ZopaSL? MilliAU? No, these are new erectile dysfunction drugs for residents of Second Life frustrated by the Linden Lab banking ban. Oh wait, maybe it could be. Let me explain.

Second Life is a virtual world that some people consider a game, others consider a business opportunity, and still others view as the framework for what people’s experiences of the Internet will be like in the coming years. Whichever opinion you hold, the Linden Dollar, the currency used in Second Life either as a means of score keeping for the game players, or a currency you do some of your business in, is central.

In April, 2005, Nicholas Portocarrero established Ginko Financial, the first major in world bank. Many accused Portocarrero of running a ponzi scheme. The bank was paying effectively 44% APR. In August, 2007, Ginko Financial collapsed. Other banks in Second Life have also had troubles and in world banks are not highly trusted.

In January, 2008, Linden Lab moved to rein in rogue banks and banned all banks that were not chartered by a regulatory authority. This led to much turmoil in the Second Life financial markets and various companies are still working on ways of redefining their businesses.

I’ve written extensively about how I feel that Linden Lab has done themselves and the residents of Second Life a disservice by the way they have handled the banking issues. A recent article in the Finextra amplified my concern. They highlighted a Gartner Group report claiming that “Social banking platforms - such as peer-to-peer (P2P) lending networks like Zopa and Prosper - will grow to control 10% of the worldwide market for retail lending and financial planning by 2010”.

This is an important trend that Linden Lab is missing if not inhibiting. But, it doesn’t have to be that way. Zopa could set up ZopaSL, Propser could step in to take them on. Kiva, which already has a space in the Nonprofit Commons, could join in. These organizations would most likely meet Linden Lab’s requirements.

Ginko was reported to have had around L$ 200 million deposited with them when they failed, which works out to be around US$ 750,000. While it is not clear that a major peer to peer banking organization could pull in these sort of deposits offering more reasonable interest rates, there is still a market for them. It might not be a lucrative market, it might not even break even. But that may be looking at things the wrong way.

People who have deposited money in Second Life based banks are more likely to be interested in social banking platforms and would be an important demographic for marketers at Zopa, Propser and other lending networks to target. What better way to reach out to them than by providing a way to participate, using Linden dollars in Second Life. Setting up such a banking center which would also includes ways of using connecting with existing peer to peer lending networks would be a brilliant marketing move.

There is another issue involving banking in Second Life. Linden Lab, in their terms of service, describe the Linden Dollar as “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.” As Linden Lab makes more and more arbitrary decisions about who can do what with Linden Dollars, trust in the Linden Dollar and in the main grid decreases. The stock exchanges in Second Life are talking about moving away from the Linden Dollar as a currency. New grids are springing up which will use their own currency. What is the best trans-national and trans-grid currency?

Traditionally, when all else fails, people go back to trading gold. These days there are plenty of ways to trade gold online. People have pointed to kitco, e-gold, e-bullion and other electronic gold dealers. A gold dealer that wants to get people thinking about the value of gold in an increasingly connected world, might do well to sell gold in Second Life.

To do this right, they would need to tap into the power of microcurrencies. A Linden Dollar is worth around four tenths of a U.S. cent. There is no cost to transfer Linden Dollars as a payment in Second Life. The only costs are when you try to convert them to other currencies. This means that I can do a transaction of just a few cents without the value of the transaction getting eaten up in the transaction costs. Then, when those transactions are aggregated, they can be significant.

The same should apply with storing online currencies as gold. Right now, a milligram of gold costs around L$ 8. That is a reasonable unit to transact. If I could move my online funds around from Second Life, to other grids, to Second Life related stock exchanges and so on, that would be very nice.

Like the ZopaSL idea, the MilliAU would probably be small enough to at best break even. Yet a company like Kitco or the others might want to buy and sell milligrams of gold in Second Life as a means of getting more people interested in their larger services.

Beyond all of that, if Gartner group is right, the companies that test the waters now in emerging technologies may be best positioned be leaders as more and more transactions are done with social banking platforms.

So, perhaps ZopaSL and MilliAU could be the ED drugs for early adopters looking for new ways of doing financial transactions online. They sure excite me.