Can currency exchanges survive with OpenSim grids?

Today, two commercial grids — AviWorlds and Avination — announced their continued support of third-party currency exchanges.

The announcements were in reaction to yesterday’s Linden Lab decision that third-party exchanges would no longer be authorized by the platform. As a result, 11 exchanges have already announced that they are ending Linden dollar trading, including VirWoX, a major European exchange and backer of Open Metaverse Currency. The OMC is currently used on about 30 different OpenSim grids.

“Avination in cooperation with the various exchanges will continue to allow many different forms of payment and cash out options for those all around the world,” Avination said in its announcement.

Avination’s C$ virtual currency is currently traded on VirWoXEldex and Podex exchanges.

AviWorlds – which is currently down for a major server migration — took this opportunity to invite third-party exchanges to take a look at their grid.

“Attention VirWoX and all currency exchange companies,” the grid said in a Tweet today. “You are welcome in AviWorlds!”

Second Life residents use third-party exchanges instead of the official LindeX exchange for a number of reasons. In particular, many foreign users can not easily transfer money to the LindeX.

“In my country, the ATM network operator (a consortium of all Portuguese banks) exchanges Euros for L$,” said virtual worlds blogger Gwyneth Llewelyn in a comment on Inara Pey’s Living in a Modemworld blog.

In addition, LindeX transactions can also be more expensive, and take longer to go through.

As a result, the Austria-based VirWoX exchange reported that it it traded 9.6 billion Linden Dollars last year, the equivalent of about US $38 million.

There’s enough money in the currency exchange business that Singapore-based First Meta Exchange received $466,000 in funding last year from Silicon Valley business accelerator Plug and Play Tech Center and Singapore’s National Research Foundation. (Read full Forbes article here.)

First Meta has already announced the suspension of trading of Lindens, but investors shouldn’t be too worried just yet — First Meta also trades  IMVU Credits, Toricredits, Frenzoo Gold Coins, FriendsHangout Tokens, and NuVera Notes.

Plus, it might be adding AviWorlds’ currency to its list.

“We’d be interested in discussing adding your currency to our exchange,” First Meta CEO Autumn Radtke told AviWorlds in a comment on Hypergrid Business yesterday.

If third-party currency trading is a critical issue for some residents, then we might see people moving to Avination or AviWorlds or other OpenSim grids instead.

However, there might not be enough business on those grids to sustain exchanges that previously dealt only with Linden Dollars — the volumes just aren’t there.

VirWoX, in particular, is in a very precarious position. The amount of trading it sees in OMC and Avination C$ is a tiny fraction of the trades in Linden Dollars.

It’s the ecosystem, stupid

The days of individual companies failing or succeeding completely on their own are long gone — if they were ever here in the first place.

Today, it’s all about the ecosystems.

How many developers and accessory manufacturers are creating for the iPhone and iPad versus, say, the new Blackberry smartphone?

Twitter and Facebook are valuable not just because of the tools they offer, but because of all the third-party applications and services that access their platforms.

Where would Second Life be without its merchants, creators, performers and myriad of other businesses?

Changing a terms of service with no warning, in such a way that it destroys the business models of companies providing valuable and useful services not only shrinks the ecosystem but may make others think twice before joining the ecosystem in the future.

If my business was solely dependent on Second Life, I know that I myself would be making contingency plans right now if I haven’t yet, or accelerating the deployment of plans already in place.

The ironic thing is that Linden Lab still has the opportunity to go in the opposite direction, to expand instead of contracting.

Instead of shutting down third-party exchanges, the company could have instead went all-out with the currency, expanding the API to other grids. With the OMC getting little traction right now, there is still an opportunity for the Linden Dollar to become the defacto currency of the hypergrid, the PayPal of the metaverse.

maria@hypergridbusiness.com'

Maria Korolov

Maria Korolov is editor and publisher of Hypergrid Business. She has been a journalist for more than twenty years and has worked for the Chicago Tribune, Reuters, and Computerworld and has reported from over a dozen countries, including Russia and China.

  • Hannah

    “VirWoX, in particular, is in a very precarious position. The amount of
    trading it sees in OMC and Avination C$ is a tiny fraction of the trades
    in Linden Dollars.”
    So, in a word: “no”.

