On April 1, 2008, the U.S. House of Representatives Committee on Energy and Commerce's Subcommittee on Telecommunications and the Internet had a congressional hearing on virtual worlds.

The official title of the hearing was "Online Virtual Worlds: Applications and Avatars (link goes to official witness list).

Video of entire hearing (300+ MB)

Witnesses:

1. Philip Rosedale, Founder/Chairman of the Board/Former CEO, Linden Labs

2. Susan Tenby, Senior Manager, Community Development, TechSoup

3. Colin J. Parris, PhD, Vice President, Digital Convergence, IBM Research/IBM Corporation

4. Larry Johnson, PhD, The New Media Consortium

Philip Rosedale	This hearing was the first time I've seen any representatives from virtual worlds get a chance to actually explain themselves. I think the witnesses did a great job of making what I'm going to start calling "The case for virtual worlds." (What I believe to be an open and shut case :) Four "witnesses" presented to the Subcommittee that morning. Their names are in the table below, along with relevant stop/start times for their presentations.
If you saw the Daily Show clip on the Congressional Hearings, you may have been concerned about congress being confused about terrorists using virtual worlds. But actually, terrorism was only mentioned a couple times in freaked out passing. The real story is that Virtual Worlds are about to be as big as Social Networking (a phenomenon that congress seems well aware of and impressed by).	Susan Tenby
Colin J. Parris	Of course, we know that Virtual Worlds are going to be even bigger than Social Networking, and really already have been for some time. Although virtual worlds are viewed as an outgrowth of Social Networking, in reality, virtual worlds have existed much longer, and have an extensive and rich history behind them going back more than 20 years. I think hearings such as this one are a step in the right direction, and demonstrate that Congress is finally realizing the potential for community, art, science, and commerce in these worlds, and taking this potential quite seriously.
It's also great to see IBM stepping up to the plate to explain things in a way that even Congress can understand. (No offense congress peeps, but you guys aren't always the best at grokking technology. Series of tubes aside :) But that's the exciting part! The success of virtual worlds has become so tangible that now even IBM can explain this success effectively in business-speak. That's damned exciting! Now, hopefully, we can point to the very excellent examples of the incredible business, educational, and artistic applications going on in Second Life, and other virtual worlds right now, and use them to help explain these very tangible scenarios to the rest of the real life world.	Larry Johnson

Sidenote: The Pete was nice enough to track down this clip for me. Due to technical difficulties, I was unable to edit the file down at this time. So here's the whole thing, at over 300 MB.

I've provided very concise times for the entire hearing, so you can still find the parts you need quickly, after downloading the whole thing.

Summary: This post's video and articles attempt to explain the sequence of events leading up to Lindens' ban on gambling that occurred last week.

Second Life A-Z

Second Life Step by Step

Second Life Utilities (SLUTS) A-Z

Protesters On Orientation Island

Last Wednesday night, the Lindens sort of quietly made an announcement that basically banned any form of wagering on chance in Second LIfe. Period.

Some casino owners are crying foul, complaining that they weren't even given a hint of warning.

But as I mentioned when summarizing a Findlaw article last April (which analyzes gambling in second life within the context of the recently passed Unlawful Internet Gambling Enforcement Act (UIGEA)), you'd have to have not been paying attention in the slightest to have not seen this coming.

This awesome video report from SL-Bernhard Drax on "Metaversed" summarizes the situation beautifully.

Even though the lindens deny it in a post from April 5, everyone else seemed have the general understanding that the Feds were inworld and the jig was up. Soon.

We all knew it wasn't going to last, but I don't think anybody thought it was going to all end so quickly.

Here's another pretty good article on it from Information Week about the Casino owners (different ones than mentioned in the video above) who say Linden kept taking their cash up till the very end:
Second Life Casino Owner Left Scrambling After Gambling Ban
: The Second Life entrepreneur complains that Linden Lab was happy to take his money for months after the U.S. banned Internet gambling. And then Linden Lab shut the casinos down abruptly Wednesday.
By Mitch Wagner

Linden Lab, which develops and operates Second Life, announced a ban on gambling Wednesday. Until then, gambling had been one of the most popular activities in Second Life.

