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Out of this world

GC goes inside Linden Lab’s San Francisco HQ to learn more about the impending release of virtual reality platform Sansar and the legal support behind it.

Virtual Regulation

Alex Speirs

Editor

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Outside of the catwalks of Milan, there’s probably nowhere on earth where fads come and go as quickly as in Silicon Valley. For every groundbreaking idea or transcendent success story, there are one hundred others that have just as quickly gone by the wayside.

At present, the hottest fad in the Valley is two letters long: VR.

Virtual Reality.

What was once purely the domain of science fiction films is increasingly threatening to become mainstream, as the technology required to underpin VR systems has reached a level of affordability that makes them increasingly accessible.

One business betting big on VR breaking the barrier to entering the mainstream is Linden Lab, makers of the wildly successful Second Life, an online virtual world still popular more than 14 years following its release.

Into the Sandbox

When Second Life was released in 2003, it broke the mould for what online games and social networks should be, at a time when both were in their relative infancy. Users were free to log on to Second Life to play (just like other video games) and interact (just like other social networks), but combining the two in a platform that was almost entirely user-generated proved to be a genre-defining feature – one which the company credits as the key to its lasting success.

‘What we do is develop platforms that empower everyone, whether they’re professional designers or amateur hobbyists, to create virtual experiences,’ explains Bjorn Laurin, VP of product at Linden Lab.

Second Life provided the tools for users to develop their own experiences, from the avatar that represented them online, through to the worlds themselves and the activities that take place in them. Creation wasn’t limited to individual users either, with universities like Harvard and Stanford setting up digital campuses, embassies facilitating in-person meetings on immigration matters, and a who’s who of corporate behemoths looking to Second Life to expand their reach. UK law firm Simpson Millar LLP even set up an online office inside the world.

Linden Lab’s next venture, Sansar, will look to build on the success of its predecessor – this time taking virtual worlds to the world of virtual reality.

‘Sansar is about democratising VR. We want everybody to be able to be a user, a creator, and have the ability to interact with other people and other worlds – it’s about creating a truly social VR experience, which is as accessible to as many different people as possible,’ says Laurin.

Built into the platform is a 3D modelling tool and a proprietary coding language to facilitate creation. When Laurin talks about the accessibility of these tools, there isn’t a hint of exaggeration. Having never used VR or digital creation, I was up designing and exploring my own virtual world within minutes.

‘It’s about creating a truly social VR experience, which is as accessible to as many different people as possible.’

‘To create VR experiences at present is expensive and inaccessible to regular users. You’d need a huge team – from artists to developers – and a whole lot of time. But with Sansar, my six-year-old son and I created a playable basketball game in one afternoon, just using assets from the Sansar store.’

The Digital Economy

Just like in Second Life, users will have the ability to sell their creations to other users for real money, this time on the Sansar Store, which is already brimming with content created by developers granted early access. All transactions will take place using Sansar Dollars – a proprietary digital currency for the new platform.

‘We first entered into transacting in digital currencies with Second Life, where players used Linden Dollars to transact with each other within the world,’ explains Kelly Conway, general counsel at Linden Lab.

Through 2013, Second Life generated the equivalent of more than $3.2bn USD worth of transactions in Linden Dollars – whose value in US Dollars fluctuates in relation to its real-time demand on the Linden Exchange. In 2016 alone, while past its peak popularity-wise, the equivalent of more than $500m USD of transactions occurred.

As the economics of Second Life grew, Linden Lab was forced to deal with broader fiscal issues, including the existence of virtual banks, their regulation, and ultimate prohibition, as well as online gambling and a market crash. Transacting through an instrument such as the Linden Dollar, which could be transferred into USD, also posed a series of questions for Linden Lab’s legal department, which has had to implement a series of measures to come into compliance with increasingly complex domestic and international money regulations.

