« Foozles I Have Known, Quests I Have Done | Main | Sleep is cancelled »

Jan 08, 2008



When Chip and I were working at AMIX, the first online information marketplace, we considered how such a service could be used for money laundering and banking-like transactions.

At the time, the company founder Phil Salin, an economist by trade, warned of proceeding "ad terrorum" with and economic schemes that looked at all like banking. So we were very careful about the shape and accounting for all transactions. We made sure that something of measurable value was always delivered.

This was not paranoia. Around the time of the eBay merger, PayPal was under threat of being declared a bank by the fed. The crush of banking law would have shut them down if it weren't for Reid Hoffman finding an obscure brokering law that allowed them to keep operating, as-is. In the end, all they had to do was give up the interest on the transaction float. (millions$/day) OUCH!

I've been long expecting this action by Linden (the latest in a long series of "this isn't just a game" action) because they run the L$ <-> US$ market. If they don't put limits on what you can do with convertible L$, the jig is up!

The next question is, when will Linden itself be declared a bank? Ad Terrorum, indeed.


Funny, your very last bullet point rings so true. People are going to be quite a bit divided on this particular issue (more so then the gambling one). And I wonder how many each side will have (praisers vs. punishers)?


Fetid Inner Core? Puh-lease. What a fiction. Everyone's going to be affected by this at the same time.


Illegal banking activities have been doomed for some time, because sooner or later LL was going to be put in the position of being legally entangled. It should have been done some time ago.

Medical note:

1. Drug trials start with drugs that have proven efficacy.

2. Drug trials don't continue if large numbers of patients start dying.

3. Unregulated banking is the drug, not regulation.

4. There's no group getting "regulated" banking in sl versus the unregulated kind.

5. The banking seen in sl was not new but theoretical sound, but a re-enactment of every John Law scheme known to history.

6. Drug trials work on substances which are, while they aren't known to the people taking them, are known to regulators.

In short we do not do drug trials by letting anyone set up a table and sell anything they want and see who lives and who dies. LL is not a controlled experiment, nor were the places selling banking meeting any sort of standard with transparent experimental controls.

In short, I really hope you are never put in charge of the FDA, because you will kill an awful lot of people.


I've always been appalled that anyone used these "banking" systems for more than trivial amounts of money. They were obvious frauds. Only a fool would have "invested" with them, and fools deserve to get ripped off; it is a crime against humanity to allow fools to prosper despite their stupidity.

From that perspective, Linden Lab ignoring it is entirely understandable. Probably there was some imminent legal reason they had to act against it now, or they would have left the evolutionary process running.


Most of the "banks" in SecondLife were cleverly designed Ponzi schemes.

If there is a downside to them being closed it is that people kept far less funds in the SL Banks than their real world counterparts and subsequently when the SL banks were revealed as the scams they were people learned a lesson at much less cost than they otherwise would have.


@Lillie, my point is not that drug trials are completely unregulated. Obviously, there are serious costs to experimenting with medical treatments, and so there are lots of checks and balances in FDA approvals for clinical trials. However, because people can be treated independently of one another, we still see lots of experimental studies of treatment effectiveness. We almost never see this in banking and financial regulation, because we pretty much have a sample size of one. (There isn't much interest in saying that some banks would be randomly selected to participate in one regulatory regime, and the remainder in another).

While not a perfectly controlled clinical trial, I think we can learn from the too-brief experiment in Second Life's financial services sector. Let me quote from the end of my Technology Review article (link in original post):

"How will this experiment in unregulated commerce turn out? If [Second Life's self-regulatory organizations] cannot earn the respect of the Second Life community, I see two possibilities. One is that as commercial ac­tivity grows in Second Life, scandals will get large enough to attract the attention of real-world regulators. Alternatively, the markets might fail to thrive because they cannot engender enough trust, and residents will gladly invite the regulators in. Of course, if the efforts within Second Life actually turn out to work--reducing incidence of fraud, increasing business transparency, and establishing mechanisms for trusted interactions--regulators will probably be willing to delegate oversight (as they largely do in the case of real-world accounting standards, for example). And it might just show that actual economies can operate with less or lighter regulation. Any of these three outcomes will teach us some valuable lessons. I hope regulators will have the patience to learn from Second Life's small mistakes."

