Second Life Banking — Worth the Risk?

Eric Reuters reports in his service’s Second Life news on the SL Investor’s Bank, one of this year’s crop of banks and investment firms operating in-world. I encourage you to read the entire story before continuing here….

Welcome back. The concept of banking is apparently not new to SL, but banking operations on the Grid have a very interesting flavor…rather reminiscent of the Wild West, seat-of-your-pants moves that built fortunes and branded men robber barons in the America of the Gilded Age. Linden Lab disavows any other activity than hosting a game inside its sim servers; but the truth is that they have served as the partum deus [1], the god of creation, of a small invisible world’s fabric, and are the de facto despot of this world. And the Grid’s Residents are bringing their skills, their dreams, and their business practices into this new land — or at least some of their business practices. Other actions, such as the use of stock investment to pay interest on investments in their own banks, is (again) very similar to long-gone business practices. Small, fly-by-night banks — and even larger ones — sometimes attracted depositors and kept themselves afloat in this way (among others) from the late Nineteenth Century until the stock market crash of 1929 that brought in the Great Depression and tighter banking regulation by the RL federal government. Out of those regulations arose the Securities and Exchange Commission, a stronger Federal Reserve Board, and the Federal Deposit Insurance Corporation.

None of these institutions exist in Second Life. Indeed, it’s doubtful that Linden Lab ever anticipated the need for creating such institutions. If they had anticipated the way the Linden-based economy would grow, they might have done so — or made the economy based on pure barter, the most basic form of trade possible. With the creation of a de facto currency, though, the way was opened up for the thriving virtual economy that exists in-world. The demand for capital to continue growing businesses, as well as the small investor wishing to get more money for their money, created a market for banks. And banks, needing capital for their operations, have found ways to attract investors — often by promising rates of interest to investors that no sane banker would touch in Real Life. (92% annual interest???)

Of course, these are Linden dollars we’re working with (playing with?) here, not real dollars, pounds, euros, drachmae or yen. Still, people expect their money to be there for them when they want it, and banks to pay on their promises. In the wake of spectacular difficulties at virtual banks such as Midas and Ginko Financial, is this an indication that the Lindens will need to step in and impose banking/finance laws from on high, for the sake of those who are losing their virtual shirts in financial defaults?

I learned about the basics of banking in my 10th-grade General Business class in high school [2]. Investment in stocks and securities by a bank is one way of making money to cover their deposits and obligations; but the sounder way is by the standard practices of loans and investment in themselves from outside sources (stock and their own bonds). Business law exists to govern these practices and ensure that shady practices and cheating do not take place without penalty. But in the laissez-faire capitalism of Second Life business, no regulation exists. The returns can be greater — but the risks can be greater as well.

Consider carefully before dropping your Linden dollars into one of these institutions. The short term might pay out for you; the sensible investor knows that the real dividends come from the long term — and there’s no guarantee that these banks will last that long yet.

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[1] My apologies to those who have got more and better Latin than myself. Mea culpa, mea culpa, mea minima culpa.

[2] Something every kid in Real Life should be required to take as part of the standard curriculum!

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