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There are a few lessons to be learned from the Second Life banking debacle, which occurred last week when an allegedly fraudulent bank, Ginko closed down rather than pay its customers the promised 40% interest rates.
First, participants in Second Life should stop being stupid, greedy, or both. (I’ll avoid calling them players because the platform is being used for activities that bear little relationships to games.) The interest rates in virtual worlds cannot significantly exceed those in other markets or else the funds from those markets will flow to the higher rates. Interest rates can vary slightly from country to country – particularly if the government of that country subsidizes the rates. But they do not vary significantly because the investment pool is sufficiently liquid to move to the higher rates. To believe in ridiculously high rates requires the investor to be willfully ignorant of the risks. Only a combination of stupidity and greed can generate blinders that big.
Second, the Second Life market is worth protecting, and the protection should come from outside the contract with Linden Labs. The credibility of the leading virtual world’s ability to attract transactions between parties depends on the reliability of the platform. As soon as the platform includes the ability to exchange any nation’s currency with fictional money, the potential for fraud begins. If deposits are guaranteed or interest is paid, then the activity is either a banking function or sale of securities. If these were merely pre-paid gift dollars, purchasing Linden Dollars but not being able to be sold for currency, the “game” analogy might apply. If instead, an anonymous avatar can trade in various currencies using Linden Dollars; offer unregulated interest rates; and sell financial products without ever disclosing the identity, then most state and federal regulators can find a statute or two which applies. Linden Labs is far better off having regulation than finding itself the subject of lawsuits from various jurisdictions within and outside the U.S.
As anyone who has worked with financial products knew, the collapse of the Second Life banking sector was inevitable. The more important question is the collateral damage it will cause to Second Life and the many activities using Second Life as their platform.
So the third and most important lesson learned is that Second Life is a prototype for a virtual world platform, not a solution itself. Universities should be building an entirely noncommercial, academic platform which includes a terms of service agreement comparable to the student handbooks found on every public university. Open to any accredited university, but without banking or gambling. Mall operators should be providing retail spaces for their customers; hotel and convention companies should be providing the same type of services for their customers; and adult entertainment providers should be creating areas that are explicitly adult oriented so there is little confusion. J-Date should have the Virtual Jewish Community Center, with theatre, lectures, social events like the brick-and-mortar JCCs. If I so chose, I could do my banking with a federally regulated bank at Financial World, knowing that regulations generally prohibit those banks from letting me be anonymous.
The lessons from the bank run are that the days of the Virtual Wild West are coming to an end. While we will be giving up the open plain, we should be gaining the universities, culture, and economic stability that makes society run. With that, the virtual world is moving ever closer to the real world.