Many people feel that Linden Lab has already tried this experiment long enough, or that the costs of unregulated financial institutions have been too great. I don't share that viewpoint. After all, Lillie, this is *not* the FDA, or the Fed. I think there is little enough at stake that the lessons learned are still likely to be worth it.

But, hey, I am not the one who makes any of these decisions. As far as I can tell, it is one down (banks), one to go (stock exchanges).


These "banks" weren't valid experiments for unregulated banking, because there was and is no real legal recourse.

In a hypothetical real-world anarcho-capitalist zone, if a "bank" operated like Gingko Financial, they would rapidly be sued (in libertarian/anarcho-capitalist theory, civil courts are as close as anyone gets to a government), and if all else fails, the last recourse of justice, vigilanteism, could remove the grifters.

Those recourses don't exist in SL. There are no courts. You can appeal to the Lindens, and they may or may not do anything; eventually, if you make enough bad press, they'll nuke the entire sim from orbit, but they don't do police work.

You can waste enormous amounts of real money going to a real court, and maybe get resolution. Vigilanteism is basically useless in SL; there are groups that pretend to be superheroes or mercenaries, but they're just kids shooting toy guns at each other.

Without consequences, of course the only kind of "banks" you'll see are frauds.


The confusion over what the sub-prime market is has caused many Canadians to panic unnecessarily. They think the so-called sub-prime crisis in the United States will spread to them because their mortgage is at a floating rate below the bank's prime lending rate. No, it will not, I believe. And I know that so do other people working in the Toronto real estate business, too.
I have found an interesting article on US and Canadian real estate markets in The Globe and Mail. It reads: U.S. sneezes, Canada stays healthy, examining why the real estate market north of the border remains immune from what's ailing U.S.
Blake Hutcheson, president of CB Richard Ellis Ltd. says that "in those areas where Canada is one small part of increasingly interdependent North American business activity, such as capital markets, we are already being hit with the fallout. The U.S. credit crunch is expected to make money to refinance existing projects or fund new ones either unavailable or more expensive" He added that "In the past, it might have taken up to six months to affect us. This time we started to feel the impact in about two minutes."


@Kami oh, please - in _ideal_ libertarian/anarcho-capitalism (theory case) there is NO government or court, you must have head on you shoulders or you are merely plankton to be consumed. You want to have a court & legal system because you can't think in terms of their absence. And case of SL pseudo-libertarian economy is different - it is overlay on top of real-life legal/jurisdiction system. You've seen not true libertarian case but it's model.


I had the opportunity to work as a virtual assistant for a banker in Second Life. He claimed he was honest and legitimate. He claimed his bank was financially backed by a real life bank. He claimed the owner of the real life bank would never let the bank in Second Life fail. As an inside observer of some of the activities, the exchanges looked fraudulent at best. When the residents of Second Life pressured the banker out, I think it spoke volumes about financial institutions, stock exchanges, etc giving even a hint of impropriety. As honest as this banker tried to be, the way he handled certain situations left SL residents with a sour taste in their mouths. The banker left Second Life and reinvented himself as another avatar.
For me, the bottom line is, banks and stock exchanges in Second Life stole money from residents. I did not invest any of my L$. The customers I worked with were very savvy. They asked a lot of hard questions before investing. I am a supporter of Linden Labs staying out of resident to resident interactions. I am a supporter of people trying new things in SL or using SL for educational purposes. However, in this situation, I am glad Linden Labs stepped in. To this date, the banks and exchanges in SL have taken advantage of residents by stealing their L$ -intentionally or unintentionally. Will the Second Life economy tank? I doubt it. The actual incidents of banks folding, stock exchanges being shut down occurred last year. The damage has already been done. Now, Linden Labs is preempting any future incidents of fraud.


While I think it is important for LL to step in and address issues of fraud in the financial markets in Second Life, I believe their current effort is fundamentally flawed. I've written up some of my thoughts on this in
http://www.orient-lodge.com/node/2716>The Future of the Second Life Economy


Bravo, Linden.