Smith, of Brighton, U.K., feels Linden Lab dealt with him unfairly. He notes that U.S. law banning Internet gambling went into effect in October.

"If this law was made in October, 2006, I think it is wrong of Linden Lab to take my money," said Smith, a mortgage broker in real life. He noted that the name of the business -- Casino World -- made it obvious what kind of business he was running.

Smith, 34, who goes by the name "Anthonymark Alcott" in Second Life, operates a full server on Second Life -- known in SL jargon as a "sim."

We interviewed Smith in-world Thursday. He teleported in with his avatar still wearing signs and a mask from a protest that he'd been attending immediately prior to the interview.

He said he spent 1 million Linden Dollars -- about US$3,800 -- on the sim and virtual gambling equipment and furnishings, since launching in February.

And that's not counting staff or his own sweat equity -- he said he's been working 12-14 hours per day on building Casino World. He said he invested all revenues from the clubs back into the business, to pay for new equipment and entertainment.

Here's the full text of the entire article in case the link goes bad:
http://www.informationweek.com/story/showArticle.jhtml?articleID=201201449&cid=RSSfeed_IWK_News

Second Life Casino Owner Left Scrambling After Gambling Ban

The Second Life entrepreneur complains that Linden Lab was happy to take his money for months after the U.S. banned Internet gambling. And then Linden Lab shut the casinos down abruptly Wednesday.

By Mitch Wagner
InformationWeek
July 27, 2007 06:00 AM

Like many other casino owners in Second Life, Anthony Smith was struggling on Thursday to figure out what future, if any, he had on the 3-D social network.

Linden Lab, which develops and operates Second Life, announced a ban on gambling Wednesday. Until then, gambling had been one of the most popular activities in Second Life.

Smith, of Brighton, U.K., feels Linden Lab dealt with him unfairly. He notes that U.S. law banning Internet gambling went into effect in October.

"If this law was made in October, 2006, I think it is wrong of Linden Lab to take my money," said Smith, a mortgage broker in real life. He noted that the name of the business -- Casino World -- made it obvious what kind of business he was running.

Smith, 34, who goes by the name "Anthonymark Alcott" in Second Life, operates a full server on Second Life -- known in SL jargon as a "sim."

We interviewed Smith in-world Thursday. He teleported in with his avatar still wearing signs and a mask from a protest that he'd been attending immediately prior to the interview.

He said he spent 1 million Linden Dollars -- about US$3,800 -- on the sim and virtual gambling equipment and furnishings, since launching in February.

And that's not counting staff or his own sweat equity -- he said he's been working 12-14 hours per day on building Casino World. He said he invested all revenues from the clubs back into the business, to pay for new equipment and entertainment.

Smith had planned, starting next month, to buy one sim per month and lease it out for residential and commercial business. But those plans are on hold.

"This will be the start of the end for Second Life, just as the U.S. government wants," Smith said in an interview conducted over text IM. We edited his comments lightly for language and spelling.

He said he believes the U.S. government is threatened by Second Life, because they can't control SL or tax it. Also, he said, real-life casinos want Internet gambling shut down to avoid competition.

"They grease the US government's hand," he said. "For a country where you are supposed to be free, it sure is a contradiction."

Shutting down gambling will stop Second Life growth, because gambling represents a significant portion of Second Life transactions, Smith said.

He also said he believes Linden Lab's abrupt implementation of the new policy is unfair.

Second Life Casino Owner Left Scrambling After Gambling Ban

Can Linden Lab Be Trusted?

(Page 2 of 2) July 27, 2007 06:00 AM

"I do not know if I trust Linden Lab anymore to work with," he said. "The way they do business is not good. They change their policy and advise if you don't comply immediately, you get all your assets frozen, or even worse, dissolved. Any other company in the world who treated their clients like this would not last long."

The gambling decision is the latest in a series of steps Linden Lab has taken to crack down on adult entertainment in Second Life, driven, at least in part, by the law in the nations in which it operates.