    • Bit Coiner

      Han Held, their volume in C$ is low primary because they restrict deposits for long-term customers (like me) to only 100k C$ a week. I’d be trading 200k a day if they allowed me to. If they increased it they’d attract currency traders and liquidity would be far better as well.

  • Since even PayPal can’t seem to clear the regulatory hoops to do this kind of thing in a lot of countries, and even then they have to do a lot of painful identity verification, it’s hard to see how Linden Lab could without putting serious resources into it.

    I suppose it might make sense if we get huge amounts of growth in the hypergrid. They could also do other centralization-friendly stuff like running identity and asset services. But there’s not much sign of that kind of growth right now, and the big grids seem to like to do their own thing, hence the piddling little volumes on OMC.

    • Maybe they just stop using the L$ and adopt Bitcoin instead 🙂

      There, problem solved.

      • I definitely think Bitcoin makes sense for OpenSim, because we want people to be able to move between grids and take their balance with them, and it’s better if we can do that without entrusting money in a single company that may suddenly get shut down for regulatory reasons. I’ve written a money module to help people do that, and I’m setting up some additional services to make it easier. Hopefully we can do client integration at some point as well. (My module opens a browser window for payments, which obviously isn’t the optimal user experience here.)

        For Linden Lab it might make sense just to have an option to cash in or out on LindeX using Bitcoins. That would work around a lot of the problems that the third-party exchanges have been solving for people up until now. Where the regulators seem really interested in things is where you come into contact with the regular banking system (take US Dollars, pay out US Dollars) so in future it might even turn out that Linden have to stop doing $US L$, but can carry on doing Bitcoin L$.

        • Brad

          Isn’t that kind of moneys in Opensims, Its a Free Metaverse just how we like it.

        • Exactly, @twitter-13682:disqus! I couldn’t agree more with you!

          It would make SO much more sense. Day traders in L$ could continue to do the same. People worried about a lack of exchange which accepts anything beyond PayPal and credit cards would just use one of the zillions of Bitcoin exchanges. LL wouldn’t lose money from fees, since they could charge what they charge with the LindeX — only using Bitcoin instead of US$ — and still make the LindeX an important revenue source for them. And they would simply ignore all stupid legislation that way.

          And, of course, thanks to your module, one would be able to use Bitcoin directly in OpenSim, which is certainly the way to go — what’s the point in inventing another virtual currency with a limited user base (i.e. one’s own grid with its few hundreds of users), if you can use Bitcoin for everything? I’d be more than happy to give it a spin, even though the grid I manage is private and has few users (except for the occasional visitor); but I’m certainly willing to do some testing. I did some testing with VirWox as well a few years ago, just to help out with debugging, etc.

          I’m writing an article about this whole subject; do you mind if I quote your fantastic idea?

          • Thanks, feel free to quote me – I wrote a load of code for Bitcoin/OpenSim but haven’t actually run it on anyone’s grid yet, so if you’re prepared to give it a spin that would be perfect.

          • Thanks 🙂 And I’d certainly be willing to give it a try… but only in June. The content creators currently working on “our” grid have a deadline for a project to be finished in May, and they’ll kill me if I start rebooting the grid to make tests hehe.

            That’s one reason why I’m still on 0.7.4…

          • Sounds good, let’s catch up in a few weeks.

          • I forgot to get in touch with you 🙂

            I’ve bumped up “our” grid to 0.7.6 Dev, and while we’re sort of putting most of the things “on hold” for another series of demos on conferences (in September and May), I do have a “test sim” linked to that grid which I can modify at will, and I’d be quite willing to add your module to it.

  • Bit Coin

    There could be enough money for the exchanges to thrive on opensim grids. But the opensim grids also need to open up their economies.

    Both avination and aviworlds will have to massively increase their currency trade restrictions.

    • Suz Blessed

      Agreed….. and Avination really is a bad excample when it comes to money exchange in general…… No wonder some third-party exchanges who where in AVN already left… wonder if they will be back again?…. To me all sounds like a big bulb with air. According to Avination there is so much money fraude going on at that grid, that is takes them almost 4 weeks to changes even small amouths of money…. Would a third-party exchange offer better service….. I do not know….