If you want to accept deposits of real value from real people there's no reason you shouldn't be required to get a real banking license/financial institution charter.



I have been following these recent financial related events in Second Life for a while now and it puzzles me why people are surprised that problems with virtual banks cropped up AFTER Second Life banned virtual gambling. From what I have been able to glean these virtual banks were dependent to a large degree on the viability of the virtual gambling companies and their profitability. When the gambling companies were put out of business in one fell swoop it created a natural chain reaction, something that would likely have happened in the real world just as easily if the Federal Government suddenly decreed that a substantial segment of the economy was now illegal and had to shut down operations immediately.

I grant you that Second Life's rulers should have exercised better regulatory controls over financial institutions within their world, but I would respectfully suggest that what happened to Ginko Financial had a lot less to do with it being an alleged Ponzi scheme or it paying exorbitant interest rates and a lot more to do with Second Life's abrupt change in policy.


These banks were universally frauds and people were losing large amounts of very real money. I'm sure Linden will be blamed when these banks can't pay back their depositors, but it's just a matter of whether people lose their money now or lose more of their money six months from now when Mr. Ponzi skips town.

Did anyone ever borrow money from any of these? It seems like most of the costs in creating a business are real world ones: tools like photoshop or a 3d modeller, tier fees, private island for your business. There's no "capital" within the game required to build, the cost and means of production are free.


We had a great panel discussion yesterday with CEOs of two Second Life financial institutions (Intlibber Brautigan of Ancapistan Capital Exchange and Travis Ristow of BCX Bank), a representative of a real-world Saxo Bank, virtual world law specialist Benjamin Duranske, and Technology Review reporter David Talbot. You can see it in full machinima glory on Second Life Cable Network Metanomics channel .

We will have a follow-up session on Monday at 11am Second Life Time (Pacific Time) for open discussion.

There are many points of contention over the course of the hour, and I won't try to address them all here. But I would like to respond to Numtini on one point: Travis Ristow of BCX Bank argued that there is a legitimate need for capital within Second Life. People need Lindens to pay for land (which ultimately costs hard cash);they may also need capital to hire people to help them with building, scripting and other services; and if they want to keep their real-world finances out of Second Life (not using a credit card), they will want to access the Second Life captial markets. Surprisingly, they are willing to pay exorbitant interest rates to do so--as much as 8%-11% per week .

Is this type of business sustainable? Usury? Is the claim actually credible? (As a former auditor, I would note that even when banks provide disclosures, they aren't audited.)

Lots of room for debate here. Feel free to join us in Second Life on Monday to weigh in.


I made this point at VB, but it really belongs here.

Didn't the bank guy actually say they're currently charging 11-21% a week on loans, Robert? (It says "11% to 25%" on the BCS Bank website, which I assumed meant yearly, but I believe he clarified that it meant weekly, and said they'd lowered the maximum rate to 21% a week).

At the "low" end (11% a week) that would be 572% a year, but this compounds weekly, remember, which means that the effective rate they are oh-so-nobly charging poor foreigners, and people who can't qualify for credit cards is a staggering 22,740%.

You can run the numbers here. In the example above, you'd set it up as $100 borrowed today, no additions, 572% yearly rate (that's 11% a week * 52 weeks), and tell it to compound 52 times a year.

At the high end (21% a week) they are charging 1092% a year, which, compounded weekly, works out to an effective rate of a little over 2 million percent a year. At this rate, if I borrowed $100 from BCX Bank, at the end of the very first month, I would owe $213.

My guess is that with these numbers, they have close to a 100% default rate (even sadder, probably after people struggle with the payments for a while) and since they make borrowers put up Second Life land as collateral they are functionally buying land for pennies on the dollar with this scheme. They can then sell the land as needed to pay off depositors who withdraw money they've been paying much lower, though still absurd (e.g. 350% a year) rates on.

It's more complex than a ponzi scheme at least, and as long as you have depositors who do not understand the implications of these "loans" willing to put up SL land without realizing they will never be able to repay, it's self-sustaining, but it's just awful.

