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Risk

1/22/2008
11:50 PM
George V. Hulme
George V. Hulme
Commentary
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Bank Failure Spawns New Regulations

Few may have noticed, but during the real-world summer stock slump Ginko Financial, a bank within Second Life, went bust. And ever since its failure, Second Life citizen complaints of interest-rate scams seem to have soared. "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% annualized, reads a recent blog

Few may have noticed, but during the real-world summer stock slump Ginko Financial, a bank within Second Life, went bust. And ever since its failure, Second Life citizen complaints of interest-rate scams seem to have soared. "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% annualized, reads a recent blog post from the virtual world operator, Linden Lab.60% return? It's not easy to turn that down . . .

The result? Effective today, any business purporting to be a bank in Second Life must prove that it's also a legitimate banking institution in the real world. "As of Jan. 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," the post reads. "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."

One might expect there to be a backlash against the more stringent rules. Surprisingly, that's not the case. Many Second Lifers actually want to see an economy they can trust.

Here's what one Second Life citizen had to say, and reflects the opinion of many others who commented on the new policy. "While this may be a painful process initially, I think this is the right step in the long run. I personally lost the equivalent of a few hundred U.S. dollars from the Ginko failure, and while I expected part of that investment to be rather speculative, I didn't expect complete failure. The mismanagement of the Ginko system was criminal, in my opinion, and we need to squelch this activity."

Another commenter went so far as to suggest real-world regulators be brought in to help develop and enforce regulations to help a proper banking system prosper.

Not all see it this way. "I think LL [Linden Lab] is completely irresponsible in dealing with this. As usual, things get worse because LL fails to plan ahead. Honestly-run banks are going to get hurt by this, and in the end, honest investors and customers. LL needs to get their heads out of their posteriors and think before they act."

I couldn't disagree with the latter post more.

Good security, and enforceable (as well as fair and reasonable) rules that help to establish trust in the system, any system, whether the economy, the Internet, or even Second Life can only help it to flourish.

If fact, this type of step is actually necessary. This is especially so because the virtual Second Life economy is directly linked to the real-world economy: Linden dollars can be exchanged for U.S. dollars.

One can only expect to see more in-world "virtual" crime to increase as the virtual economy grows. So, Second Lifers, brace yourself for more scams, more attacks on account holders, and more rules as the popularity and power Second Life prospers.

 

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