The MetaVerse’s Enron?

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The MetaVerse seems to become more and more like meatspace every day. Now, add to our various and sundry virtual scandals, crimes and misdemeanors the ugly specter of financial irregularities.

Certainly there have been voices from the beginning that said that Ginko and other virtual “financial institution” were madness and con games…and now it seems they are quite correct. In the end, how can one have institutions that deal in virtual money, create virtual accounts and deduct virtual charges with little or no accountability or oversight…that aren’t called Visa or Mastercard of course.

Mr. Skilling, your avatar is waiting.


I have reposted the following excellent article by Bryan Gardiner on the rise and fall of Ginko from Wired.

Bank Failure in Second Life Leads to Calls for Regulation

By Bryan Gardiner

The recent collapse of Ginko Financial, a “virtual investment bank” in Second Life, has spurred calls for more oversight, transparency and accountability, especially when it comes to business practices in the metaverse.

Last week, Ginko Financial — an unregulated bank that promised investors astronomical returns (in excess of 40 percent) and was run by a faceless owner whose identity is still a mystery — announced it would no longer exist as a financial entity.

The declared insolvency meant the bank would be unable to repay approximately 200,000,000 Lindens (U.S. $750,000) to Second Life residents who had invested their money with the bank over the course of its three and a half years of existence.

“You have to remember, there’s not a lot of places to put your money in Second Life,” said Benjamin Duranske, a lawyer who publishes Virtually Blind, a blog that chronicles virtual laws and legal issues that impact worlds like Second Life. “When you have disposable income and a bank that’s promising a 60 percent return on deposits, that alluring — especially if it works for a while.”

Quickly following this news, a tidal wave of backlash took shape from thousands of angry Second Lifers in SL forums.

Yet in many ways, the undoing of Ginko and the collective loss of more than 750,000 very real U.S. dollars is only the latest event hammering home the fact that the lawlessness of the virtual land has its drawbacks. Indeed, after Linden Lab, the owner and operator of Second Life, invited the FBI to investigate casino activity, the company subsequently instituted a ban on all gambling earlier this month.

On Tuesday, Linden Lab itself issued a statement trying to clarify its stance on regulations and Second Life’s virtual economy.

“Linden Lab does not intend to recreate or subvert real-world laws in any way,” the statement says. “We caution our residents to be wary of anyone offering extremely high interest rates at no risk, either in the real world or in Second Life — if it sounds too good to be true, it probably is.”

The response was timely, considering Second Life currently has 20 to 30 banks that operate essentially the same way Ginko did. That fact, plus the large losses associated with Ginko, has led to a growing call for even more transparency and regulation among SL residents.

Duranske is at the forefront of the movement. An intellectual property lawyer who’s taking time off from his practice to work on a book about virtual law, he was one of the first people to jump on the shady business dealings at Ginko Financial more than two months ago. Indeed, his blog has one of the most comprehensive accounts of Ginko’s downfall.

Duranske claims he’s personally talked with a few SL residents who have lost as much as $10,000 in the Ginko scheme, but estimates that the majority lost a more moderate amount–somewhere in the range of $50 to $100.

“A lot of people forget, Second Life is governed by U.S. law and the laws of California,” Duranske explained. “It just so happens that these laws haven’t been enforced.”

But that’s about to change. Duranske says because Ginko has received so much press lately, the bank, as well as others, will inevitably become an issue that Linden Lab will have to tackle. That either means self-regulation or more federal intervention.

He’s hoping it won’t come to the latter.

Robert Bloomfield, an accounting professor at Cornell University, is of the same mind. Bloomfield says the collapse of Ginko and the recent closing of casinos, among other incidents of alleged fraud, are shocks to participants in the Second Life financial sector.

That said, Bloomfield believes residents are already responding by creating a variety of oversight institutions of their own, including companies that insure against fraud and homegrown regulatory institutions like the Second Life Exchange Commission, which is modeling itself on the SEC.

“It will be very interesting to see which organizations survive (if any), and how they reduce the risk of fraud,” he said in an e-mail.

Bloomfield admits he’s getting in on the act on a personal level and has forged an ongoing agreement with two Second Life-based stock exchanges, the International Stock Exchange and the SL Capital Exchange (formerly AVIX) that will provide him with comprehensive data on trading histories for all listed firms.

He expects to publish analyses of that data in the near future and says such information could very well be another important step toward transparency.

In the end, Bloomflield says SL’s financial and business sector can teach us a lot about the nature of regulation and oversight. Even with the unfortunate case of Ginko, he still believes the intervention of real-world regulation is remote.

“I am really hoping that RL (real life) regulation does not come to SL because right now SL has the chance to sort out what type of oversight and regulation it wants,” Bloomfield said. “If the RL authorities or Linden Lab do start meddling with business affairs, it could ruin a golden opportunity for real innovation and creativity, a chance to recreate a world in a new image.”

2 Comments

  1. Why is it such a “shock” to participants in SL’s financial sector? I’m not shocked at all and I’m sitting here shaking my head at the idea that anyone would be. Don’t get me started. You are taking your chances, but even more so than in RL exchanges, because there’s nothing in place to protect you when that bank or exchange takes a hit. It would all be easy to dismiss as “pretend” if it wasn’t for the fact that lindens can be exchanged into RL currency.

    As SLNN’s main finance reporter since March, over and over again I’ve written pieces that show and discuss a lack of regulations and accountability along with scandals that have been rocking the exchanges for months. I’ve just been waiting for the ball to truly drop, but despite it all, people continue to invest. Go figure.

    One of the questions I always ask these CEOs is what they think about RL regulators stepping in and how will they be accountable to shareholders? It’s something that has been really lacking and I can only hope that it will improve in the future to avoid more fiascos such as Ginko and the WSE’s recent theft.

  2. No, no surprises here.

    Last year, a friend of mine told me she was keeping her savings in Ginko… so I investigated it a bit, just in the spirit of looking out for her. Sure enough, they stated quite clearly in the information notecard that they were not insured, nor under any legal obligation to return funds deposited with them. Quite clearly. I suggested she get out but I don’t know if she did. I’m (wishing that I was actually) astonished that anyone would be so foolish as to think that giving them L$ was anything short of gambling under an unspecified time limit.

    This, along with several other unpleasant incidents (mostly of a purely social nature but some also financial) really makes me take a hard look at SLife as a social scientist. I wonder at the sorts of choices people make, when they realize that SL offers great freedom to anyone and everyone to play whatever “game” they decide to create for themselves.

    I celebrate that freedom, and would hate to see it chipped away at still further by real world lawyers. Not because I want people to take advantage of each other, but because it is a world full of good lessons to us all, to see just what people do with so much choice offered to them. Chaos, anarchy? Maybe. Both as an anthropologist and an inquisitive human, I like to see what people do when not even the sky is a limit. I am fascinated to see what people do when nearly all the limits are those they set for themselves. It’s brutally honest about human nature.

    I’ve been pleasantly surprised. My surname might reveal that I expected less of people. But I have been greatly encouraged to see what supportive groups and relationships they, we have built that could not have been built elsewhere, Caledon chief among them. I am delighted to see people make good choices for themselves, be responsible for themselves, when in other worlds (including the real one), all the laws “protecting” us enforce the illusion that Big Brother is responsible for us, not we for ourselves.

    Looking at the trends with increasing government involvement and legal restrictions, I can see I am likely in the minority in my desire to keep the grid wild and unfettered. Or am I?


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