Gambling - Put your Scare Hats on..

Someone posted a message in Second Life Answers RE: A new law in Washington state making gambling online illegal in the state, and what is Linden Labs going to do about it.

Recent discussing with lawyers and online research lead me to believe that the L$ can be considered a viable commodity.

With new federal statutes coming out, and more states coming out against online gambling participation, how long will it be until Linden Labs is going to have to take a definitive legal stand, one way or the other?

If you own land or have business interests in Second Life, how will these new laws and possible changes or problems affect you?

Is Second Life the only game in trouble?

Slay dragons for gold and sell the gold on Ebay? Was your odds at killing said dragon detemined by random factors? Are you gambling?

I don't know if this has been discussed in a straight-forward, no-nonsense manner before (and thread search didn't turn up anything so blatant), but this discussion is going to have to be held, and soon.

I had to do some research on this not too long ago as someone lost the equivilent of US$2.00 on L$ while gambling on one of my casino games. They said they were a lawer in belgium, and threatened to sue me for damages and running an illegal online casino.
After consulting with my business lawer here in the US, we discovered many loopholes in this claim, as it has always been a large contraversy with online gambling web sites. The loophole with SL right now is that LL does not sell L$ to people. SL residents buy and sell L$ to each other within the game and with a free economy, technically, the L$ has no real economic value as even stated in paragraph 1.4 of the TOS http://secondlife.com/corporate/tos.php
"...Linden Dollars represent a limited license right governed solely under the terms of this Agreement, and are not redeemable for any sum of money or monetary value from Linden Lab at any time."
This statement locks L$ in as a "fictional" currency, and brings gambling in SL right into the same law as gambling online with "fictional" money instead of real money. Since you are not actually betting with a real currency coming from your real bank account, its considered a game, and does not fall under the gambling act.
I have to know all of this as I run the largest casino operation in SL. When people make these claims to me, I need to have all of my ducks in a row, and be up to date on all of the laws concerning virtual gambling.
The same applies to your question for all online games where you can make money from it. its not gambling, because its not a real currency, and you are paying other players for it, and not the gaming company themselves. The gaming companies are allowed to set up an easier way for the players to make such transactions, and charge a fee for processing the transactions for the players as long as it is a set fee and not based on the amount being transfered as its again not real money coming from or going to the gaming company.
Does this answer your question?

I don't see why LL would be in trouble. People in Washington State who go to casinos might be.

I have been making phone calls, so far its my understanding that as long as we don't contribute to the pots or win the pots we are free to play Sl-ingo and tringo type games. As for poker and slots thats up to 10 years in jail no matter what if caught. So that said, will LL implement a feature to track what I do when I do it, and where so that if I am ever accused I will be able to have my back covered?

I don't see that LL are under any obligation to a state government to carry out surveillance on their users to make sure they don't contravene some dumb local law. They're not even based in Washington. Anyway, I read this:

http://www.pokernews.com/news/2006/5/washington-state-online-poker-legislation.htm

so I wouldn't worry too much.

From: http://terranova.blogs.com/terra_nova/ElvishGold.pdf

Summary
This essay addresses whether virtual currency, the medium of exchange used in
the economies of massive multiplayer online games, can ever be imputed to be real
money under American law. Part I defines the basic concepts surrounding virtual
property and virtual currency. Part II focuses on the application of American commercial
law to virtual currency, examines whether virtual currency should be construed by courts
to be real money, and looks at pubic policy concerns of making such a determination.
Part III examines virtual currency under existing Federal criminal law and focuses
specifically on how the Money Laundering Control Act, 18 U.S.C.A. 1956, applies to
virtual currency. Finally this essay summarizes the arguments presented and concludes
that in specific situations, virtual currency should be imputed to be real money under the
law.

This was a research paper that you may wish to read.

Also, we have to remember that Linden Labs benefits directly from the trade in it's 'intellectual property' for real money, and that by doing so, they may be indirectly contributing to the direct valuation of the Linden Dollar, even though they have stated that it has no direct value.

While a casino MUSt exchange your money on demand, and there is certainly no guarantee that you will be able to cash out with the L$ (in fact doing so may make it as much as worthless through flooding the market), Linden Labs has certainly advertised the capability of making a living through establishment of a business in Second Life. This could be an important factor in the end decision.

Also remember that gambling doesn't have to be for 'money'. It can also be considered to be gambling for things of value.

