Tuesday, May 7, 2013

Third Party $L Exchanges Banned?

Today, Linden Lab made a change to its Terms of Service.

You can find the ToS here:
The change is to Section 5, which deals with Linden Dollars ($L).  Specifically, Section 5.3 now reads,

5.3 There are other exchanges that are operated by third parties on which Linden dollars are exchanged.

Third party exchanges are not authorized by Linden Lab and Buying or Selling Linden dollars on third party exchanges are not authorized transactions. Third party exchanges are wholly distinct from both the LindeX exchange and Linden Lab and they have no affiliation with Linden Lab. We do not endorse or otherwise guarantee the legitimacy of the Linden dollar transfers offered on them, and we are not liable for purchases of such Linden dollars. Buying or Selling Linden dollars anywhere other than the LindeX is done so solely at your own risk. If you Buy Linden dollars that are traced to unauthorized credit card activity or other fraudulent activity, we will recoup these Linden dollars from your Account. The only authorized exchange is the LindeX.

Now, this wording is clearly distancing Linden Lab from the various third party $L exchange services.  They say that this is to better protect Second Life residents from fraud, and indeed there have been cases of fraud using the $L.  Up until now, LL provided their "Linden Lab Exchange Risk API", a software tool designed to reduce the chances of fraudulent activity, to legitimate third party exchanges.  However, the Second Life website has been updated to remove the references to the Exchange Risk API.

But, at least in the new ToS, LL does not prohibit using third party exchanges.  They merely say, "...done so solely at your own risk."  However, in a blog post on the Second Life website, , they say,

"... trading of Linden dollars (L$) on exchanges other than the LindeX, Second Life’s official L$ exchange, is not authorized or allowed." (italics mine).

In my view, this is not only to prevent fraud.  There are two additional reasons for LL to hog all of the $L exchange activity.
  1. Fees.  LL collects fees when you buy or sell $L.  There is a problem with this thinking, though.  Most people who use the third party exchanges do so because they cannot use the Lindex, due to the fact that LL only accepts certain forms of payment (major credit cards, for example -- but not gift cards or debit cards.)  Also, many SL creators/merchants outside the US cannot use PayPal, and use the third party exchanges to cash out their in world earnings.  By cutting these people off from a way to buy and sell $L, LL is going to lose a significant part of its user base.
  2. The US Treasury.  The government has begun to take a closer look at online currencies used in games, with a particular eye to them being used as tools for money laundering.  Despite the fact that LL uses legal mumbo-jumbo to say that the $L is not a currency, in the eyes of government regulators, if it quacks like a duck, it's a duck.  And Uncle Sam doesn't take kindly to private citizens issuing money.  So LL is likely taking steps to make the $L seem less like a freely traded currency by limiting it to the LL-controlled Lindex.  They are, by doing this, also separating themselves from any audits or actions that might be taken against these third party exchanges.
Most people haven't yet become aware of these deeper issues...the only thing that worries them is that they have to click that they have read and accepted the revised ToS on the login screen.  But I think this development could have far-reaching consequences for Second Life, its economy, and us users.

EDIT, May 8 2013:
Linden Lab sent an email to operators of third party exchanges, telling them to remove in world ATMs.  While there is still plenty of doubt about whether LL means that third party exchanges are simply "not accredited" or in any way associated with LL, or that they are not permitted, the Lab's actions in the matter so far speak louder than their contradictory words.

For more details on this, including what a number of third party exchanges have done in response to the new policy, see:


  1. I agree that this new amendment is due to the recent fraud committed by hackers and the fact that the U.S. Treasury does view $L as private citizen currency if the third party exchanges continue. Nicely done post ;)

  2. But theres so many residents that cannot received money from me (Mauritius) and so many countriess..we are locked up! what for us?

    1. Joe, you're right, and I am sorry for your situation. This fight isn't over; a few of the third party exchanges are still doing business as usual. While LL can forbid things like in world ATMs, and can (if they choose) take money obtained from a third party source from your account, it's not clear to me that they can actually *prevent* third party trading in $L simply by saying so.

      Some of the exchanges are taking steps to register with the Treasury Department as "money service businesses". It's possible that LL would allow such registered and regulated exchanges to operate...but that is only speculation on my part, and LL has rarely if ever backed down from policy decisions of this sort.