The Wall Street Journal-20080123-Cheer Up- Ben- Your Economy Isn-t As Bad as This One- In the Make-Believe World Of -Second Life-- Banks Are Really Collapsing
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Cheer Up, Ben: Your Economy Isn't As Bad as This One; In the Make-Believe World Of 'Second Life,' Banks Are Really Collapsing
In the real world, banks are reeling from the subprime-mortgage mess. In the online game Second Life, a shutdown of the make-believe banking system is causing real-life havoc for thousands of people.
Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits.
Second Life is an elaborate online world where players create new identities for themselves -- images called avatars. These avatars can own land, run businesses and build homes. And there's a link to the real economy: To buy things, players use credit cards or eBay Inc.'s alternative payment service PayPal to convert actual U.S. currency into "Linden dollars," which can be deposited using pretend ATMs into Second Life's virtual banks.
The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world.
The shutdown has caused a real-life bank run by Second Life depositors. Though some players managed to get their Linden dollars out, others are finding that they can no longer make withdrawals from the make-believe ATMs. As a result, they can't exchange their Linden- dollar deposits back into real dollars. Linden officials won't say how much money has been lost, but a run on another virtual bank in August may have cost Second Life depositors an estimated $750,000 in actual money.
"Everyone thinks that because you're losing play money, it excuses everything, but it's convertible to real money," says a Second Life player whose avatar is named UpMe Beam. On Sunday night, the female character was wandering topless through the virtual lobby of a Second Life bank called BCX Bank, where a sign said it was "not currently accepting deposits or paying interest."
In real life, UpMe Beam is a man who says that he is a certified public accountant who has audited banks. He wouldn't disclose his name, but says he has been unable to withdraw $5 he deposited in November to see how a Second Life bank works.
Steve Smith, who runs BCX bank under the avatar name Travis Ristow, yesterday said depositors -- who are owed a total of $20,000 -- will be able to get their money back next week. The bank, which had promised to pay depositors more than 200% in annual interest, is now allowing only small withdrawals.
"This won't affect us long term. It's just a short-term difficulty," said Mr. Smith, 40 years old, who also has significant land and real- estate interests in Second Life. He said he retired from the real-life mortgage business to devote his time exclusively to his Second Life enterprises.
"There is not a whole lot that is fake about this," says Robert Bloomfield, a professor at Cornell University's Johnson School of Management. Mr. Bloomfield's own Second Life avatar, named Beyers Sellers, hosts a pretend television show in the online game about virtual economics.
Linden announced plans for yesterday's shutdown two weeks ago, and since then Second Life players have been streaming into the fantasy banks to withdraw their deposits, which are convertible into U.S. dollars at a floating rate. Yesterday, one U.S. dollar was worth an average of 269 Linden dollars, its typical exchange rate.
On Monday, avatars strode past empty seating areas and potted plants in the spacious, modern lobby of JT Financial, a mostly deserted virtual bank located in Second Life's CapEx mall. "Due to an extreme surplus [of withdrawals] since the announcement of the Linden Labs new policy regarding inworld banks, we have temporarily disabled the withdraw feature on ATMs until further notice," read a big sign.
Linden officials won't confirm the number of players affected by the shutdown, how much in deposits is likely to be lost, or whether any real action will be taken against operators of the virtual banks now facing a run from depositors. The losses clearly are tiny compared with the more than $100 billion in recent write-offs by actual banks and securities firms.
"When virtual environments first started, they were viewed as libertarian dreams with no interference," says Behnam Dayanim, a lawyer who specializes in Internet law at Paul, Hastings, Janofsky & Walker LLP in Washington. "As companies that sponsor these environments become more accountable to investors or regulators, they are starting to encounter real-world limitations."
Second Life has attracted many actual companies, including Adidas AG, Coca-Cola Co. and the Ben & Jerry's unit of Unilever, which see virtual environments as a promising haven for marketing and advertising. Real banks have steered clear of the make-believe world so far, partly out of concerns that interacting with avatars could cause them to run afoul of federal "know your customer" rules, which are meant to prevent money laundering.
The banking crisis at Second Life surfaced during the summer, when Linden banned gambling on the site, citing "conflicting gambling regulations around the world." That caused a run on Ginko Financial, a Second Life bank that had invested heavily in the virtual world's gambling operations. Ginko capped withdrawals, and ultimately issued bonds to customers instead. The bank went out of business in August.
The collapse led to an outcry from depositors at Second Life banks. Linden responded on Jan. 8 by announcing the broader shutdown, claiming it would "protect our residents and the integrity of our economy."
Linden essentially acknowledges that the financial services being offered in its virtual society have evolved to the point that they need to be regulated in the real world.
From now on, "proof of an applicable government registration statement or financial institution charter" will be required of anyone collecting deposits in Second Life, according to Linden. The company insists it "isn't, and can't start acting as, a banking regulator."
"If this is real money, there is an argument that you need to follow real law," says Benjamin Duranske, a lawyer who runs the Second Life Bar Association and is writing a book on virtual law.
Some players think the shutdown might not prevent future losses, because a shady real-life bank operating outside the U.S. still can set up a virtual branch in Second Life. Other players see the crackdown as diluting the game's free spirit.
Joshua Zarwel, a 29-year-old graduate student at New York University, has spent the past few weeks returning real money to depositors in his virtual bank, called SL Bank. Launched in 2006, SL Bank had been paying an annual interest rate of 24% to 30%, compared with less than 5% for savings accounts at most actual U.S. banks.
Mr. Zarwel's avatar, named Teufel Hauptmann, used the deposits -- averaging $25 per user -- to buy and sell Linden dollars on the Second Life currency exchange, known as the LindeX. He says he parlayed his currency arbitrage into about $15,000 in actual profit. "It started as a hobby and grew into something more," he says.
