Linden dollars, Terrorism and Crime

In "The Linden Dollar Game", commenter, Matt Beam, near the end of the discussion raised a very interesting question which hasn't been discussed very widely.

Just a question:

If anyone around the world can play 'Second Life' and exchange his currency into Linden-Dollars and back, so can two users fake a deal like followed and transfer real money for a real threat:

Sleeper in US builds trivia in SL and offers financier in Middle East for a fantastic prize. Financier exchanges amount into LDs, pays sleeper in LDs, who exchanges them into USDs, commits the crime and no one can prevent this transaction.

Am I right ?

Regards
Matt

Posted by: Matt Beam | Saturday, March 17, 2007 at 02:47

My answer to this question is largely hypothetical in nature.  I have no direct evidence of specific laundering or other criminal transactions.  Others have written about observed frauds that have occurred within Second Life.  And at least one security analyst, Roderick Jones of Concentric Solutions has written more extensively about the potential use of MMOGs and VWs as a terrorist recruiting, training and financing tool.  The latter I have commented on myself.  (Search Terra Nova for these discussions).

Potential for Abuse:

The hypothetical transaction Matt describes could occur.  These transactions are not entirely without record, and they are certainly not preventable.  There are two primary transaction flows, one of which is entirely conducted on Linden Lab's network and servers.  The other is partially completed through Linden Lab's sphere of control.

1. Using the LindeX (exchange owned by Linden Lab) and Second Life, the scheme you describe is carried out.  Ostensibly, LL could keep detailed records of these transactions and the identities of the actors.  Since LL is a black box we do not know for sure how accurately these records are being kept, if they are being kept at all.  However, this would become known upon an enforcement action by authorities or other subpoena of LL's records.
2. Actors use Second Life for L$ to L$ exchange, however, they use private exchanges on one or both purchase/redemption ends of the transaction.  In your example, the "financier" could buy L$ with EUR on one private exchange, trade with the "sleeper" inside the game, then "sleeper" could redeem L$ for USD through a different private exchange.

This second method is much more troubling as it becomes impractical for any one entity to maintain a reliable transaction audit trail.  While LL could (and perhaps does) keep detailed records of all intra-world L$ trades, the sheer volume of such trades would prevent effective, reliable isolation of criminal activity if the "end points" are not also executed through Linden Lab's resources.  In other words, to LL, the part of the transaction that takes place in-game would look no different than anyone else buying & selling goods and services.  Clever criminals could easily break up their transactions so as to not draw attention through the size of L$ volume traded between in-world entities.

No regulations or agreements aside from those exerted by the payment processors (Visa, Paypal, etc.) exist to harmonize how the private exchanges keep records on transactions.  Some private exchanges are active in-world businesses using those exchanges to monetize in-world virtual holdings (SLExchange, owned in part by Anshe Chung).  Others are "RMT brokers" who are active in many games (example).  These different entities have differing motivates for operating exchanges, and almost certainly keep differing levels of records.  Also, given the international nature of L$ exchange points, it is difficult to imagine there exists much harmony or cooperation on transaction audit standards.

This potential problem extends well beyond Second Life.  The potential for abuse exists in nearly all of the popular MMOGs and VWs.  The RMT market for all of these game platforms combined is estimated to exceed USD$7bn by 2009, sufficiently large to attract the attention of launderers and other criminals.  Even Second Life, which is only a relatively small portion of the total RMT market, transacts $USD millions per month when combining the LindeX and private exchanges.  At this point that may be sufficiently small so as to deter larger scale international money launders or terrorist groups.  But Second Life is growing rapidly (and by the account of some, it is growing exponentially, though such claims are disputable).

Final Thoughts:

Some things that come to mind as I write this.

1. For the past couple of years there have been efforts to create liquid cross-game exchanges of virtual currencies.  You would be able to exchange L$ for World of Warcraft Gold, for example, on such an exchange market.  Of course, the endpoints would both have real currency redemptions as well.  The creation of such markets is probably inevitable.  In such a system, it would be practically impossible to detect, track and intercept criminal transactions because those transactions could be infinitely obfuscated.  Only cooperation on the scale of current real world financial markets, including international and national regulation regimes, reciprocity agreements, and industry self-policing bodies could hope to challenge criminal usage.
2. Virtual currencies only comprise a portion of the RMT market.  A large volume of value traded within game titles includes virtual items, such as swords in World of Warcraft or shoes in Second Life.  Although these times are not as easily valued, they represent a store of value and potential for utilization in laundering transactions.  A system where criminals acquire, trade, and sell virtual inventories of virtual items would add further difficulty to attempts at detecting these schemes.  Also, markets exist where these virtual items are directly exchanged for real currencies, operating in the same manner as Ebay.  Only, since these items are virtual, the speed and obscurity of these transactions take place on a much higher level than do real-world Ebay trades (where trades usually generate shipping records).
3. Much RMT occurs outside of the game companies' EULAs/ToS agreements.  This has the practical effect of ensuring that few if any records are kept of RMT transactions, since they are "black market" transactions in context of the game operators.
4. Sanctioned RMT (where the game companies' EULA/ToS allow for such transactions) is always accompanied by a "firewall" where the game company claims all game currencies and items are the property of the game company, and not the "player owner".  Since the game company views items and money within their game as entertainment tokens (likely for legal and regulatory reasons), they may be hesitant to adopt standard financial audit techniques and reporting methods.  Such could breach the firewall and allow players of their games to claim virtual property rights and assert virtual financial interests.

Resources:
I'll add resources for this article here, as I discover them or they are suggested.

• Synthetic Worlds: The Business and Culture of Online Games, Castronova, Edward.  Fundamentals of virtual economies and markets, including potential sinister applications.