In May, Linden Lab banned erotic "ageplay" -- depictions of sexual activity involving children in Second Life -- following an investigation by German authorities.. Shortly afterwards, Linden Lab announced plans to institute age verification to keep minors out of adult activities. The company said it planned to launch age verification in May, but the system still hasn't gone into effect.

Linden Lab announced a ban on "grossly offensive" behavior May 31. The clumsily worded announcement bans depictions of sex acts or lewd acts apparently involving minors, rape, extreme and graphic violence, and more.

Second Life users criticized the ban as being overly vague, not giving them a clear idea in advance what would be allowed and what would be prohibited.

Attorney Benjamin Duranske blogged: "This is a poorly considered, dangerously over-broad, and annoyingly opaque policy statement."

In April, Linden Lab said it invited the FBI to inspect Second Life casinos. At around the same time, Linden Lab said it would no longer accept advertising for in-world casinos.

Smith said he sought assurance from Linden Lab, around the time of the FBI visit, that he would be allowed to remain in business. He said the company told him that it wouldn't allow promotion of casinos and gambling in Linden public channels, and that casino owners and their customers would have to decide whether their activities were legal based on local laws.

Smith is applying to Linden Lab to have three months of server maintenance fees -- called "tier" in Second Life jargon -- forgiven, because gambling was the source of revenue he used to pay the tier.

Ironically, Smith planned on Thursday to attend a job fair in Brighton where Linden Lab was recruiting possible employees. He said he decided not to go because he would feel like a hypocrite.

I'm thinking there's got to be some kind of land grab coming on for the land that used to be occupied by all those gambling casinos. Does anyone know anything about this?

Or will the Linden gods just make all that land "go away?" :-)

Meanwhile, in the real world,
one company's IPO is in a shambles, due to the turmoil on Second Life's economy from the gambling ban:
Crisis in Second Life Financial Sector Deepens

I'm starting to really dig Reuters' Second Life site.
(You can go there inworld, too.)

Here is the full text of the article in case the link goes bad:

http://secondlife.reuters.com/stories/2007/07/31/crisis-in-second-life-financial-sector-deepens/

Crisis in Second Life financial sector deepens
Tue Jul 31, 2007 9:07am PDT

By Adam Reuters

SECOND LIFE, July 31 (Reuters) - A gambling ban, insider theft at the World Stock Exchange and a bank run on Ginko Financial have combined to threaten confidence in the integrity of the Second Life financial sector.

The amount of money spent in-world each day plummeted from nearly US$2 million on Thursday, when the ban went into effect, to US$1.1 million on Tuesday (see chart, right).

The virtual world’s battered financial markets were thrown into more turmoil on Monday when Ginko Financial announced a new public offering and a plan to buy the AVIX stock exchange, all amid a severe cash shortfall at the bank.

Ginko Chief Executive Nicholas Portocarrero told a group of investors that Ginko’s public offering on the AVIX exchange would fund the purchase of AVIX itself, in a convoluted transaction that was not fully explained.

Portocarrero, who for the first time identified himself as Andre Sanchez of Sao Paulo, Brazil, is also the largest shareholder in the WSE’s parent company, Hope Capital.

After the contentious public meeting, the managers of AVIX backed away from the buyout and cancelled the IPO, leaving Ginko’s fate uncertain.

“Ginko Financial was supposed to buy one of Second Life’s stock exchanges, AVIX, using money from an IPO that was to be held on, you guessed it, AVIX,” wrote Benjamin Duranske, who has extensively covered the ongoing crisis on his Virtually Blind blog.

“It didn’t happen. Why not? Because lot of smart people who understand finance, law, and ethics showed up to explain why that wasn’t going to work and ask some very hard questions,” Duranske added. “As a direct result, Ginko no longer has an IPO on AVIX, and is, apparently left to drown on its own.”

Portocarrero said during the investor meeting that he could not predict when the bank’s funding crisis would be resolved, according to several transcripts of the event.

“I do not have an estimate as to when the liquidity crunch will end,” he said. “It is in great part, out of my control.”

