How legal are virtual banks and stock exchanges?
by Tateru Nino 
Dec 7th 2007 at 1:00AM
Filed under: Economy, Opinion, Second Life, Legal
A recurring question, amid the forest of what might be legitimate failures and mismanaged enterprises or might just be scams, is just how legal are the banks and stock exchanges that operate alongside and inside various MMOs and Virtual Worlds such as Second Life.
As seems to be usual with legal matters, a simple question doesn't yield a simple answer.
We asked ASIC (the Australian Securities and Investments Commission) about virtual stock exchanges like the WSE. It took a while before we were able to get an answer, but as far as WSE-style exchanges go, they do not fall under the regulatory jurisdiction of ASIC - however their self-description as a game seems challengeable by Consumer Affairs/Fair Trading.
ASIC also pointed out that Managed Investment Funds using a stock exchange like the WSE would most certainly fall under their jurisdiction and would need to comply with all legal regulations of any such business.
Likewise, any business subject to the Australian Corporations Act offering shares of themselves on such a stock exchange would be in violation of the act.
As for banks, of course, do fall under ASIC regulation.
Banco Central do Brasil, Departamento Econômico when asked (and it wasn't easy) about banking ventures like the expired Ginko Financial told us that such unregistered banks were in breach of Brazilian law - they've apparently had trouble with unregistered banks before.
Likewise, you'll find that such unregistered/unregulated financial institutions are also in violation of New York state law. These regulations are common in many countries.
There's no real difference, of course, in a bank or stock exchange that deals over the Web, over the telephone or in a virtual world. The medium by which the business communicates with its customers is not relevant to their status, nor are the value tokens that are used as a medium of exchange.
With all that in mind, it is considerably more likely that even if a stock exchange or bank operating through a virtual world is not fraudulent or a Ponzi scheme, they are still more likely to be operating unlawfully than lawfully.
Reader Comments (Page 1 of 1)
Daman Tenk said on 2:54AM 12-07-2007
Does it matter?
For many Europeans it is impossible to get a credit card.
I'm not going to get back to dancing for a bunch of losers for 100 linden dollars a night.
So instead I buy my lindens now.
Because over here banks don't hand out credit cards like candy (this isn't the US you know), I have no choice but to buy my lindens from a middle-man, the Dutch Exchange. For MANY Europeans the Dutch Exchange is the only way to buy money in SL.
Take away the middle-man banks and you're discriminating against Europeans again. But who cares anyway? Linden Labs proved with their sick Age Verification scheme that they don't mind a new age of Apartheid!
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Cyn said on 6:05AM 12-07-2007
An exchange, like the Dutch Exchange, may not be the sort of bank the article is addressing.
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Prokofy Neva said on 8:09AM 12-07-2007
No, the question to ask isn't whether they are legal, but whether they are illegal.
They haven't been made illegal yet by any real-life entity, anywhere.
There are laws that apply to online gambling in the US now, for example, and that made gambling illegal in SL.
There isn't a law yet that makes online virtual micropayment banks and exchanges illegal on the face of it, or certain practices illegal.
Anything said about this is speculation, or mere stabs in the dark by these real-life entities cited here about what might apply -- but they haven't really studied it.
*When* there is a real-life legal probe *and* a court decision declaring the activity unlawful, *then* you can say this. Internet lawyers stump around pompously telling you what they think is legal or illegal. They represent nothing. When a real authority pronounces, then it will be clear.
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Gwyneth Llewelyn said on 3:58PM 12-07-2007
Tateru's article specifically targeted non-US regulatory bodies. Although Australia also operates under a Common Law system, Brazil (and the rest of the non-English-speaking world) doesn't.
Under Civil Law systems, what is not explicitly permitted is usually forbidden — this means that anyone operating a bank or any kind of financial service without a (local) license will indeed likely be liable under their (local) laws.
It's the Common Law systems that have to explicitly forbid something — and if they don't, they're implicitly allowed. So, the advice is to make sure you establish your virtual bank/financial service in the US or on any other country under a Common Law system. Be advised, however, that even some countries under a traditional Common Law system are slowly changing over to a "hybrid" of both models, Canada being one of them (and even the UK starts to show signs of this "hybridisation")...
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Benjamin Duranske said on 10:24AM 12-08-2007
Gwyneth is right, here. Criminal law doesn't depend on a common law body of cases like civil law does. It's statutory. So if there's a statute on the books making something illegal, it is illegal whether or not there's been a prosecution for the specific flavor of the crime in question, at least in the U.S. Here, the relevant statute is 15 U.S.C. § 77b (a)(1), which defines "security" pretty broadly. There are lots of debatable questions in virtual law, but this one -- whether securities laws apply to in-world securities -- is fairly straightforward. If you are buying a share in a company for anything "of value" it is a security, and there are all sorts of regulatory devices that securities dealers have to comply with, none of which are being followed by the virtual exchanges. One could argue that Lindens don't have "value" but it hardly seems like a winner, given that there's a web page where you can readily convert them to real world cash.
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Fellatione Aabye said on 10:06AM 1-09-2008
Geee People
Ban the Banks .. The Most Recent idea of Linden Labs.
OK ... when a bank or a so called one offers you more interst than any other inworld bank .... Does that not make a bell ring in your head ... or are all those than so greedy ???? That they even can think straight anymore ...
Am at a bank in SL with a .10% interest on cash ... compounded daily ... I use(d) that bank as safekeep against all the malware who tries to ripp you off inworld .... (NOTHING is doneagainst that by LINDEN Labs) ..
In last resort i ll have to create an Alt as Piggy bank ... and let that alt than only inworld when i need some money ....
He AMERICANS ... Wake up please ... There are other nationalities too in second Life ... and in Europe .. a Credit Card isn t a candybar like on your side of the world ... and the operating costs are rather steep too ... so a bank like the dutch bank was a gift for the OH so much hated Europeans ... I buy my Lindens too ....
Thinking of buying Lindens couldn t it be possible that Linden Labs is missing a part of the money-cake right now ... no profits of the trade? Is just an idea ...
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Tateru Nino said on 11:10AM 1-09-2008
Well, banking is a regulated industry in almost every jurisdiction in the world (not every last one of them, but nearly every one). The regulations were enacted to regulate and control banks, and those who *appeared* to be banks or who provided similar services in order to limit fraud or incompetence.
Those regulations, of course, apply absolutely to a bank operator, regardless of whether their bank is in a bricks-and-mortar building, online, on a website or wherever.
You can pretend that they don't apply to you. You can claim that they don't apply to you. But that doesn't make it true.
In that almost none (perhaps none of them at all) of the SL banks appear to be in compliance with their local regulations - it makes me wonder why you'd trust your money with someone who isn't obeying the law.