The Future of the Second Life Economy
Submitted by Aldon Hynes on Wed, 01/09/2008 - 18:05
Linden Lab is finally attempting to reign in the abuses of unscrupulous banks within Second Life. This is long overdue and if done right will help grow the economy in Second Life. However, I have numerous concerns about their approach. They seem to be seeking an approach focused on imposing rules, that may be self contradictory instead of engaging the technology and community, which is core to Second Life, to address the underlying issue.
The key issue is:
As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter.
Let us spend a little bit of time trying to understand this. ‘Interest’ is pretty straight forward. Yet, does this apply to corporate bonds? They offer interest, yet they may be bought on exchanges and don’t have an ATM. What if I give Linden dollars directly to my banker, instead of using an ATM, with the understanding that my banker will pay me back, with interest at some point in the future? This would seem to be legitimate based on their current wording. If this isn’t legitimate, how do you differentiate giving money to a friend with the expectation that they will pay you back, with interest, from giving money to a banker? Or, does Linden Lab propose that players should not be allowed to lend money to friends?
More significantly, what do they mean be ‘any direct return on an investment’? Does this mean that companies in Second Life can no longer offer dividends? Dividends are a direct return on an investment. How does this apply to exchanges? In particular, the Second Life Capital Exchange currently offers interest on deposits that are not currently invested. It would seem like this constitutes forbidden banking, but it isn’t the primary purpose for the ATMs. Likewise, you can buy bonds on SLCapEx that pay interest, which may or may not be permissible. By attempting to address the problem by fiat, it appears as if they are creating more problems than they are solving.
Perhaps the bigger question is, what sort of registration statement is required? The Linden Lab Terms of Service states,
Second Life "currency" is a limited license right available for purchase or free distribution at Linden Lab's discretion, and is not redeemable for monetary value from Linden Lab.
Is there any government organization that applies to the lending of limited licenses that are not redeemable for monetary value from Linden Lab? Clearly, this is something that does not apply to banking regulators, unless Linden Lab is now implying that Second Life “currency” is like a sovereign currency, which is probably not what they want to be saying. Is forming a limited liability corporation sufficient? If so, how does this protect the investor? If Linden Lab thinks that some governmental organization should be regulating the exchange of limited licenses in Second Life, how to we vet the trustworthiness of such a governmental organization? What is to prevent some organization, such as a ‘Nigerian Banking Commission’, or some tax haven’s investment commission from turning a quick profit by offering such registrations to anyone that will pay a modest fee? Or, is Linden Lab going to get into jurisdictional issues about which countries can and cannot offer registrations?
Linden Lab’s FAQ about this is even more poorly written. One question asks, “Why not “virtually regulate” these “banks,” instead of banning them?”
Their answer:
Linden Lab can’t and won’t become a virtual “banking regulator.” Banking regulation – whether in the “real” or “virtual” world – is complex and intensive, and is a government activity. Linden Lab is not empowered to regulate the businesses of banking or securities. We can and will take steps, however, to ensure the stability of the Second Life economy, and that is what we are doing.
This is at best disingenuous. Banning something is a form or regulation. Linden Lab is virtually regulating these banks by banning them. They are doing it in the simplest, and least thought out way. In subsequent questions, they are asked if this “Will this cause a “run on the banks”. They respond, “It might. We unfortunately have no control over this.” To the question of “Will this destabilize the LindeX?” they respond, “While this may occur, we believe any disruption will be minor and temporary.”
To me, this sounds much more like, “we have no idea what to do about this, we’re trying to cover our asses, and we don’t really give a damn what this does to the Second Life economy.”
Meanwhile, Central Grid is gearing up. TNW and BNT are both talking about setting up their own grids. If Linden Lab isn’t really concerned about the state of the Second Life economy, I am sure that other grids will emerge that will be more concerned.
So, what could be done instead? Linden Lab should promote community governance. They should help facilitate a Second Life Chamber of Commerce, a Second Life Exchange Commission, and other self-regulatory organizations. It should provide tools to help these organizations be more effective.
As an example, the International Stock Exchange provides the number of trading accounts and deposits on its front page. Second Life Investors Bank provides a detail of Deposits, Withdrawals and Transactions. It isn’t surprising that over the past 24 hours, there have been 119,940L$ of withdrawals and only 6,913L$ in deposits. VSTEX provides details of total deposits and withdrawals in their 2007 Financial Statement. They have provided me details of this information from time to time at my request. As an example, this afternoon, I received a detailed report of transactions since yesterday morning. 393,291 L$ were withdrawn, and 196,064 L$ were deposited.
