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When Virtual Crises Turn Real

A run on the bank at the increasingly popular Second Life shows how an online "universe" needs regulation, too. But how to regulate it?

Inside the banking offices of Ginko Financial, an eerie crisis has developed. A collection of almost impossibly strapping men and buxom women, along with various furry creatures with wagging tails, crowd around a cash machine. But no cash can be drawn, and the teller windows are empty.

Linden Lab CFO“The threat [of fraud] is there…[but] in Second Life, it just so happens that we know everything that happens.”— Avatar of John Zdanowski, CFO of Linden Lab

This is one of the virtual banks in the “online universe” of Second Life, a fast-growing computer simulation designed by San Francisco–based Linden Lab. The virtual world runs on “Linden dollars,” which the lab currently provides at the rate of L$270 for every real dollar. And more than $20 million worth of Lindens changed hands in the last quarter, making Second Life serious business.

For those stuck in real life, Second Life is populated by account holders who design “avatars,” characters that can resemble their real-life personae (or not, depending on what the subscriber desires). These avatars interact in many ways, including through commerce. And many account holders seem intent on getting rich in Linden dollars, and thus in real-world money as well. Starting an account is free, although for a charge the avatar can be endowed with any number of special enhancements to make it more attractive in the online world. (Some choose to make their avatars animals, or “furries,” in the jargon of Second Life.) Using purchased Linden dollars, subscribers buy private islands or other land, and create businesses, including banks and even stock exchanges — anything that can be used for fun or profit in Linden dollars and therefore in real money. Last year an avatar became the first to earn $1 million worth of the local currency.

But as Second Life has grown in size and complexity since going live in 2003, many are seeing the need for regulation to protect against fraud, money laundering, tax evasion, and other scams. How should such financial regulation work, though? Such schemes are only some of the “virtual criminality” that threatens to overflow into real-world lawbreaking. Second Life also has concerns about avatars stealing from or otherwise harming other avatars, and most recently a controversy over imaginary-sex software has spurred a lawsuit.

Linden Lab tries to stay above the fray, allowing what it considers a natural experiment to play out and develop. But when it made a foray into regulation last month by banning gambling to comply with local laws, the user backlash and subsequent financial crisis showed that regulation of virtual worlds must be handled with care. And now experts from the real world are beginning to weigh in on issues involving what Second Lifers call “in-world” affairs.

“These things have languished below the radar screen,” says Steve Prentice, chief of research at Gartner, a technology consultancy. “They were probably viewed by regulators as games. But as they grow, there’s a greater understanding that they’re not games.”

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