Governments should apply real-world laws and regulations to virtual currencies in online worlds like Second Life to prevent potential money laundering, fraud and tax evasion, a report from a British advisory group said on Monday.
The Fraud Advisory Panel, set up by the Institute of Chartered Accountants in England and Wales, said legal loopholes were exposing virtual world users to "a growing risk of theft and deception."
In recent months law enforcement and tax authorities have focused increasing attention on virtual worlds, including a U.S. Congressional probe into virtual world taxation, a German criminal investigation into child pornography in Second Life and a new South Korean law that cracks down on money transfers in online games.
While the report said the dangers were hypothetical at this point, it warned that people seeking to avoid law enforcement and tax authorities were likely to seek out loosely regulated online economies.
The virtual world Second Life has more than 6 million users and its own currency, the Linden dollar, which can be exchanged for U.S. dollars. More than US$1.5 million worth of money changes every day in Second Life, which is operated by U.S.-based Linden Lab.
"My experience has been that fraudsters migrate to areas that are most vulnerable," said Steven Philippsohn, chairman of the panel's cyber crime working group. "(They) always benefit where countries are loosely regulated, and this is an environment that is unregulated all together."
Online money laundering is a primary concern, according to study author Mark Johnson.
"I see this as a virtual version of the hawala or hundi system," said Johnson, who heads risk management firm TRMG, referring to the informal money transfer network that is commonly used through the Middle East, Asia and Africa.
"It's trust based -- I give you 1,000, you give someone else 1,000 -& it serves to move money from A to B to C to D while obscuring the trail."
He recommended treating virtual currencies like the Linden dollar as "real money," including a requirement for virtual world operators like Linden Lab to report suspicious financial transactions, just as for real-world banks and financial institutions.
"At the moment, Second Life had the most sophisticated economic model. But the model is so clearly compelling and successful that there will be a number of variants," Johnson said.
"Linden Lab and its servers are based in the United States. But when you start to get domains based in Belize and the Congo and such -- that's when it really gets messy."
Copyright 2007 Reuters Limited.
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