[ExI] LA Times: Virtual bank's Second Life scheme raises real concerns

PJ Manney pjmanney at gmail.com
Wed Jan 23 19:42:40 UTC 2008


Oscar Wilde said, "Life imitates art far more than art imitates Life."
 You couldn't prove it to me, especially when Virtual Life imitates
Real Life so consistently.  Given the recent real world market woes
and global-level scams perpetrated by supposedly reputable financial
institutions, I find it terribly ironic that these Wild Westerners of
Second Life don't want regulations that might engender things like
taxes when they expect to make interest rates of 40%, but they do hire
lawyers and demand Linden behave like a "Fed" to guarantee their
not-so-virtual assets.

Would they make such mistakes in their first life?  If not, then why
would they do it in their second?  Self-deception never ceases to
amaze...

PJ

http://www.latimes.com/business/la-fi-secondlife22jan22,1,5958139.story?coll=la-headlines-business

>From the Los Angeles Times
INTERNET
Virtual bank's Second Life scheme raises real concerns
Vanished deposits spur questions about the need for regulation.
By Alana Semuels
Los Angeles Times Staff Writer

January 22, 2008

Stephanie Roberts knew Second Life was just a computer game, but she
couldn't resist the virtual world's promise of a real-world interest
rate of more than 40%.

The 33-year-old from Chicago, who played the game as a raven-haired
vixen called Zania Turner, deposited $140 in Ginko Financial and
waited for the money to grow. Instead, it vanished five months ago
when Ginko, perhaps the first Ponzi scheme in history perpetrated by
three-dimensional online avatars, left Second Life.

"I was foolish," Roberts said.

So were many others. Ginko took with it about $75,000 in real-money
deposits, shaking faith in Second Life's venerated lawlessness -- no
cops, no courts, no government -- and unnerving Linden Lab, the
usually laid-back San Francisco company that created it.

Recently, Linden Lab banned all virtual banks from the online
role-playing game, giving them until today to shut down, fearful that
Ginko wasn't the only one paying crazy rates of return to some with
the deposits of others.

Within moments, there was a meltdown. ATMs didn't work when players
rushed to withdraw their Linden dollars, which can be exchanged for
U.S. currency at a rate that hovers around 270 to 1. Stocks plunged
and so did real estate prices.

Avatars, the players' digital doppelgangers, marched with signs saying
"Give us our banks back NOW!!" and sent melancholy messages: "We're
doomed."

It was nearly a 3-D insurgency.

"People are panicking," said Margaret, a British mother of two who in
Second Life is Ragged Delec, an exotic dancer.

Margaret, who asked that her last name not be printed, hasn't been
able to retrieve $400 that she had squirreled away. "This has done
some serious damage to the Second Life financial industry," she said.

The Ginko debacle and Linden Lab's response to it is raising fresh
questions about the need for regulation over -- not to mention the
wisdom of -- financial transactions in a place that doesn't exist.

"The whole Second Life adventure encourages user freedom, but it's got
so many users, and so much money is flowing in, that you have to face
that the community needs some degree of control," said Stephan
Martinussen, executive director of the global solutions department at
Denmark's Saxo Bank, which had toyed with the idea of opening a
virtual branch.

Ginko was able to skip town and leave virtually no trail for
authorities to follow, if there had been any authorities. Even Linden
Lab might not know the identity of the avatar who ran the bank.
Company executives declined to be interviewed for this article, but
lawyers in contact with unhappy Ginko depositors said they weren't
aware of any investigative action taken by the company.

No individual seems to have lost enough money to make filing a lawsuit
worthwhile, said Robert Bloomfield, a Cornell University professor who
has been following the Ginko case. Anyway, because Second Life members
live in different countries, "it's not at all clear what jurisdiction
you would file suit in," he said.

Multiplayer computer-based gaming environments such as Second Life
aren't monitored by real-world regulators.

And before the recent announcement, Linden Lab had handed down only
two other official bans against anything: It prohibited gambling and
simulations of sexual activity involving minors.

"It's been this wild, Wild West kind of atmosphere," said Benjamin
Duranske, a lawyer in Boise, Idaho, who runs Second Life Bar Assn. and
blogs on the virtual world.