I ran across this great Findlaw article (April 11, 2007) about the legal implications of Second Life’s gambling industry — within the context of the recently passed Unlawful Internet Gambling Enforcement Act (UIGEA) that was passed in 2006.

The article raises a lot of interesting questions about Linden’s currency system, whether one is gambling with it our just using saving it in their Linden “bank account.”

The article is written by Anita Ramasastry (PDF of Her Curriculum Vitae), an Associate Professor of Law and the Director for the Shidler Center for Law, Commerce and Technology, at the University of Washington’s School of Law. It raises some interesting questions about the true relationship between Linden’s “currency” and the “real” U.S. dollars for which Linden Dollars are able be exchanged.

According to Ramasastry, at the request of Second Life, FBI agents are cruising the virtual landsapce and visiting its virtual casinos to see if the line is being crossed. And where would that line might be? Nobody’s sure right now.

The first half of the article gives a really nice two page summary with a lot of interesting information about Second Life’s currency in general, so I felt comfortable summarizing it for you.

An in-depth analysis of the legal issues surrounding the sites in-world gambling gets a lot more complicated, and that’s what the second half of the article’s about. (Notice that I only pulled a few facts from that section, and did not attempt to summarize.)

I’m still just starting to soaking this all in and make sense of it, but it did seem like there were a few conclusions that could safely be drawn at this point, along with some good food for thought, for those of you, like me, that have been trying to understand the big picture of how all these “gaming currencies” are starting to interact with and have an effect on the “real” ones.

This stuff is a bit complex and we’ll have to just all learn about it together.

So first the general currency info of interest, then the gambling specifics below:

1) Linden Dollars don’t actually count as legal currency, because they are not issued by a “real government, and are therefore only a reside in a “stored-value or token system.”

2) According to Linden’s Terms of Service agreement, in section 1.4 states that its “currency” is really only being used under a limited license agreement and “is not redeemable for monetary value from Linden Lab.”

3) The TOS also states that Linden might start charging for the use of its LInden Dollars in the future, or not, upon its sole discretion, and that the dollars are merely a “class of ‘data’ that can be deleted, altered, moved or transferred at any time. Linden Lab disclaims any value, cash or otherwise, to data residing on its servers. Thus, the currency is “licensed content,” for which a license can be revoked as easily as it is granted.” (Quote is from article, NOT Linden Labs TOS.)

4) The bottom line may be that, since the relevant statues of the law in question cover not only “currency,” but also whenever “something of value” is wagered, that wagering Lindens qualifies as, well wagering. (Since Lindens can be cashed in for US dollars, they would appear to have some “value” in the traditional sense.)

The second half of the article is a pretty technical legal analysis of the questions surrounding gambling in relation to UIGEA, but these aspects of the boring details seemed newsworthy and simple enough to include in a little summary:

1) UIGEA (the Unlawful Internet Gambling Enforcement Act) statute “forbids banks and other entities from processing payments for Internet gambling transactions. It also tasks the Treasury Department and Federal Reserve with issuing regulations to guide financial institutions in identifying and blocking such transactions. UIGEA can be enforced by both federal agencies and state governments, and violations trigger civil remedies and criminal penalties.”

2) According to Wikipedia (half way down page) there has been a recent challenge to certain aspects of UIGEA:
“In April 2007, U.S. Congressman Barney Frank introduced a bill overturn the gambling aspects of the Act, saying “The existing legislation is an inappropriate interference on the personal freedom of Americans and this interference should be undone.”

3) Professor Ramasastry’s interpretation of the statute seemed to agree that it appeard “quite broad,” and notes that the relevant criminal statute referred to by the law “sweeps in anyone who “aids, abets, counsels, commands, [or] induces” a criminal act, or “procures its commission”; and anyone who “willfully causes” an act that, if he had done it directly, would count as a federal crime. And it states that such persons are punishable as if they were the perpetrators themselves.”

4) It’s probably going to come down to whether Linden Labs can effectively block payments to its virtual casinos without interrupting the other various legal activities of its “residents.”

It’s harder than it sounds guys!

Maybe we can all help them figure it out.