  • Nathan Adored

    Well, my feeling has been for awhile that yes, LL COULD make L$ become *the* in-world currency for all the opensim and aurorasim grids if they wanted to, more or less like the last paragraph here suggests, but that they’re too myopic to recognize that or *WANT* to do it. Basically, they’re blinded by their own assumptions that SL is where it’s at, and that SL always will *be* where it’s at, so why waste their time on other grids, particularly since they probably think of them as “the competition” to SL, except…. it’s also quite likely LL think the opensim and aurorasim grids are a go-nowhere idea that will *never* really catch on. This also means that Virwox are more likely to take that niche for themselves, since they ARE… or rather WERE… second ONLY to Lindex in amount of L$ traded. My guess is, maybe this foolishly short-sighted TOS change by LL will *galvanize* Virwox into doing whatever it takes to attract other grids to OMC$ and/or persuade them into letting Virwox trade in the particular grid’s existing in-world currency, and for Virwox to build themselves up into the virtual-world-money-trading powerhouse they need and deserve to be, but it’s going to take a lot of virtual legwork and meetups, however, this opportunity is *theirs* to win or lose.

  • Brad

    I think this is next a big surprise to everyone is shorty going to be released, there is many rumors going around in the SL community of LL doing some type of merger.
    Think about it for a minute, why would big business make such a move if they didn’t have a back up plan.

    • Hannah

      Why? Because of regulatory pressure from the U.S. government, which in turn is reacting to the unregulated nature and popularity of bitcoin.

      • Nathan Adored

        Then again, maybe they’re just using that as a plausible excuse to get rid of some competition. Cept, if that’s the case, it’s likely gonna backfire. Badly.

        • Hannah

          It’s possible, but SL really doesn’t have any competition worth speaking of.

          • there are many other services competing for the same customer such as the numerous OpenSim hosts like InWorldz and Kitely, SoaS and NWS, and people hosting their own

            several schools, universities, and museums run their own OpenSim servers – those all have competed and won business away from LL

            look at me – i used to be a $2,920+ USD monthly customer running 19 estates inSL – I am no longer there but still do lots of virtual world projects

          • Nathan Adored

            I meant the competing L$ exchanges.

        • Hannah

          Aimee, on SLU, had thoughts close to yours: http://www.sluniverse.com/php/vb/general-sl-discussion/83054-5-6-tos-change-end-13.html#post1767379

          If I was Virwox I’d be investigating my legal options (and I’m sure that they are).

    • A… merger? With whom or what? I haven’t read any of those rumours 🙂

      It sounds interesting, though!

  • Lani Global

    SL major TOS change without notice. Take it or leave it.

    That pretty much says it all 🙂

  • “The ironic thing is that Linden Lab still has the opportunity to go in the opposite direction, to expand instead of contracting.

    Instead of shutting down third-party exchanges, the company could have instead went all-out with the currency, expanding the API to other grids.”

    Maria, you’re so right on that!! For years I have been writing (and occasionally pestering some Lindens, while I still knew a few) about the possibility of the L$ going “beyond Second Life”. Think micropayments, fundraising, crowdfunding. Think about competitors to Flattr or Kachingle, both awesome ideas with little traction, just because they don’t have a large user base. Think about the Web-based ecosystem beyond the virtual world itself. Think Coffee & Power, which also used L$!

    But Linden Lab is apparently so scared about the legal consequences of having a world-wide microcurrency that they’re drawing back into their own shell. I guess that the next “monopoly” will be the SL Marketplace, forbidding others to sell SL content on the Web (they already have paved the way for that, by refusing the access to the Direct Delivery API).

    This blindness and lack of foresight, this constant looking at its own navel (and shrinking it all the time), is quite painful to see. In my own country, entrepreneurs are coming up with tons of ideas for microcurrencies, virtual currencies, and ways to make online payments much simpler and with lower fees, and start really competing with “established” payment gateways; there are whole taskforces and think tanks discussing this and see what works out. They usually stumble on the “critical mass” problem: how to start, and become a “respectable” player, before you have enough users?

    Linden Lab has it all. A decade of experience. A virtual currency used daily by a million people. 34 million accounts registered to use that virtual currency. Half a billion US$ or more in annual transactions.

    There is nobody on Planet Earth better positioned than Linden Lab to launch a new microcurrency — no, not even BitCoin 🙂

    And what do they do?

    They hide inside their shell and close the doors.

