Andrea Castillo on Private Money in Virtual Worlds

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Could the mighty Federal Reserve one day be vanquished by the humble Linden Dollar? Linden Lab's official gig is developing the platform for Second Life, an online world intentionally designed without manufactured conflicts or set objectives. But for about a decade, the designers of this virtual world have stealthily moonlighted as a sort of central bank for its own ad hoc digital currency.

It all started with a simple in-game currency pegged to the U.S. dollar. As the Second Life economy diversified and more Linden Dollars changed avatars' hands, a more complex monetary policy was needed. So the developers created the LindeX, a currency exchange where users could trade Linden Dollars for real-world currencies. Linden Lab monitors the economic statistics revealed by the LindeX to tweak the growth rate of the money supply as needed. The result? The Second Life economy now has an economic capitalization of over $600 million, which is nothing to sneer at.

But as Andrea Castillo observes, stateless digital exchanges are also coming under increasing government scrutiny. Yet for bureaucrats and those who love them, there may be no way to credibly manage this growing trend. The virtual money revolution will not just transform the economy, Castillo writes, it will undermine the government's control of it.

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