Usery laws are notoriously complex (California's limits person-to-person loans to 10% interest, but exempts real estate and banks, so it's hard to say if that applies) so it's hard to say if this would be covered. What it would come down to is whether a prosecutor was willing to take it on. It certainly wasn't the kind of operation called out in Linden Lab's statement (which was directed at the much more common ponzi schemes, which are insolvent from inception) but it sure doesn't sound to me like the grid will be worse off without it.

The other thing I wish we'd gotten to was the idea that the bankers kept coming back to that this was all possible due to a "1000% economic growth rate." That's nonsense -- the economy isn't growing at 1000% in any traditional sense, there is just more money being added by new users. Growth rate refers to the increase in the value of the goods and services produced by an economy, not how much money is being brought to the economy by foreigners immigrating from elsewhere (the closest analogy here). Besides, as amply demonstrated above, this scheme isn't relying on the "growth rate" -- it's just an underhanded way to get dirt cheap land by offering people loans that they have absolutely no long-term ability to repay.


This all rings hauntingly familiar. Weren't we talking about the flaw of counterparty risk in anonymous virtual worlds vis-a-vis Second Life over a year and a half ago? There never were banks in SL, just schemes; just as there never was independent, sovereign currency, only redeemable game tokens.

I'm not sure the subprime analogy is much more than a convenient label. The real world credit crisis is comprised of exceptionally complicated factors involving private banks, central banks, ratings agencies, credit derivatives markets, bond and money funds, sovereign investment funds, and not least of all the entire--and utterly corrupt--US real estate industry. Unlike some ponzi going belly up in a computer game played by a few tens of thousands of self fashioned, pseudo-anachro capitalist artisans, the subprime meltdown will affect everyone reading this, and your children, and likely your children's children.

I agree that goings on in the SL "economy" are not simple ponzis. They're much more similar to HYIPs. In fact, if you view the economic dimension of the game as a whole (rinse, lather, repeat)...


While I have no doubt that the scam artists claim to have legions of customer lining up to borrow money at 21% a week, I have yet to hear a single borrower complaining about the Linden changes.


Someone posted this link http://www.fakepaycheckstubs.com on my blog...are you kidding me? Is this legal? No wonder why the subprime mortgage crisis is hitting us so hard..,...heck, why dont we give driver licenses to illegal immigrants who cross the border. Then, give them access to computers so they can join in and "fake how much they make" to get a home loan so they can join the subprime meltdown too! Great idea! OH GEEZ! check it out yourself at http://www.fakepaycheckstubs.com
fake pay stubs fake payroll stubs fake check stubs make fake pay stub bad credit loan instant proof of income letter fake check car loan real estate refinance consolidate now no credit need pay stub make pay stub create pay stub fake check buy online buy online fake make http://www.fakepaycheckstubs.com


I couldn't applaud Lindens decision more loudly.
Of course, without the investigations into the illegal activities in Second Life for the last two years, Linden would likely allow it to continue. However, finally it appears they are taking steps to protect themselves from the inevitable law suits that was coming their way. There is no such thing as an SL bank. It's of course not a regulated venture and those that set behind the ponzi's are usually not educated enough to attempt such a venture.

A majority of the SL community has been begging Linden to work at curbing the fraud and illegal practices witnessed. It protect the future of Linden Labs against fraud litigation, and protects the idiot users whom believe in those that parade "Financial Sector Analysis" out of their parents basements.

When it comes to a loss like Ginko, and the real USD that was defrauded, it's time to step up to the plate. I believe this was the best move I've seen by Linden in a long time and only wish they had taken action years ago.



A couple of updates: First, the complete transcript of last Thursday's Metanomics panel discussion of Second Life Banking is available here .

Second, we now have our panel for Monday set up, which includes Joshua Fairfield, Dan Miller of the US Congress, and Dave Altig from the Federal Reserve Bank of Atlanta. It should be very interesting to hear what they have to say. Details available here .


Following up, since we had another panel yesterday (video) and I learned a bit more about BCX. It was a great panel -- we got audience questions directly this time, which was fantastic, and had no significant technical issues (well, except for the fact that I semi-crashed partway through and became invisible, though could still be heard). I hope Robert sticks with the format.

