The E-Sylum:  Volume 11, Number 4, January 27, 2008, Article 26


[In the past we've discussed the virtual currencies of online
worlds such as Second Life.   For students of financial history
the lastest news from the online world may seem like déjà vu -
the abuses and collapse of the Second Life financial system
clearly echo the abuses and collapse over a century ago in
the real U.S. financial system.  Too many unregulated banks
operating without scrutiny provide a ripe environment for
abuse, and users of the virtual banks have been liberated of
up to $750,000 in real money.  -Editor]

In the real world, banks are reeling from the subprime-mortgage
mess. In the online game Second Life, a shutdown of the make-
believe banking system is causing real-life havoc for thousands
of people.

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.

Second Life is an elaborate online world where players
create new identities for themselves -- images called
avatars. These avatars can own land, run businesses and
build homes. And there's a link to the real economy: To
buy things, players use credit cards or eBay Inc.'s
alternative payment service PayPal to convert actual U.S.
currency into "Linden dollars," which can be deposited
using pretend ATMs into Second Life's virtual banks.

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.

"There is not a whole lot that is fake about this," says
Robert Bloomfield, a professor at Cornell University's
Johnson School of Management. Mr. Bloomfield's own Second
Life avatar, named Beyers Sellers, hosts a pretend television
show in the online game about virtual economics.

Linden announced plans for yesterday's shutdown two weeks
ago, and since then Second Life players have been streaming
into the fantasy banks to withdraw their deposits, which
are convertible into U.S. dollars at a floating rate.
Yesterday, one U.S. dollar was worth an average of 269
Linden dollars, its typical exchange rate.

The collapse led to an outcry from depositors at Second
Life banks. Linden responded on Jan. 8 by announcing the
broader shutdown, claiming it would "protect our residents
and the integrity of our economy."

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.

To read the complete article, see:
Full Story

  Wayne Homren, Editor

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