Daniel RavenNest has started a thread over at SLUniverse with a link to a PDF report regarding virtual currencies, in their report they use two case studies, Bitcoin and Second Life. The PDF report can be read here. The report has misconceptions and inaccuracies in the Second Life section but I must admit that I get the heebie jeebies at anything EU related with Second Life, when Linden Lab introduced VAT to comply with an EU directive on electronic services I contacted MEP’s, MP’s, The UK government, The UK tax office and had communications with EU officials. They completely ignored the fact that the legislation they had introduced actually created the issue that the legislation had been introduced to prevent inside Second Life, namely Europeans being put at a competitive disadvantage due to tax laws. That such a basic concept went over their heads, gives me little faith in their investigations into virtual currencies.
However there are some valid concerns and although people may find claims of money laundering far fetched, it is feasible and it’s not just Europe that has concerns over this, The FBI have apparenly had similar concerns too.
There are also concerns regarding consumer rights and risks, they even cite the Ginko scandal in the report plus the bans on banking and gambling. They don’t seem to give Linden Lab much credit for acting in those cases. However they do mention that as Linden Lab and its virtual currency are outside of financial regulations, the circumstances that allowed Ginko to operate, were outside the scope of normal financial regulations and they do at least acknowledge that Linden Lab now only allow financial institutions with government approval to operate as banks inworld.
There’s a mention of Anshe Chung reputedly becoming a millionaire and how others make profits but surprise surprise they don’t mention tier payments and whopping VAT, they only mention premium membership and even then they don’t mention that VAT has to be added onto the prices in their report.
In terms of risk they cite intellectual propert infringements, but don’t give Linden Lab much credit for complying with DMCA’s and whereas plenty of Second Life users don’t find the DMCA process comfortable or compelling, the law is what it is in terms of DMCA, Linden Lab do co-operate there.
They have concerns about Linden Lab running the whole show:
“In its role as unique authority and regulator, Linden Lab can control every single aspect within the community which, in turn, could have real economic consequences for its users. It could, for instance, make new rules, implement a new tax or eliminate a particular business without any kind of limitation, which gives this company near complete access to the funds circulating in the Second Life environment. For the time being, Linden Lab has used this power to ban specific businesses from Second Life, for instance internet gambling companies (in July 2007), but it could be used at any time for other purposes.”
Linden Lab used that power for business reasons they stated at the time but many suspect it was to comply with unlawful internet gambling laws, surely the ECB aren’t disagreeing with Linden Lab’s actions there.
They sum up the Second Life section with some very large concerns:
“Special attention also needs to be paid to counterparty risk and fraud risk. Users are not protected against either, but both are real risks that exist in this virtual environment. Users generally do not know the reliability of the counterparty with which they are doing business. In this context, the lack of regulation and information required to open an account might create the adequate conditions for criminals, terrorists, fraudsters and money launderers. The extent to which any money flows can be traced back to a particular user is unknown.
To sum up, every criminal act which takes place in the real world might also be reproduced and adapted to Second Life and probably also to other virtual communities; but the likelihood is even stronger as a result of the lack of proper regulation and oversight and owing to the high degree of anonymity that exists in these online worlds.”
This is where I feel they are getting into misconceptions, there’s no mention of Linden Lab’s policies on cashing out, the slow cashout to Paypal annoys some users but is part of Linden Lab’s security. Cashing out from Second Life means providing real life details and whereas people can operate fraudently in that area I don’t really see how that sits outside of proper regulation, the report really should have mentioned the Paypal connection.
However the report sums up by saying that virtual worlds and currencies are currently small and therefore offer little threat to finances outside of those worlds, however they fear they will rise and suggest periodical reviews.
If they are going to have periodical reviews, then let’s have a sensible discussion about it, a sensible discussion would include VAT, which hinders Europeans at a time when we’re crying out for growth industries, virtual worlds can be an area of growth and people should be encouraged to engage in them at a time when traditional industries in the western world are waning.