Incidentally, I'd not even be talking about BCX but for the fact that the guy who runs it is trying to make a big deal out of how he's got a clean operation, and yesterday, accused me of slander (he meant libel) for running some math in the comment above that crunched his absurd interest rates as if it was compounded weekly. I did that because said that one of his loans serviced fourteen depositor accounts in the previous panel, but he now said that he doesn't compound those weekly, making 14:1 a total fiction. He was either misstating things yesterday or a week ago. Pick your poison.

Since there's no stated policies anywhere on this stuff, they can just make it up as they go depending on the side they're taking hits from. If it's lack of profits, then the answer is, "look at our massive interest rates on loans, we make 14:1 over deposits" but when you do crunch those numbers, then it's "well... they're really not that big."

If loans really aren't compounded weekly, then he is "only" charging between 572% and 1092% a year for loans. This, of course, is presented as a reasonable rate, because the world is a virtual world. Virtual or not, the new statement about the interest rate directly conflicts with what he said last week, which was that you could service 14 depositors with a single loan.

Run the math -- that's the only way to figure out what's really going on.

$100 loaned generates $572 to $1092 a year.
$100 deposited pays $147 to $361 a year.

At the extreme ends (the lowest interest rate on deposits and the highest interest rate on loans) that's only about 7:1. At the lower, probably more typical end, it's about 3:1.

Where on earth does he get 14:1 without compounding weekly? Wait, as I was typing that I had an idea. It may come from the defaults tied to virtual land -- he admitted that in one month he had a 20-30% default rate.

The point here is that the story is constantly changing, and my best guess is that this guy (and others like him) have very little real understanding of these numbers, his profitability, or his overall financial picture, though I'm sure he thinks he has a solid grasp on it.

Take a look at the balance sheet on the BCX site. "Deposits (Customer)" are listed as a "Corporate Asset" and there are no liabilities listed at all. It's just a big joke. I mean, this is Accounting 101 stuff -- even dumb lawyers like me understand it. Deposits represent liabilities, not assets. They represent other people's money. Is there anybody out there who will say with a straight face that this is a reasonable balance sheet?

I know there is some natural sympathy for these guys -- who got surprised by this announcement -- but I have heard nothing so far that makes me think that the grid is not better off without this operation, and dozens of others like it. They aren't intentionally crafted as ponzi schemes -- not the more advanced ones. But they're also not legitimate banking operations, and I see nothing that gives me any confidence that they know what they're doing or will ever be able to pay everyone back, though they say so. No timeframe, a lot of mumbling about asset purchases and liquidity, talk of sales and exchanges for bonds. It sounds remarkably like what Ginko was feeding depositors about a week after it collapsed, frankly.

It's just a big, absurd, house of cards, and they're scrambling around saying whatever sounds good last week, today, whatever. I don't buy it. This is most definitely not legal analysis, it's just a guy who has been following these fairly closely talking about it, but it bugs me. Regular users were getting fleeced by these guys, who then cast it as some kind of community service. It makes me kind of sick.

On the other hand, I've got a story about a bank that it really is sad to see disappear slotted for tomorrow at VB. Bad news of a happier sort, I guess. There were a few good ones, and it is sad to see them go.

[Crossposting to VB, to keep comments there in sync.]


Nice catch, Ben. I talked to Travis Ristow, CEO of BCX. First, they have gotten their accounting in order, and have shown a new set of statements here: http://www.BCXbank.com/BCXJAN.xls.

There are still a couple of items worth mentioning. First, they have as assets about L$4,000,000 in software development costs--this was the cost of developing their platform. Probably not an asset that is easily liquidated, though the accounting is reasonable.

Second, they have L$5,720,255 in loans outstanding. Given the default rate of about 20%, I would shave a good L$1M off this to set up an allowance for doubtful accounts.

So assuming we trust the numbers (although they weren't audited) and ignore the problems created by the ban itself--and keep in mind that these are as of Jan 7th, before the ban was announced, they actually look reasonably solvent. They owe about L$11M to depositors, of which about half are demand deposits, and the remainder term/CD deposits that mature in 30 days or more.

