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Ginko Financial Collapse Ultimately Yields Real Virtual Risk (Huh?)

I’m feeling old lately.  First it was my visceral reaction to the paranormal super-poking goings-on on Facebook and now it’s this news regarding Linden Lab’s Second Life that has my head spinning. 

It seems that the intersection between the virtual and physical worlds is continuing to inch ever closer.

In fact, it’s hitting people where it really counts, their (virtual) wallets. 

We first saw something like this bubble up with in-world gambling issues and now Linden announced in their blog today that any virtual "in-world banks" must be registered with real-world financial/banking regulatory agencies:

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. We’re implementing this policy after reviewing
Resident complaints, banking activities, and the law, and we’re doing
it to protect our Residents and the integrity of our economy.

Why?  It seems there’s more bad juju brewin’.  A virtual bank shuts down and defaults.  What’s next?  A virtual sub-prime loan scandal?

Since the collapse of Ginko Financial in August 2007, Linden Lab has
received complaints about several in-world “banks” defaulting on their
promises. These banks often promise unusually high rates of L$ return,
reaching 20, 40, or even 60 percent annualized.

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. Offering
unsustainably high interest rates, they are in most cases doomed to
collapse – leaving upset “depositors” with nothing to show for their
investments. As these activities grow, they become more likely to lead
to destabilization of the virtual economy. At least as important, the
legal and regulatory framework of these non-chartered, unregistered
banks is unclear, i.e., what their duties are when they offer
“interest” or “investments.”

There is no workable alternative. The so-called banks are not
operated, overseen or insured by Linden Lab, nor can we predict which
will fail or when. And Linden Lab isn’t, and can’t start acting as, a
banking regulator.

Some may argue that Residents who deposit L$ with these “banks” must
know they’re assuming a big risk – the high interest rates promised
aren’t guaranteed, and the banks aren’t overseen by Linden Lab or
anyone else. That may be true. But for all of the other reasons we’ve
set out above, we can’t let this activity continue.

Thus, as we did in the past with gambling, as of January 22, 2008 we will begin removing
any virtual ATMs or other objects that facilitate the operation or
facilitation of in-world “banking,” i.e., the offering of interest or a
rate of return on L$ invested or deposited. We ask that between now and
then, those who operate these “banks” settle up on any promises they
have made to other Residents and, of course, honor valid withdrawals.
After that date, we may sanction those who continue to offer these
services with suspension, termination of accounts, and loss of land.

Wow.  Loss of land!  I thought overdraft fees were harsh!?

Ed Felten from Freedom to Tinker summed it up nicely:

This was inevitable, given the ever-growing connections between the
virtual economy of Second Life and the real-world economy. In-world
Linden Dollars are exchangeable for real-world dollars, so financial
crime in Second Life can make you rich in the real world. Linden
doesn’t have the processes in place to license “banks” or investigate
problems. Nor does it have the enforcement muscle to put bad guys in

Expect this trend to continue. As virtual world “games” are played for
higher and higher stakes, the regulatory power of national governments
will look more and more necessary.

So far I’ve stayed away from Second Life; I’ve got enough to manage in my First one.  Perhaps it’s time to take a peek and see what all the fuss is about?


  1. Chris
    January 16th, 2008 at 08:38 | #1

    Inevitable? Hmmmm….
    Looks to me like Linden Labs is shifting risk onto a highly-regulated (and — w.r.t. tech — risk averse) group.
    How in the heck is a banking regulator supposed to assess whether the "holdings" of their 2L "bank" are adequate?
    I admit to being ignorant of 2L, but I strongly suspect that it is more or less a closed system which Linden Labs is at liberty to modify within very broad boundaries. This means, essentially, that the soundness of any of these virtual institutions depends on the whims of a global dictator.
    Given that Linden bucks can be exchanged for real ones, if I were a lender in such a world, I would demand a very high risk premium. If I were a regulator of such a lender's real-world incarnation, I don't know what I'd do, but I'd certainly want to limit exposure to "virtual world risk" to a minuscule portion of any institutions real position.
    Bottom line: I guess it is OK, but as soon as it builds non-negligible presence, it may be under serious scrutiny (and hence, constraint).

