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SECOND LIFE, Jan 8 (Reuters) – Linden Lab said on Tuesday it is banning Second Life banks that promise interest or other investment returns, citing resident complaints and risks to the virtual world’s economy. The new policy contains an exemption for banks that are certified as real-world financial institutions.

“As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter,” the company said.

The requirement of an applicable government registration statement or financial institution charter will likely be insurmountable for existing Second Life banks, at least at present.

Read the full statement from Linden Lab here.

Second Life has long been home to banks and other financial institutions that offer extremely lucrative interest rates as high as 95 percent per year. Critics have long charged that these institutions are nothing more than Ponzi schemes — a type of a fraudulent investment vehicle in which early investors are paid large returns with the deposits of new investors.

Several Second Life financial institutions, most notably Ginko Financial, have collapsed.

“Usually, we don’t step in the middle of Resident-to-Resident conduct – letting Residents decide how to act, live, or play in Second Life. But these ‘banks’ have brought unique and substantial risks to Second Life, and we feel it’s our duty to step in,” the company said. “Offering unsustainably high interest rates, they are in most cases doomed to collapse – leaving upset ‘depositors’ with nothing to show for their investments.”

The crackdown on banks comes several months after Linden Lab banned gambling. It has also restricted depictions of underage sex due to legal concerns.

BANKS MOVE TO QUELL DEPOSITOR FEARS

Linden said it would give banks until Jan. 22 to “settle up on any promises” and “honor valid withdrawals.” However, Second Life banks — like their real-world counterparts — typically hold only a small fraction of their total deposits in cash, so it is unclear if they will be able to come up with the available funds by the deadline.

Nervous depositors started crowding Second Life’s in-world ATMs after the new policy was announced.

“In real life the banks don’t have more than 10% in cash,” said Charlie Winx, an avatar from France who declined to reveal his name. Winx started withdrawing money from his L$260,000 (US$960) account within minutes of the news. “I think we’ll lose a lot.”

Owners tried to calm depositor fears and prevent a run on their banks.

“I’ve already started preparing for massive client refunds,” said Tyrian Camilo, who runs the SLIB, one of Second Life’s largest banks. “Interest payments have been halted, withdraw limits have been lowered to give everyone a fair chance.”

Camilo, who declined to give his real life name, hopes to pursue a real world license. “I hope we can achieve that, but it’s a long shot.”

L&L, another prominent Second Life bank, shut down all ATM operations immediately.

“The reason for this is to protect the investment of everyone,” the company said on its Web site.

“Our plan was to launch real world at the end of the year but it looks like things are going faster than we would have liked,” said L&L’s Sheffie Cochran (Second Life: Lindsay Druart) of L&L. “We have until the 22nd to make moves and I am hard at work making them.”

Cochran was bitter towards Linden Lab. “Some of the highest account holders in SL are in the financial sectors and this ban will cause widespread hysteria,” she said. “I would have wished that they would sit down and talk to the sector and devise a plan to assist and alleviate.”

After Jan. 22, Linden Lab will begin removing ATMS and other banking assets, and will begin sanctioning bankers with “suspension, termination of accounts, and loss of land.”

(SL Reuters)