog.)

Alex Kadochnikov

Alex Kadochnikov is a partner at Gill & Kadochnikov. His primary focus is on commercial litigation, counseling start-up entrepreneurs, and employment-based immigration. He is also an expert on the rise and proliferation of virtual currencies and their effect on the legal and financial landscape.

17 Responses

  1.' bladyblue says:

    I assume that this is also going to effect Anshe Chung’s Virtual Currency business and the smaller virtual worlds.

    • Anshe’s company, being located in China, might not be under the same legislation… but the US might forbid her to offer services in the US. It’s an interesting question.

  2.' KeithSelmes says:

    I wonder how that affects others providing in world tokens or credits ?
    And internationally, since this is in the US but the situation is global

    • I think this announcement is more of an indication of things to come. Someday, in the future. As virtual currencies get bigger, more and more regulators will start looking at them.

      I don’t think OpenSim-based companies necessarily need to start worrying about this now. But if their long-term business model depends on a particular kind of virtual currency, they might want to make contingency plans.

  3.' AviWorlds says:

    It all depends on the wording your grid uses. And instead of cash out feature a grid should use REFUND. People buy the TOKENS or CREDITS to play inworld and they can be REFUNDED. And as long as the TOKENs or Credits cannot be used in real life for purchasing goods.
    That is what AviWorlds grid uses. We call it a TOKEN or CREDIT and we do refund it to our users if they request a REFUND for a small fee we charge for that type of request. Just dont call your TOKENS or CREDITS a CURRENCY.

    • I think the point Alex was making in his column is that it doesn’t matter what wording a grid uses. If it looks like a currency, and acts like a currency, then it is a currency.

      The two tests seem to be: can you buy goods and services with it, and can you convert it to cash.

      I think regulators have a lot of bigger targets to go after, first, before they come after small OpenSim grids.

      Grids can also implement PayPal or PayPal Micropayments on their grids to avoid the issue altogether, or use a third-party virtual currency like OMC and let them deal with the legal issues.

      •' AviWorlds says:

        I am sorry but CURRENCY does not even provide PROFITS to any grid and neither SL. If it does it is a very low margin and it is reported anyway.
        For example. I sold 10000 AVs to joe blow. That 10000 AVs is worth $40.00. That $40.00 goes to AviWorlds bank or paypal. AviWorlds must keep the $40.00 in hand at all times to back up the 10000 AVs sold because someone along the line may ask for a REFUND. I dont call it CASHOUT.
        So if someone asks for a refund of 10000 AVs I must have it and therefore I did not make any profits on it.
        If AviWorlds gets to a point that we are so big and we have to keep millions in hand in order to back up AviWorlds TOKENS yes offcourse that would be NATURALLY reported to the IRS here in the USA.
        Any profits made is reported automatically.
        That does not mean we cant have the TOKEN sales or REFUND it if someone desires.

        There is no way to avoid any issue that involves MAKING A PROFIT on something you sold.
        You sold you made a profit then GOVERNMENT gets involved and takes its share SPECIALLY EUROPEAN GOVERNMENTS that are leaning too much towards SOCIALISM then your TAXES are going to be even higher like a VAT tax LL already charges regions owners from EUROPE.

        So if you use PAYPAL, OMC, L$ or whatever….You made a profit on it then it is to be reported.
        Does not mean you cant use none of these currencies or even have your own. Just report it. Prove you did or did not make a profit and there you have it.

    •' Brian Preble says:

      Did you read the FinCEN report? It states that any organization that sells virtual currency for real money (national currency) is considered an MSB. It has nothing to do with users converting back to cash.

      Linden Lab could terminate L$, or eliminate the ability to buy and/or sell it, but that would break the economy and drive merchants like myself away. They could also switch to Bitcoin or PayPal transactions for everything. Easier perhaps, but it still leaves them with a lot of paperwork. Whatever happens, I’ll be keeping a close eye. This is my livelihood at stake.

      •' AviWorlds says:

        Brian the whole REPORTING game is if or when you made a profit on it. LL will have no problems reporting and I am sure they already do. But that would not be a problem. If LL makes a profit it is reported and they pay taxes on it.

        That is even already passed on to the users. There is also a fee to buy or sell the L$ dollars.
        People need to understand that anything that involves a profit is taxed. But that does not mean because you make a profit on it you cant be in business correct?
        So do not worry about it. Unless YOU yourself make a lot of money then YOU NEED TO REPORT it also.

  4.' Benjamin Franklin IV says:

    I can’t believe your all still discussing cash, money, currency, etc. the opensim dev team strictly states it is a vulnerable production environment, this is why they do not offer you a currency module in the out of box release. I feel confident open simulator after this many years of “development” and it’s is still in its “virtual diapers” will only amount to media hype.

    • I haven’t heard of any security issues so far with OpenSim virtual currencies.

      Currently, there are three main options.

      1 — A commercial grid owns all its own servers and runs the currency itself. Grid users never have access to the server code, so the currency is reasonably secure. (This won’t work for open grids where people can connect regions they run at home or on their own servers.)

      2 — A grid uses PayPal, where the final payment confirmation step takes place on a website. This option is as secure as any other kind of Web-based payment. Meaning, pretty secure.

      3 — A grid uses OMC, where again the final payment confirmation step takes place on a website. Here, the security is as good as the OMC website — since the guys who run OMC also run Virwox, one of the biggest virtual currency exchanges out there, doing millions of dollars of business, it’s probably reasonably secure as well.