Before someone gets me wrong...I'm a Libertarian - I am not against gambling in SL. I just think it would be a good idea to get some UNINTERESTED third-party advice on it. And that it might be nice to know that Linden Labs is protecting the SL Universe by doing something along those lines (and perhaps sharing the study/results with us)

Thank you for this. I've wondered how things like thiswork out in the courts. A lot of these anti-online-gambling laws seem to be nothing more than political pandering, too, since unless you somehow manage to stop the flow of specific bits over thousands of fiberoptic wires from another location, I just don't see how, say, Washington State can enforce a law banning online gambling on a server established in either CA or, say, Dominican Republic. They can go after the players, but that cuts into the 4th ammendment of privacy rights and unreasonable search. So, unless they get cops to walk around the neighborhood on the chance that they can glance into someone's living room window and see someone's monitor prominently showing that they are gambling with real money, I don't see how something like this can even be enforced.

Rasah (and someone else, forget who) brought up important points about 'Enforcement' and I think we must all realize that enforcement of possible laws restricting Internet gambling would be a very difficult thing indeed, we must remember that this is a different issue that legality.

Second Life has a lot of press (and will garner more to be sure!) centered around its ability to transform virtual playtime into a real-time job. This press will certainly make SL a target right after the online sites such as PartyPoker.Com and HollywoodPoker.com which basically flaunt their gambling aspects.

Just because it can't be enforced on an individual basis, without real change, I would expect those changes to begin occuring if our wonderful Congress decides to pass federal legislation.

Right now it'd be states interacting with each other (and I don't foresee the Attorney General of the great state of Virginia to be too concerned with the 5,000 virtual coin jackpot I won at Extreme last month [est retail value: $14.33?]). But when it becomes a federal statute, and you involve the FBI, who already has their hand in virtual tracking, then add the big red target stuck to SL's butt, you may have a recipe for disaster, or at least change.

Edit: Carlee - I don't think the LL servers could/would track every single object that you touch, but your payment transactions are already on your accounts page, and usually have the names of the objects that you paid money to. Will the state of Washington come looking for you? I doubt it very much, but I'm not a lawyer, and a lawyer would just tell you the facts as the law sees them. They're not going to give you odds on whether or not The Man is coming to get you....that'd be gambling.

Just read most of this paper (still reading. Very interesting. Thanks for the link. While reading, I had an interesting thought. What if LindenLabs starts to make enough money on Lindex transactions and land sales that $L actually become a fairly strong and powerfull curency (i.e. there is A LOT of it value-wise), then closes shop in California, and moves all their building and all the servers to an abandoned island somewhere in the pacific, which is not actually governed or owned by any nation? (This assuming they can get an internet connection there). They could cut all their corporate ties, along with governmental rstrictions, and although the land in SecondLife would still be in the virtual terriroty, that land will be stored on sovereign soil, transactions will continue to be made with their own curency (exchangeable for USD as well as other curency as it is now), and with enough power, may use $L as a bargaining tool with other countries. Would that make the entire world of SecondLife an actual sovereign nation, with its own defined territory (either SL land or the island it's stored on), a "permanent" population (free accounts don't ever have to leave), and with it's own power to engage other legal governments due to the financial power it would hold?

(I guess the only major quirk that would still exist is that it'd be hard to send in people's avatars to fight should the island be under attack for some reason.)

Oh yeah, add to that that money laundering for such illegal activity would be incredibly easy to do in SecondLife. You can gamble on a slot machine using some fake chips that have no value on Lindex or anywhere else, and then simply exchange those chips for $L through some misnamed exchange object that is owned by the casino owner. Then you exchange those $L for $USD. That's three layers of curency right there? If needed, even more can be added with simple scripts, which can make it nearly impossible to know wher your money is actually coming from or going to.

only real 'problem' i could see here, is that at any point a local state distric attorney could get a subpoena to serve to LL for the transaction records of your account, and then using those RL documents, build a case up on you (or your customers) for violating anti gambling statutes... As written right now most places are not directly vulnerable to that, but the laws are changing, and becoming more 'flexible' and pretty much its no stretch of the imagination to see the world, 2025, with fully regulated online gambling, if enogh legislative backing is put to it and enough profit could be made for states and countries enforcing it.

Hiding behind 'virtual' currency does not actually work, if you put in RL cash and take it out, and as i said, those records can be found via subpoena, if a big enogh push was made for them, and eventually, it will be. Will it be this year? prolly not, next year, eh, 20 years from now, its almost certain it will have happened, at some point

I've never put rl currency into my account, but i've played my fair share of slingo. In fact without slingo I am not sure how I will sustain my expenses in world, except my small shop in Teletus.

I would like to see what if anything the Lindens are taking on this.

Whilst I appreciate this is a big issue for Washingtonians, they are a small part of the SL populace.

