"The ironic thing is that Linden Lab still has the opportunity to go in the opposite direction, to expand instead of contracting.
Instead of shutting down third-party exchanges, the company could have instead went all-out with the currency, expanding the API to other grids."
Maria, you're so right on that!! For years I have been writing (and occasionally pestering some Lindens, while I still knew a few) about the possibility of the L$ going "beyond Second Life". Think micropayments, fundraising, crowdfunding. Think about competitors to Flattr or Kachingle, both awesome ideas with little traction, just because they don't have a large user base. Think about the Web-based ecosystem beyond the virtual world itself. Think Coffee & Power, which also used L$!
But Linden Lab is apparently so scared about the legal consequences of having a world-wide microcurrency that they're drawing back into their own shell. I guess that the next "monopoly" will be the SL Marketplace, forbidding others to sell SL content on the Web (they already have paved the way for that, by refusing the access to the Direct Delivery API).
This blindness and lack of foresight, this constant looking at its own navel (and shrinking it all the time), is quite painful to see. In my own country, entrepreneurs are coming up with tons of ideas for microcurrencies, virtual currencies, and ways to make online payments much simpler and with lower fees, and start really competing with "established" payment gateways; there are whole taskforces and think tanks discussing this and see what works out. They usually stumble on the "critical mass" problem: how to start, and become a "respectable" player, before you have enough users?
Linden Lab has it all. A decade of experience. A virtual currency used daily by a million people. 34 million accounts registered to use that virtual currency. Half a billion US$ or more in annual transactions.
There is nobody on Planet Earth better positioned than Linden Lab to launch a new microcurrency— no, not even BitCoin :)
And what do they do?
They hide inside their shell and close the doors.
*shakes head in disgust and frustration*