    *shakes head in disgust and frustration*

  • In other payment-related news, FaceCash seem to be suing everybody in California who has anything to do with payments. Maybe it’s related to Linden Lab doing sudden, weird legal things in too much of a hurry to communicate them properly to the person who writes their blog.

    http://www.scribd.com/doc/139975904/Aaron-Greenspan-lawsuit

  • Sylvia Sonoda

    If there is one thing that Linden Lab has proven over and over again, it is that they are so good at making descissions that are not good for Second Life inhabitants. This is simply another adding. It is a small miracle that they still exist. I am sure not thanks to, but despite of LL actions. I am so happy I moved to Opensim in 2009 after 3 fulltime years in SL.

  • Perrie

    One thing you failed to note is that Avination is UK based “Avination is a service of: Avination Virtual Limited, 5-7 Cranwood Street, London EC1V 9EE – All rights reserved.” and not subject to U.S. Regulations.

    This still doesn’t relieve LL from doing a better job in serving it’s customers.

  • Alicia Stone

    Just a minor note – while creating a virtual currency in the US must have no real-world value, the area of gift certificates with a redeemable cash value for thier purchased value is mandated by law. I would suggest that offering virtual gift certificates instead of virtual currency for a grid would be more helpful if you are a US based company.

    • Alicia —

      The laws differ by states, but, in general, gift certificates and gift cards can only be reedemed for cash from their issuing retailers when the value drops below $5, $10, or 10% of the initial value of the certificate.

      A prepaid card cannot be redeemed for any value above this value set by state law, according to federal regulations.

      In addition, there is an upper limit of $2,000 to these cards. This is also known as the “closed-loop exception” to FinCEN prepaid requirements. More details here: http://www.perkinscoie.com/fincen-issues-final-rule-regarding-prepaid-access-08-02-2011/

      Another write up is here: http://www.syncpayments.com/2012/03/new-legal-rules-applicable-to-gift-cards-and-other-prepaid-card-programs/

      Finally, in the eyes of US law, virtual currencies are usually legally equivalent to virtual gift certificates and prepaid cards. I recently did a number of articles about this for financial magazines, and talked to a bunch of legal experts.

      That doesn’t mean that there aren’t third-party exchanges and online websites where you can sell your unused gift cards. These exchanges are operating in a gray legal area, however, and — because of the potential for money laundering — are not a safe long-term strategy.

      In fact, there’s speculation that Linden Lab has forbidden third party exchanges from buying back Linden dollars from end users specifically for this reason and that, eventually, Linden Lab will cease cash outs as well, or limit cash outs to registered business partners.

      For example, consider an iTunes card. You get one of these cards as a present, and can use it to buy music and movies from Apple. You can’t redeem it for cash from Apple (though you might be able to sell it to your little brother at a discount). But the musicians whose songs you buy using the iTunes card will be able to get their money — they are Apple’s business partners, not retail customers.

      My bet is that Linden Lab is arguing that merchants and others who cash out their Linden Dollars are business partners in the Linden Lab ecosystem, just as musicians and ebook authors are business partners in the Apple iTunes ecosystem.

      If I was a grid owner, looking for a way to offer a virtual currency, this is the path I would take — allow only accredited merchants to cash out their currencies, and keep merchant accounts very, very separate from end user accounts.

      For example, if a musician wants to get an iTunes card, they would buy it separately, through regular retail channels — it’s completely distinct from their relationship as an iTunes content provider.

      • Alicia — Here is the list of states that allow cash backs on gift certificates and prepaid cards: http://www.scripsmart.com/states_with_gift_card_cash_back_laws

        Here’s the original FinCEN FAQ about prepaid access: http://www.fincen.gov/news_room/nr/html/20111102.html

        Note the sections about “closed-loop exemptions.” Unless they qualify for the “closed-loop exemption,” FinCEN considers prepaid card providers to be money services businesses, and they need to register as an MSB and comply with anti-money laundering and other requirements, which can be very onerous and expensive for a small business.

        There is one other exemption for prepaid cards — including “open loop” ones that can be redeemed for cash — if the maximum limit on the card is less than $1,000, if they cannot be used internationally, and if they can’t be exchanged between individual people (no peer-to-peer exchanges or transactions), and can’t be reloaded. Each of these four requirements pretty much rule out virtual grid currencies.