      I would still recommend that people don’t keep large balances in a virtual currency — any virtual currency, including Linden Dollars, for the following reasons:

      * You can, at any time, lose access to your account and your money, for a wide variety of reasons.

      * A grid can, at any time, change the value of its currency, change the way cash-outs work, or eliminate cash-outs altogether.

      * A grid can go out of business. This happens to small grids a lot, but has been known to happen to large companies, as well. If that happens you may, or may not, be able to get your money back.

      •' Minethere says:

        nods…I remove my paypal money when it goes over 100 usd.

        Having seen many internet companies come and go over the years…it’s a prudent thing to keep low balances-))

  5. Ener Hax says:

    anything that develops its own currency, coupons, or whatever that can be both bought for money and then “cashed out” for real money is going to be considered money by all governments. taxes have been around for a very long time and no government wants to lose out on taxes

    •' WhiteStar Magic says:

      Excellent Post Ener. In the UK first then the rest of the EU, you have to pay tax on PayPal withdrawal’s. The IRS is doing what it’s being told to do by the US Federal Government, this should come as NO SURPRISE ! There are still some Nations which do not have such taxation on P.P. or Virtual Currencies but they are a dying breed. One only has to look as far as the news, wherever you are to see why the Governments are doing this and the debt loads being carried.

      If you are a US Citizen, you should be far more concerned over the President’s idea of reducing Social Security which every working American has paid into, which every retiree is collecting and is entitled to. That affects over 400 Million individuals in the States.

      If you are a citizen of another Nation, like I am, then we all have much bigger issues to deal with than worrying about IRS decisions, unfortunately they do tend to set precedents, which others (Nations) look at in regards to bilking the average Tax Payer out of more monies.

      There is an old saying which is in a different language and translation is not so simple so I will paraphrase it: ( Money is only worth as much, as the faith you have in the Nation and it’s systems, that issues it. ) It is paper after all, based on that faith and it could very easily become “toilet paper” instantly.

      I’m certain some won’t like my comment and even chose to troll or be miserable about. But I believe a dose of Reality Check is warranted because people are placing faith in dubious matters & issues like this BitCoin currency or Linden Dollars which is only supported by a single Corporate Entity… If Linden Labs bankrupted tomorrow, you would be POOCHED big time and lose whatever “real” monies you have invested in it. Consider that !!!

  6.' AviWorlds says:

    If regulators target small OPEN SIM grids; Nothing can be done against them. First of all most OPEN SIM grids do not make any profit. If they make something I am sure something that is called OPERATIONAL COSTS and EXPENSES will probably take care of any profit margin chance it had.
    If an open sim grid makes sufficient PROFITS then it is making money and it should not be a problem for the CEO of that grid or CFO of that company to REPORT IT and pay taxes on it.
    So if you are small and are probably paying from your OWN pocket to keep your grid afloat; that is called EXPENSES or LOSSES. IRS or any taxation department WONT BE ABLE TO TOUCH YOU.

  7.' AviWorlds says:

    OPERATIONAL COSTS, EXPENSES, PROFIT MARGIN, LOSSES all this is part and have their weight on how much a business make and should report.

  8.' Susannah Avonside says:

    Of course governments are going to take
    an interest as more and more of us resort to the internet and the
    global economy as part of our everyday lives. The UK is presently the
    nation whose economy is the most internet dominated in the world,
    wwith predicitions that interent business will count for 23% of GDP
    by 2016. The majority of users at the present use PayPal, but there
    are increasing numbers who have etchical concerns about that system,
    and so are looking for alternatives, with systems like BitCoin being
    one of them.

    A virtual currency in a virtual world is no
    different, and if the metaverse is ever to be a viable business
    environment, (which is, after all why Hypergrid Business exists,
    though at present the metaverse, in a business sense is a bit like a
    solution looking for a problem) then it will inevitably involve the
    development of an economy. In Europe we are already paying tax on out
    purchases of Linden Dollars, and also as a result on any OMC currency
    we buy through VirWox, if we exchange Linden Dollars. In the UK this
    amounts to 20% of the value of the RL money we use to buy ouor

    In terms of cash outs, for a while now it has
    been neccessary to inform the tax authorities of any profits made, so
    that tax can be levied accordingly. I should think that the number
    of people this affects, (in the UK at least) is extremely small, as
    SL isn’t at all profitable for the majority. I would hope that those
    who are at present relying on their virtual earnings for a living are
    seriously looking for something more substantial.

    WhiteStar Magic makes a good point
    about virtual currencies, but his point about a ‘single corporate
    entity’ could equally be applied to the Bank of England or the
    Federal Reserve in the USA. We should all be thinking about this
    issue, as in essence all modern RL currencies are more virtual than
    real. Since the banking crisis in 2008 many of us have become
    sceptical about money and by association, banks and politicians.
    Both are out to screw us, one way or another, either by taxing us in
    the case of politicians, or through charging us huge sums of money,
    to use our own money in the case of the banks, who then go cap in
    hand to the politicians for a taxpayer funded bailout when they screw
    up. Only one of the countries affected by the present financial
    crisis refused to bail out their banksm and that was Iceland, which
    is now back in economic growth, which is more than can be said of the
    UK which is targeting it’s most vulnerable citizens as scapegoats for
    it’s financial woes whilst allowing UK bankers to be rewarded with
    obscenely high salaries and bonusses.