‘Online transactions have grown and become significant to the economy, so the US government has responded by issuing a virtual currency guidance in order to implement some form of regulation on the market. That was introduced shortly before I joined the company in 2013, which meant that coming into compliance with the regulations has been a critical aspect of my job since joining Linden Lab,’ says Conway.

image of Linden Lab virtual reality game

‘When I came on board, we registered with the federal government as a money services business, which then triggers numerous states that you need to register with individually as a money transmitter. We now have 42 of the 45 necessary licences, but this proved such a significant undertaking that we created a subsidiary of the company to house all of that functionality – both for the existing Second Life platform and the impending release of Sansar.’

As a licensed money transmitter, a host of new regulations become applicable – including minimum capital requirements for the business and surety bonds – as well as fees stretching into six figures on an annual basis and broader rules governing financial institutions.

‘US federal law implements the Bank Secrecy Act, which we are subject to as a money transmitter, and which requires us to undertake a lot of anti-money-laundering analysis and comply with the rules around knowing your client. In addition to what we’re subject to in the US, there are a host of applicable EU laws, which also require us to look into aspects like terrorism financing too,’ explains Conway.

‘To meet these challenges, we have a compliance team which is 14 strong, including a chief compliance officer. We’ve found that, at a procedural level, it’s essentially about monitoring and analysing transactions, understanding where funds are being sourced from, then prohibiting or stopping any transactions that raise suspicions.’

Virtual Rights

While digital currencies are an integral function for Linden Lab’s business model, equally important are the licensing systems in place, which facilitate creators being able to establish intellectual property rights for their creations and subsequently monetise them.

‘One of the defining features of Second Life was that from the outset, we took the approach that the users should retain some of the ownership of their creations. When you have financial incentives in place for users, so they know they can ultimately earn money from the hard work they put into their creations, the result is some truly fantastic work,’ says Conway.

‘Because we provide the platform and tools for creation, we need to take a licence in their work so that we can distribute them, modify them for the platform and use them as required.’

The system created enables Linden Lab to offer a financial incentive for users to create, distribute and promote content, but it also comes with additional complexities from a legal standpoint, particularly where conflicting interests or existing property rights are applicable.

‘We have a platform which enables our users to create their own IP, so we also have to consider existing IP rights for external holders. That’s meant that we need to have a robust DMCA [US Digital Millennium Copyright Act] system in place, so that if we receive requests from companies or entities that have an existing ownership right, then we can ensure this isn’t being misused,’ explains Conway.

‘We took the approach that the users should retain some of the ownership of their creations.’

‘It’s about being able to strike a balance between having a sense of ownership and pride for the users who are creating, but also having the systems in place to make sure that we’re respecting existing rights and remaining compliant.’

Ready, Set, Sansar

After spending an hour with Sansar, it’s easy to see the enormous potential for the platform. From the basketball court created by Laurin and his son, to an ancient Egyptian burial tomb inaccessible to the public – recreated with laser scanned images and the help of Egypt’s Ministry of Antiquities – the experience is both visually astounding and exceptionally immersive.

But perhaps most impressive are the facial movements and expressions that happen when speaking to other users in real-time. They add an element of authenticity to the experience, another layer, which lends credence to the scale of ambition Linden Lab has for the social element of Sansar.

‘We developed the technology that makes the lips react just like in real life when you speak into the microphone. We wanted it to be believable, just like if you were having a conversation with me face to face,’ says Laurin.

With Sansar entering the public beta phase in August, release of the final platform isn’t far away – even if both Laurin and Conway are coy about giving an exact date.

‘We’re at a stage now of making sure that we have the functionality needed to ensure that when Sansar is released, we’re legally in good shape. Right now we are in the midst of updating our terms of service, which is always fun,’ says Conway.

‘I’m sure there’s going to be some fires to put out between now and the end of the year. I’m also sure that there’s plenty more coming, as we anticipate an extended lifespan for the Sansar platform. But between our legal team, our fantastic engineers and the product itself, we’re excited to get this going – and show what we’ve been working on for the last four years.’

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