The only law enforcement are the Lindens. Linden labs out in California owns Second Life. Citizens (well over 2 million now), when they start an account have to agree to the behavior terms set out for SL. The main one is about harrassing people or "griefing" as they call it. If you have someone bothering you, you just take a snapshot of the incident and report it to the Lindens. They are very quick to investigate and deal with the offender. We've had to do this with someone who came to our place and threw red barrels all over the ground then somehow removed our building. We took the picture and reported it and the Lindens took care of it. I haven't heard of any kind of taxation on SL...but I'm sure the IRS will come along sooner or later.
Since Red is very involved with SL in his real job, we've learned a lot over the past month and a half. We tried to make a place for cc.com to hang out, but only a few people tried it out. So, we moved on to something else in SL. We've created a ballroom for dancing...very elegant and very different than most of the places on SL (very sleezy). People from all over the world come to get dressed up and dance there and they love it. I've met people from Germany, Holland, England, Italy, Brasil, and Japan.
As for losing grip on reality...I guess for some, that is possible. I guess they do that with video games already. I find it fun to meet people from all over the world. There are other advantages to for different people. For instance, I know one young lady (19), who comes to the ballroom to dance and meet people because she can't physically leave her house because of an illness. In SL, she is able to get all dressed up and look like a million bucks, dance and meet interesting people. I also know of a couple who are separated because of their jobs..one is in the US and one is in Europe. They meet at the ballroom almost every night to chat and dance. For them it's a lot more personal than chatting and a lot less expensive than talking on the phone.
Anyway...sorry to ramble. When you get in there KTO... look me up. Liv Young