Saturday, January 26, 2008

Bank Failures in Second Life

I have never seen how Second Life works, but I am fascinated by the game's connections with the real economy -- often replicating some of its worst aspects. For example, players hire people in China to make play money for them & then sell the play money for real dollars -- a relatively obvious production of surplus value.

The Wall Street Journal just published an article about bank frauds and failures within the game.

Here are some extracts from the article:

Sidel, Robin. 2008. "Cheer Up, Ben: Your Economy Isn't As Bad as This One in the Make-Believe World of 'Second Life." Wall Street Journal (23 January): p. A 1.

"Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits."

"The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world."

"The shutdown has caused a real-life bank run by Second Life depositors. Though some players managed to get their Linden dollars out, others are finding that they can no longer make withdrawals from the make-believe ATMs. As a result, they can't exchange their Linden-dollar deposits back into real dollars. Linden officials won't say how much money has been lost, but a run on another virtual bank in August may have cost Second Life depositors an estimated $750,000 in actual money."

"Steve Smith, who runs BCX bank under the avatar name Travis Ristow, yesterday said depositors -- who are owed a total of $20,000 -- will be able to get their money back next week. The bank, which had promised to pay depositors more than 200% in annual interest, is now allowing only small withdrawals."

"When virtual environments first started, they were viewed as libertarian dreams with no interference," says Behnam Dayanim, a lawyer who specializes in Internet law at Paul, Hastings, Janofsky & Walker LLP in Washington. "As companies that sponsor these environments become more accountable to investors or regulators, they are starting to encounter real-world limitations"."

"The banking crisis at Second Life surfaced during the summer, when Linden banned gambling on the site, citing "conflicting gambling regulations around the world." That caused a run on Ginko Financial, a Second Life bank that had invested heavily in the virtual world's gambling operations. Ginko capped withdrawals, and ultimately issued bonds to customers instead. The bank went out of business in August."

"Linden essentially acknowledges that the financial services being offered in its virtual society have evolved to the point that they need to be regulated in the real world. From now on, "proof of an applicable government registration statement or financial institution charter" will be required of anyone collecting deposits in Second Life, according to Linden. The company insists it "isn't, and can't start acting as, a banking regulator." "If this is real money, there is an argument that you need to follow real law," says Benjamin Duranske, a lawyer who runs the Second Life Bar Association and is writing a book on virtual law."


Anonymous said...

It makes perfectly good sense to me that if one is dumb enough to put real money into a virtual bank one deserves virtual withdrawls of virtual money. The only question is, what became of the real money?
Does anyone know where I can apply for a virtual charter issued by a virtual governmental agency? Come to think of it, isn't the latest banking crisis the result of real banks making virtual promises based on virtual property values as collateral for virtual financial instruments? Where did the real money go to in those instances?

YouNotSneaky! said...

The thing is, the "virtual" money in these virtual worlds is actually worth "real" money in the real world. Hell, a unit of some of these virtual world monies is worth more than some of the real currencies of real countries. So the problem is more along the lines of international contract enforcement.

It seems like the game company (Linden?) doesn't want to go the trouble of designing better rules within the game so its outsourcing its contract enforcement/regulation to the real world US government. I'm not sure why us non-2nd Life playing but real dollars tax paying folks should subsidize the provision of this service to this company.