  2. January 16th, 2008 at 09:03 | #2

    We will continue to see this; it is inevitable. The concepts of virtual property and digital object ownership are actually fairly common today. And when using, buying or trading in a virtual world, conducting commerce in a virtual environment if you will, it's easier and safer to use some virtualized currency. At least for now. I am not aware of any of these systems becoming large enough to warrant the attention of banking regulators, but it will happen. And when it does it will be very interesting to see the wrangling for power and oversight. And more importantly, taxation.

  3. January 16th, 2008 at 12:50 | #3

    This is just weird. It is Monopoly (the game) taken to an extreme where the person managing the bank has decided to use some of their own money to help players, then decides it's time to go home and takes the money with him.
    It's a big game gone out of control. People put their own real money into it (just like any hobby or interest) but now expect to carry over all the same laws from the real world into this game world? I don't buy that, although it does blur the lines when it comes to income…
    It's a situation Linden Labs is willingly letting go in order to continue to be popular…but in the end, this is a game and it will take a LOT (in my mind) to fully bridge the real world with virtual monies, livelihoods, and businesses. Sounds like more people just being whiney…which is the MO this decade and last…

  4. January 16th, 2008 at 18:06 | #4

    When a 50+ year old technologist handed me his business card with his 2L Avatar name on it, I honestly didn't know how to respond. Well, actually I did. I coughed diet coke out my nose.
    I tried rationalizing this against something like the SIMS and other MMORPGs, but just can't cause the right synapses to fire in order to see what the POINT of 2L is? See, I like to detach from reality if I'm going to invest in a "game."
    What I sense, however, is that 2L isn't really structured as a "game." It's (second) life imitating life. How boring is that?
    The real world's F'd up enough. Why would I want to look like a Jamaican Bodybuilder with a Czech name in 2L!?
    I suppose it's a legitimate escape mechanism just like any other immersive activity — WoW, CoD, Halo3, etc., but the end-state just seems different to me, but perhaps it shouldn't. It just doesn't seem like entertainment.
    I get Twitter. I get LinkedIn. I even get Facebook (despite my rant.) My pupils hurt going to MySpace, but since I'm not interested in highlighting my sexual conquests or how many times I threw up last Saturday, I tend to lean toward the more "moderate" of these sites.
    @Chris: I tend to agree with you that all Linden is really doing is transferring risk to avoid scrutiny in the long term. However, as with the comment above about life imitating life, as soon as the gubbermint (virtual or otherwise) starts regulating 2L (or social media sites for that matter) interest will wane.
    I'm sure all this means is that I just really don't get anything v2.0 and will never be the next Scoble.
    Thank God (or the virtual incarnation of him/her.)

  5. January 17th, 2008 at 05:59 | #5

    I liken 2L more to IRC on steroids as opposed to a game like an MMORPG. It's a way to play out some fantasy life or do things you can't necessarily do according to the mores of our culture, and so on (illustrated best by the sexual tendencies of 'players' in IRC or 2L compared to RL; which in turn can be compared to the sexual tendencies of people in a room with the lights on vs with the lights off…).
    I fully agree, I still play way too much WoW, but that's an obvious fantasy realm that doesn't really carry much over into my real life other than new contacts; buddies formed by having a shared hobby/interest (common to everyone). But we're certainly (I hope) not going to hinge our real life perceptions or reality on my gear or experiences in game.
    I remember how evil D&D was back in the 80s because a few morons had trouble separating fantasy and reality and ended up killing themselves over in-game scenarios with their character. 2L seems a lot like that, only much more accepted…like boiling a lobster slowly.
    I dunno, I'm 30 years old and quite a geek and gamer, but I tend to be scared of 2L and refuse to even try it. It's a bit too weird and I don't see the point…
    Then again, I don't mind wearing my WoW pride on my sleeve (or shirt)…so many a business card is just their way of reaching out to kindred spirits with a common interest?
    Hrm…I think I just argued myself into a circle…ugh.

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