Virtual Exchanges Get Real

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What's In a Game?

Most virtual business experts, though wary of regulators and regulations, recognize that fraud is easier in a land where anonymity is the norm. If it were just a game, then that might be all right. But people are using these virtual businesses and exchanges to accumulate wealth that's transferable to the real world. It's still unclear how many people actually convert Lindens back to dollars, but some Second Lifers have reaped real-world fortunes (see BusinessWeek.com, 11/26/06, "Second Life's First Millionaire").

At a recent panel discussion in Second Life, many participants were outraged when exchange CEOs referred to their markets as a game (see BusinessWeek.com, 7/24/07, "Theory Meets Practice Online"). "There is potential for serious loss in real money that is being converted to licensed game currency," writes Shania Stewart, a proponent of increased regulation who doubles on Second Life as Mystik Boucher, the CEO of Mystik Designs, the virtual design company that employed the robbery suspect as its chairman. This person, she says, "was released immediately upon my knowledge" of his potential involvement.

Stewart, whose avatar was the first to report the alleged fraud on the WSE, says via e-mail that her virtual company is no longer listed on the WSE because she believed the exchange had no intention of disclosing what happened. WSE CEO Connell rejects that allegation.

There is no shortage of opinions among Second Lifers about whether regulations are necessary and if they are, how to approach them.

Who Will Govern Cyberspace?

One possibility pondered by the community is that a real government will step in. Lots of residents throw around this idea that the real-world U.S. government will eventually arrive in the virtual world—especially if residents start making lots of U.S. dollars that could be taxed by the Internal Revenue Service. That said, there are people with avatars from across the globe, making Second Life a potential concern among market regulators and tax authorities in other countries.

Catherine Fitzpatrick, a real-life Russian translator and virtual-world real estate manager who goes by the name Prokofy Neva, suggests that the most appropriate government body might be the U.N., even though it has little track record as a market regulator.

Of course, no government or international entity has signaled any interest in regulating the virtual world thus far. Yet with reports from Europe suggesting that terrorists might be using these otherworldly realms to launder real-world money for their activities, some residents suspect that real intelligence agencies may already be monitoring or participating in Second Life and other virtual worlds.

Most avatars seem to prefer a solution where the community starts policing itself, reducing the likelihood a government body—real or virtual—will see a need to step in. Few, however, agree on how this will or should happen.

Bloomfield is working with the Second Life Exchange Commission, a new body formed to educate residents on the exchanges and to set up guidelines. He also may organize a group of students studying business, law, computer science, and political science to create a Second Life nonprofit that recommends best practices for the stock exchanges.

But these kinds of groups are controversial among participants because the leaders are not elected and have no real authority.

Ethical and Legal Thickets

John Margarella (aka TraderJohn Susa), a real-life stockbroker who serves as chairman of the SLEC, says he'd like to develop guidelines to prevent fraud. Assessing the validity of virtual companies that want to be listed on an exchange should be easier than it is in the real world, adds Margarella. "If someone is claiming land on five [virtual] continents, you can zip there fast and check to see if they're evaluating land properly."

Some residents, of course, suggest the best solution is "buyer beware"—that there's no need for regulation in a land of make-believe.

"It's a game," says Connell, who in the physical world is the managing director of an investment firm called Hope Capital. "You don't regulate something that's not real." He says that what happened to his exchange in recent weeks was an "ethical fraud," but not a criminal act, because this is all fictional. Others disagree, as participants make real money, even if it's not much, through these virtual businesses and exchanges.

Anonymity No Longer an Option

Despite his desire to do without market regulation, Connell has made some changes. For starters, he is no longer hiring anonymous avatars to help him. Instead, software development and upgrades will now be done by people Connell knows in his first life.

Mark Bell, a doctoral student at Indiana University who is writing Second Life for Dummies, due for publication in December, says reputation and accountability will come to rule the day: The people running and participating in virtual exchanges will need to be open about their first-life identities. Such transparency will make it hard to disappear, building confidence in the market.

Even if fraud persists, no one expects the exchanges to close altogether. "It's just too fun for the residents," says Bloomfield. "Some of them think they're on the verge of creating a new economy."

Di Meglio is a reporter for BusinessWeek Online in Fort Lee, N.J.