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For months, as banking meltdowns in the virtual world Second Life cost participants steep losses of real money, corporate owner Linden Lab of San Francisco stuck to a laissez-faire line, essentially saying, We just host the software; residents should avoid deals that sound too good to be true. But this week, Linden Lab abruptly banned virtual banks that can’t furnish “proof of an applicable government registration statement or financial institution charter.” The requirement appears likely to shut down all of Second Life’s banks.

“There is no workable alternative,” Linden Lab wrote in an announcement posted Tuesday. “The so-called banks are not operated, overseen or insured by Linden Lab, nor can we predict which will fail or when. And Linden Lab isn’t, and can’t start acting as, a banking regulator.” The company wrote that “these ‘banks’ have brought unique and substantial risks to Second Life, and we feel it’s our duty to step in. Offering unsustainably high interest rates, they are in most cases doomed to collapse–leaving upset ‘depositors’ with nothing to show for their investments. As these activities grow, they become more likely to lead to destabilization of the virtual economy.”

A Linden Lab spokesman said that the company was not offering further interviews or comment on the decision or its timing.

The about-face came six days after Technology Review posted a story that described avatar losses and cited the possibility that one virtual-bank meltdown may have produced aggregate losses of some $700,000 in real money to many hundreds of Second Life “residents” in a manner that would be illegal in the real world. (See “The Fleecing of the Avatars.”) “I think the timing may well have been due to [that] story,” says Ben Duranske, an Idaho lawyer who has been closely following the complaints of Second Life participants.

Last year, some Second Life residents–subscribers whose digital alter egos, or avatars, populate the virtual world–deposited their virtual money, called Linden dollars, into a “bank” called Ginko Financial that had popped up in-world, promising high interest rates. Last summer, Ginko restricted withdrawals and eventually vanished. Since Linden dollars can be exchanged for real U.S. dollars, the losses were painfully real. (See “Money Troubles in Second Life.”) It is not clear who was behind the Ginko operation.

Duranske yesterday posted this blog entry praising the bank ban as a “positive step that will save a lot of people a lot of unhappiness in the long run.” The policy, which pertains to in-world companies that offer transfers of Linden dollars and payment of interest, takes effect January 22.

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Credit: Prokofy Neva (a.k.a. Catherine Fitzpatrick)

Tagged: Business, virtual worlds, Second Life, avatars

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