But the general issue of Legislation and RL taxation are definately relevant.

I would expect LL would claim the same distance from transactions as eBay do. The content is created by SL citizens, the same way that eBay are not responsible for the listings. LL operate a system of enforcing copyright and may well have to develop a more enforceable VERO system as eBay do.

The transactions which occur between SL avatars is just that, LL have no role to play, other than platform providers. If the activity of the provider is itself illegal, then that is a different position entirely.

The comment by. games prototype is exactly as it should be. Games knows that their activity is not illegal in the state/country in which they are incorporated. Thetype of person who threatens to 'sue' is just the type of person who shouldn't be allowed on the internet anywhere, as they are just looking to cause problems at any turn. Probably the kind of person who sues McDonalds becuase their coffee is hot, but that just shows the reality of life. It will be far more problematical for the actual provider to defend their position, unless they provide sufficient notification. As with RL websites, wher users need to click a confirmation of age and content prior to entering. This may need to happen, but it should not be LL who is liable. That type of succesful action could well become a death blow to collaborative work on the internet

I would anticipate that tax and enforcement authorities will be interested in the activities of individuals in SL, but the part LL play in that is as a platform provider, not as a transactor.

I have a concern about revenue generation in SL, with my activities being funded by a UK VAT registered business. I therefore am in discussion with authorities here in the UK about VAT input and outputs in transactions in SL.

So I approach this from a more than academic standpoint.

But I do feel the legality of a persons actions, is their issue, not one for LL to manage. What is legal in one place is illegal in another, the platform provider is not and should not be held responsible for the individual 'players' action, other than where they have control over content. They do have a role in assisting law enforcement, which I guess will be somewhere in the TOS and they do make it clear they will treat ownership and copyright as activities in which they will play a full role, but that is far from being sued for the activities of an individual on the site who breaks a law in one country. It is why many internet sites are situated in obscure countries, it's why many businesses are incorporated in tax havens, but the actions of the individual will remain an issue they have to face in their Countries or State's courts.

Yet, Ebay takes the position that they will remove infringing and illegal content:

Mp3 files, relicensed orignal software, kiddie porn, working weapons.....

So Ebay may be a bad example...We don't WANT LL to regulate our content.

LL will remove illegal content as well.

If this were to become an issue in California, I am pretty sure they'd delete it. At the moment though, Washington state law probably doesn't apply to companies hosting in San Francisco.

IANAL though, so don't quote me.

But the question, then, is whether or not gambling is illegal if you're playing with play money, and is the L$ play money?

If a reasonable person has a reasonable expectation that they can turn the L$ balance into a USD$ balance at the end of the night, then it's no longer play money. So far, all the press that I have seen on Second Life seems to focus on the viability of the L$ as an economic exchange, no matter what the TOS says.

In fact, LL seems to be pushing a duality of sorts, both claiming that the L$ holds no inherent value (TOS) and at the same time making a market for it (LindeX) where real fees are charged per transaction.

If, like Ebay, they're up to removing any illegal content, then local laws are going to be applied to them. There's going to be conflict, just like Ebay ran afoul of international content laws with Nazi paraphenalia. And that conflict is going to start with a state's Attorney General.

It's also going to get worse as federal laws get bandied about and language of the laws gets tightened to include virtual currencies.

What I'm hoping will happen is that Linden Labs will get involved at some point, not to restrict our play, but to make it so that SL remains a game and not subject to outside legal issues. And to do that, they're going to have to tackle this issue head on, to make it crystal clear. And if that involves getting rid of the LindeX - maybe they should?

I think the question is more of whether gambling using valuable, non-monetary prizes is illegal.

If I bet my watch against your car in a game of poker, that's obviously gambling. What about if I bet a piece of paper you can give to Joe to get a watch against your piece of paper I can give to Bob to get a car? I would argue that's still gambling, and for taxation purposes such a transfer (excluding the gambling aspect) counts as taxable income.

In SL, users are basically trading (or gambling for) chits (which we call "L$" that can be exchanged for the services of others (graphic art, software, server space rental). I would be completely unsurprised if SL casinos were classified as gambling by the US government.

Yer missin the point here some. If you put yer cash in, and then later, you take cash out, those are now monetary winnings. If you just use yer gambling winnings to buy some SL clothes, yer fine, no issue, but if you withdraw funds, the 'fake money' excuse is not appliccable anymore

In the state of California (where Second Life "happens", yes, it's quite illegal.

The California penal code cites the following items as being covered: "merchandise, money, representative or articles of value, checks, or tokens, redeemable in, or exchangeable for money or any other thing of value" (section 330a).