They can pay the short term deposits off with about $L5M in cash deposits and equivalents and other securities. In the long term, things are a little rougher, because the software platform is not something they can sell (as long as they remain a going concern), and they have not taken an allowance for credit risks. But overall, this doesn't seem terribly shaky to me.

Of course, keep in mind that these are not audited financial statements, so we only have BCXs word that they have these assets.



No post since Jan 8?

And so many other signs as well.

I declare the Golden Age over.


Sure, there are debt settlement law firms out there, and
some of them are very good at what they do. However, some of these firms
charge 25% or more of the enrolled debt. Many, if not most, consumers
simply canТt afford to pay fees of this magnitude. Also, being an
attorney in one state does not offer any special protection to a
consumer in another state where that attorney is not licensed. ItТs
simply not necessary to hire an attorney to settle your debts. Most
consumers can handle it on their own with a little training and
http://mydebtmanagementonline.com>debt in settlement usa


Given Ben's continued rantings about exhorbitant interest rates, I shall post an article I found in my local real life newspaper, to show that the rates charged on these very short term, high risk loans are reasonable:

NH House Okays 36% Cap on Payday Loans
Concord (AP) - New Hampshire's House has approved a 36% cap on payday loans which will force payday loan companies out of the state if the Senate and Governor agree.
new hampshire and Rhode island are the only new England states whos laws make payday loans profitable.
New Hampshire has no limit on payday interest rates. Rhode Island caps the finance charge at $15 per $100 two-week loan. That works out to a 391 percent annual interest rate.
Ken Compton, CEO of Advance America, said the company would continue to work with lawmakers to craft reasonable regulations, but if a 36% interest cap is enacted, the company will close in New Hampshire.
-end story-

See folks, these sort of interest rates EXIST IN THE REAL WORLD. Loans in SL are short term, rarely longer than 3 months, typically a month or less, and thus are of a similar class to payday loans.

Payday loan centers exist in many states across the country. Also check cashing stores charge similarly high fees simply for cashing a check. The financial industry in RL that provides access to millions of people who are "unbanked" makes major fees off their customers that people who are well documented and financially established would consider usurous or extortionate.


36% does not equal 1092%.


Generally banks determined debt financing as a function of bonds, which invokes "bond math", which is not in evidence in these scheme anywhere.

The above "in order" financial statements are not in the form of a bank's financials. They look like what I'd expect to see from a local video rental store or lumber yard. Banks have a whole different set of accounting issues:


I can't tell the sources of credit risk, productive assets, or leverage. There's also no cash flow statement (which I know is derived, but still forces a categorization on the part of the reporter which would be very telling in this case).

At what point does everyone finally admit that SL is comprised of lots of people playing pretend?


The subprime meltdown has led hundreds of companies to change their investment strategies, while multiple lawsuits are threatening the industry causing what are sure to be sweeping changes to the regulatory landscape. Therefore, events like
www.iqpc.com/us/subprimemortgage are very informational and provide business professionals with the solutions to arising problems as a result of the Subprime crisis.


The subprime meltdown has led hundreds of companies to change their investment strategies, while multiple lawsuits are threatening the industry causing what are sure to be sweeping changes to the regulatory landscape. Therefore, events like
www.iqpc.com/us/subprimemortgage are very informational and provide business professionals with the solutions to arising problems as a result of the Subprime crisis.


Hey guys,
Was wondering if any of you are part of any free dating sites?
Ive been researching and looking around for all the best free dating sites to join.
A lot of free dating sites are free, but you need to verify your age with your credit card which a lot
of people aren't comfortable with.
Ive found a site that lists all the free dating sites where you dont need credit card at all.
Just simply your name.. age.. email.. and your good to go!


I want to be in


Subprime Crisis is not over yet. Though the stock markets world over have recovered the losses it suffered in January to March but another wave of trouble is on the cards.


Subprime Crisis is not over yet. Though the Stock Markets world over have recovered the losses it suffered in January to March but another wave of trouble is on the cards.

The comments to this entry are closed.