December 6th, 2007
Despite Linden Lab’s efforts to avoid formally acknowledging a “virtual economy,†a nascent- yet sophisticated – financial sector is developing in Second Life, one in which businesses can raise funds, sell shares, issue bonds and take on debt. And lest we think the recent real-world credit crunch was the sole definition of financial risk, Reuters’ Second Life bureau offered an analyis of virtual finance which caught our eye. As the article notes:
“…In August one of the largest banks, Ginko Financial, went belly-up after the Second Life gambling ban caused a panic among investors, and the institution was unable to meet withdrawal requests from angry customers. Midas Bank followed. Earlier this month hackers made off with US$11,500 in a series of heists against at least five banks.
…Luke Connell (Second Life: LukeConnell Vanderverre) of Hope Capital, which controls the World Stock Exchange (WSE), denied that the banks are Ponzis.
“The banking business model in Second Life is really more of an investment bank model than conventional real life banking model,†Connell said. He claimed that banks generate their interest from profits from activities such as trading virtual stocks, not on the backs of new investors.
Many of the banks have a complicated relationship with Hope and the WSE. Banks listed on the WSE compete against Hope Capital for customer deposits. Cross-investment is common. Midas Bank collapsed in a complex deal in which it invested in bonds from Hope.
Connell admitted fraud is rampant. He estimated that 10 to 20 percent of businesses that listed on the WSE file for initial public offerings, raise money, and then vanish from Second Life, leaving investors in the lurch.
…Not all banks generate their interest from investments in virtual stocks. Thanh Ho (Second Life: Arbitrage Wise), who claimed to have L$80 million in deposits (US$300,000) at JT Financial, doesn’t invest deposits into virtual stocks at all. Ho covers his 44 percent interest by investing the money in a variety of private business ventures, including banner ads on his ATMs.
Mike Lorrey (Second Life: Intlibber Brautigan) of BNT Holdings also said he covers interest on L$4.3 million (US$16,000) in deposits without investing in stock. He sees building a banking relationship with thousands of customers as laying the foundation of a future wide-ranging virtual financial empire.
“Since Second Life economic growth for the past year has been 1000 percent, offering 44 percent, or even 72 percent on your money is actually rather miserly of the SL banks,†Lorrey said….”
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