Lindens *are* exchangeable for money. It doesn't really matter how you got them, there's a linden-endorsed and widely-publicised channel through which you can turn them into money.

Additionally, owning, controlling or housing a "machine" (like, for example, one of the SL servers), which you _know_ is being used for unlicensed gambling, is also a felony in California, punishable by up to 6 months imprisonment. You don't have to be running the game yourself to commit the crime; you just need to know that it's taking place on hardware you own, or in a place you own.

Can the lindens really claim that they don't know that their machines are being used for unlicensed gambling?

All seems very dodgy to me... that's why I've never had so much as a lottery kiosk in one of my stores.

No. I think you're missing the point. Every transaction for L$ should be counted. That's regardless of whether you convert your L$ into US$ or not. All anybody is doing in SL is transferring IP around using chits as an intermediary.

Look at it this way. If I commissioned somebody to create some digital art for me, would that work have value? I think anybody with more than half a brain would answer 'yes'. How about if I commission someone to write some code for me? Valuable? You bet. In any country you'd care to name, selling a piece of digital art or some software I've written would be a taxable transaction.

So, if I offer to write some code for someone in exchange for a work of digital art, is *that* a taxable transaction? You bet it is. If it weren't, everybody would get paid in grocery coupons and nobody would have to pay any taxes. Adding the L$ intermediary doesn't change things. I'm transferring something of value to you, and you're transferring something of value to me. Taxable transaction. This is immediately extendable to winning L$ as they can be exchanged for other things of value.

Rick, to extend what you've said outside the realm of L$.

If I promise to give you a Necromancer's Skull Cap #8 in Everquest in exchange for helping me with my class-specific quest, am I not hiring you to perform a task with an exchange item that has real US currency considerations (You can sell the skullcap on GamerzFix)? I'm sure that the government would happily accept your filing of a barter form for this transaction. But weren't you just playing a game (until you went and sold your character on Ebay)?

Where does the game end and the real life tax consequences begin? No line seems to be drawn between what is play and what is real if we do not treat the L$ as play money. And if we do treat the L$ as play money, then we should be able to do whatever the hell we want to with it.

Let's say that I amass a fortune of $10,000,000,000L in play money, and I never ever sell it to anyone for real money. I then stop playing Second Life and move on with my life.

Total in: $72US for a one-year subscription to SL.
Total out: Many many hours of fun.

You're telling me that this is a taxable event? Who's to measure how much fun I had?

What if the SAME person spent $72 and had as much fun as I did, burned his stipends every week and enjoyed all the free music events, free classes and other social enjoyment that comes from the game?

There's something very wrong with treating the L$ as real money until such a time as you sell it to someone else for real cash. And it's along these same lines that I argue that playing a slot machine or a lottery in SL is not illegal gambling. I could play slots on Pogo.Com, or on a $10 software package I bought for my computer just as easily...get the same visceral experience and have the same end result.

No actually thats considered barter and is not taxed. Aka if you give yer neighbor a cup of flower, and they then give you a cupcake back of the batch they made in thanks, that is not taxable income. Yer not going to have to itemize that out.

If you have never put a single dollar of RL money into SL and you never take a single dollar of RL money out of SL, you are effectively shielded under barter clauses of taxation. If on the other hand you DO do those things, alot of your 'virtual' clauses you would use to defend say, a casino operation, go right out the window.

So, is SL a game like Everquest, or a development platform?

As we all know, everything in SL has been created by its users, who retain the IP rights to those creations. The real-world value of these objects can be transferred between users, and LL had instilled in their userbase the expectation that they will be able to make real-world income from their creations.

Contrarily, the things in Everquest have been made by SOE's developers as works for hire and are transferred to the players within the context of the game.

Going with your example, I have to ask, "how did you make your L$10,000,000,000"? If it's anything other than collecting stipends (for, uh, 385,000 years), then you've been engaging in commerce, transferring valuable goods and services to others. So, your equation should be more like:
Total in: $72 + labour in the equivalent value of L$10,000,000,000
Total out: Many hours of fun, plus L$10,000,000,000 worth of credit for services sitting waiting for you to use them

In spite of the TOS clause that says the L$ are worthless, LL explicitly supports their exchange, which in my opinion calls that clause into *serious* question. This is a fundamental difference between SL and other games that may end up costing users in the end.

Sorry, but you are absolutely wrong. Barter is taxed as any cash transaction would be.

U.S. law
Canadian law
U.K. VAT law
Australian law

I mean, think about it. If it weren't taxed, then everyone would take their salaries in equivalent services and the governement would collect no taxes at all.

I see a "Pokemon is gambling" style lawsuit on the horizon