That's the allure. In Second Life players can be anyone (among the
pro-bank demonstrators one day last week were a disco dancer, a
tentacled human and a mermaid; on another day there was a storm
trooper and a very large rabbit) and do nearly anything.

Most activity is tame, with avatars experimenting with interior design
or sunning themselves on virtual beaches, although players do buy
avatar genitals and use them.

"Usually, we don't step in the middle of Resident-to-Resident
conduct," Linden Lab said in a Jan. 8 statement, which was posted on
its blog. "But these 'banks' have brought unique and substantial risks
to Second Life, and we feel it's our duty to step in."

Money and banks aren't necessary to play Second Life. All players need
is a computer and access to the Internet so they can download the
software and generate their role-playing avatars

Without money, though, life in Second Life can be dull, and most of
the game's 50,000 or so active players keep some cash on hand. They
use credit cards or online payment systems such as PayPal to get
Lindens and use them to buy things, including property. (There is an
endless supply; Linden Lab makes money selling land and can put as
much of it on the market as it likes, because in a virtual world there
are no physical boundaries.)

The troubles began when banks started popping up.

"There were a few small, thieving institutions," said Sheffie Cochran,
who ran a Second Life bank called LLB&T.

Cochran, a 26-year-old enrollment counselor at the University of
Phoenix, spent about $10,000 to create LLB&T; the island on which it
was located set her back $1,700 and the Internet-based system she
needed to convert Lindens to U.S. dollars cost many thousands more.

To be able to pay interest -- the weekly rate was 0.1% -- Cochran
converted her customers' Lindens and invested the dollars in money
market accounts and stocks, including Electronic Arts Inc. and Vonage
Holdings Corp. Her real-world profit turned into her virtual bank's
interest outlays.

Cochran said she never failed her customers, but that others did.
"It's the nature of anonymity," she said.

The most infamous was Ginko, whose brief history was detailed in an
article two weeks ago in MIT's Technology Review titled "The Fleecing
of the Avatars." It called the Ginko con "ominous for those who see
such environments as future centers of e-commerce."

Second Life is popular with corporate America -- IBM Corp. holds
meetings in an outdoor amphitheater on its sprawling virtual campus,
members of Best Buy Co.'s Geek Squad hang out in a virtual store and
visitors to Dell Inc.'s virtual island can build their own computers.

But none of the corporations that have set up shop in Second Life
conduct any financial transactions there.

That may be because they have jitters about the unregulated nature of
the space. In July, IBM, one of the earliest companies to establish a
presence in Second Life, introduced official guidelines to govern how
its 5,000 employees interact in the virtual world.

Linden Lab seems to see itself as no more responsible for what goes on
in Second Life than an Internet provider like AOL is for illegal
activities discussed over e-mail, said David Naylor, an attorney with
British law firm Field Fisher Waterhouse, and that attitude crimps
Second Life's potential.

"It's only when people have a reasonable level of confidence that the
transactions they enter into are not fraudulent that you'll see
transaction volumes really going up," he said.

There have been some calls for the government to step in, but
Washington is pretty much scratching its head right now.

"Most members of Congress don't understand what this is all about,"
said Dan Miller, a senior economist with the Congressional Joint
Economic Committee.

"Is a Linden real money? Is it an asset? Is this just a form of
barter? Is this a form of capital gains? We just don't know. The
courts haven't ruled on this, and the regulatory bodies haven't
stepped forward to stake their claim," Miller said.

More than a few Second Lifers think Linden Lab should have kept its
nose out of its world's money matters. Cochran, the banker, said the
company destabilized the virtual economy by giving banks just two
weeks to close.

"It's like asking Bank of America to cash out in 10 days," she said.
"They should have just stayed out of it."

Cochran said she would have to liquidate $7,000 in real-world assets
to pay her 900 customers, many of whom are demanding their money back.
Other banks sold off real estate holdings or stocks at fire-sale
prices to raise cash fast.

Margaret, the British mother, said she wouldn't be surprised if she
never saw her $400 again. And she figures she has only herself to
blame.

"This has lost a lot of people a lot of money," Margaret said. "But I
think anyone who ignored the warnings of 'nothing is guaranteed'
deserves all they got."

alana.semuels at latimes.com



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