January 29, 2008
Banking Crisis: Has Second Life Become Pottersville?
Posted by Christine Hurt

We'v ehad some interesting discussions here on the blog about Second Life.  (See Leandra Lederman's posts on taxation here; mine on gambling, which has since been prohibited by the hosts, here.)  Apparently there has been a run on the banks in Second Life!

I have never been on Second Life, but I understand that player can exchange U.S. dollars for "Linden dollars," using online banks.  Then, as necessary, players can get Linden dollars for use on Second Life by having their avatars use the ATMs in the virtual world.  Linden dollars also may be cashed back out for U.S. dollars.  Unfortunately, these virtual banks may literally be run by an individual who may or may not invest your account dollars wisely.  Although these banks promised players very high rates of interest (24% to 30%, and in one case 200%) compared to bricks-n-mortar banks, opening accounts there may also have had much higher risks than a regulated, FDIC insured institution.  On bad investment that some virtual banks made was in Second Life's gambling industry, which was destroyed when Second Life banned gambling.  Following that ban, there was a run on the banks in August, with players attempting to withdraw their funds at the same time.  Some players found the virtual ATMs to be out of order during this crisis.  The WSJ article estimates $750,000 in player losses during that time.

This week, Second Life announced that only banks with actual charters will be allowed to operate in its virtual world.  Is this necessary regulation or interference with the libertarian model of Second Life?  (The phrase "libertarian dream" is used in the article.)  I guess if you're dumb enough to give real money to a virtual bank without knowing who owns it, what they will do with your money, and what the reserves there are, maybe you deserve to lose it?

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