A problem with this sort of information is that I am trusting SLIB or VSTEX to provide me accurate information. Then, even if the information is correct, there are minimal safeguards in place to make sure that money isn’t absconded with going forward. Instead of trying to wash their hands of Second Life economics, Linden Lab could make information more accessible, for example providing tools so that reporters and investors could see what the real transaction flow is at ATMs, or setting up accounts that could only transfer funds via the ATMs.
By using the community of Second Life and the technology, Linden Lab could help build the economy by making it more secure instead of damaging the economy by arbitrarily banning those types of transactions that they seem incapable of figuring out how to deal with.
Banning isn't regulation;
Submitted by Prokofy on Thu, 01/10/2008 - 00:20.Banning isn't regulation; it's saying "we don't want to be in the regulation business". It's a very blunt axe, to be sure, but it's saying "we just don't want to go there". The Lindens, for example, could say "We're in California, we could legalize ageplay under the first amendment and duke this out with all these prudish Europeans and scandalized Americans." But they don't, because it loses them customers, gets them bad press and because it's morally repugnant, even if legal, and they sense that's the opinion of most people.
Banking has just caused too many people to complain, with too many anonymous avatars seeming to get off scott-free, and they have to move so as to limit their liability from litigation. I think on the banks issue, the point is not to hammer on Linden Lab and make them produce and legalize everybody's Second Life for them. I think the task is for people who want this or that thing legalized or de-legalized in Second Life to work on it themselves, in SL and RL.
I find it a bit of comment-fisking to look all arch and talk about your friend who gives you a loan and asks for interest. The fact is, your friend them doesn't put an ATM in your home when he does that and encourage you to also play a stock market through it. Come to think of it, if you invest in, oh, Oppenheimer or Schwab or something, you don't go down to your neighbourhood deli and find an ATM machine enabling you to play with your stocks. Yet all the SL exchanges have ATMS that function just like bank ATMs do.
The exchanges might survive all this, if it weren't for the fact that their funds are...in banks. And also tied up in land and building they've terribly overvalued, and various intricate barter deals like "you script this for me and I'll give you stock in my new IPO company."
I'm hoping, too, that some way will be found to create institutions of community lending, it's terribly important for all kinds of reasons, having to do with development, growing virtuality, empowering women and minorities, etc. etc. It's all a good thing.
I think it's just downright lousy of Benjamin Duranske to bully-pulpet from the tech media and blogs like NWN and say Philip Linden is wrong for *appreciating* what Ginko was as a *structure*. Philip is likely ignorant of Grameem bank, as he is of Ginko's, but that doesn't matter. Philip is essentially right. We need to find new ways to lend and develop.
Grameem bank isn't even what people imagine it to be, as I've written at length on my blog. I hardly think having bureaucratic international civil servant kleptocrats take international development loans and gain interest on them and pocket some of it, and then create these banking schemes, is something meeting a real test of sterling civic goodness. And I really don't like the idea of having little communist neighbourhood committees like in Cuba browbeating people to pay their loans back. You don't develop countries by creating little harassing collectives tied to the international bureaucracy's tit; you do it by empowering entrepreneurs in business.
Nevertheless, there are elements of Grameen that are important, and elements of Ginko that are worth thinking about as possibilities to keep going.
However, with all the huge variety of levels, understandings, degrees of education, knowledge, ability, Second Life may be too wild an environment. The people running these banks are 23 years old, they are inexperienced and incompetent and adults shouldn't be handing them money.
All you have to do to get rid of your illusions about all this, however, is imagine if you stripped away all the grandeur and drama of 3-D Second Life, with its lifelike avatars, fabulous steel and glass bank buildings, immersive environments, handsome men in tuxedos and gloves, gorgeous women in sweeping ball gowns, large statues of golden calves, limousines pulling up, CEO titles sprouting over every head and just said..."Let's play bank here on Aldon's site." I send you $10 on paypall, you offer me 2 percent interest and we play bank, using something like opendemocracy's predictions on events or ratings for blog entries or something as the "business". Would people find that fun? Oh, a certain number would, but it would be rather stripped down, and sort of nonsensical -- why not put money in PayPal money market?