Ginko Financial - Pioneer or Pyramid?
By Adam Reuters
SECOND LIFE, Oct 15 (Reuters) — If you make a 44 percent annual return in the real world it means you’re a genius hedge fund manager, or maybe Warren Buffett. In Second Life it means that you’re an account holder at Ginko Financial — unregulated, unaudited, and a magnet for controversy.
Second Life’s best-known bank seems to be going strong nearly a year after a withering attack from SL business magnate Anshe Chung, who sparked months of discussion board controversy when she alleged that Ginko was a Ponzi scheme — an illegal investment vehicle that pays off old investors with money from new ones.
According to Ginko, it has more than L$61 million (US$220,000) on deposit from nearly 10,000 account holders, all of whom earn 0.10 percent interest a day — equal to about 44 percent a year. So where does the interest come from?
Ginko Chief Executive Nicholas Portocarrero, who declined to provide his real-life name or location, told Reuters in an interview inside Second Life that the interest payments are funded by other investments the bank has made, and denied that the bank was a Ponzi scheme.
“The bank is essentially loaning the money to itself right now,” he said, explaining that it makes investments in a similar manner to a venture capitalist. Portocarrero said the bank — which puts restrictions on the amount of money that can be withdrawn in a set period — keeps a reserve of 5 percent of deposits on hand.
“Sometimes (it’s) less, depending on how the deposits/withdraws went for the day, and (there is) a U.S. dollar reserve of no fixed value, which we sometimes trade on the LindeX with,” he added.
According to Ginko’s detractors, the interest payments come from other depositors — a hallmark of Ponzi schemes, which are dependant on a constant stream of new investment. Because the invested capital is earning little or no profit on its own, the schemes usually collapse under their own weight.
Outsize returns and a lack of transparency should serve as a red flag to investors, according to Mitchell Zuckoff, author of “Ponzi’s Scheme: the True Story of a Financial Legend.” Charles Ponzi drew in 40,000 investors and $15 million in the early 20th century with the promise of a 50 percent return in 45 days. When the scheme collapsed, only a small fraction got their money back.
“Without impugning them, it sure smells to me — even hedge funds don’t promise that rate of return,” he said in a phone interview with Reuters. “Ponzi at least explained how he claimed to be able to double your money in 90 days.”
Portocarrero denied that his bank is paying out interest with newly deposited funds, and was unapologetic about the lack of oversight and regulation.
“I understand that people might be uncomfortable with me not disclosing things and not (being) supervised, but I am also uncomfortable disclosing things and being supervised,” he said. “This is trade, if people are not willing to take this risk, they can just stay away.”
Even Ponzi schemes do make money for early investors, Zuckoff noted.
“A hallmark of a Ponzi scheme is that early investors do get that return,” he said. “There’s an element of greed in the investments. But the absence of transparency, regulation, or even any rational justification on how he can offer almost 50 pct a year, it should make any reasonable investor think, ‘I’m going to lose some money here.’”
Ginko does have some high-profile customers in the Second Life community, including Chili Carson (real life name Arlene Ciroula), whose KAWG&F accounting firm was the first to establish a presence in Second Life.
“I have some money in there.” she said in a phone interview. “You have to trust. I put a couple of bucks in there, watch and see what happens.”
Linden Lab boss Philip Rosedale thinks there may be a way for Ginko to do business as a financial institution without necessarily being overseen or regulated. More broadly, he said the lack of formal contract law in Second Life may not be a problem in the long run.
“If a bank like Ginko were to borrow money from us as the federal reserve, then they were to presumably charge a higher rate of interest by lending themselves — I actually believe that they could still use something akin to the Grameen model to establish a reasonable credit risk in their lending,“ he said in a telephone interview.
Grameen Bank of Bangladesh is a microfinance organisation which makes loans without requiring collateral, using social pressures between lenders to enforce repayment. Shortly after Reuters’ phone interview with Rosedale, Grameen Bank and its founder Muhammad Yunus were awarded the Nobel Peace Prize.
“People lend each other money in groups. The idea is to use a very close circle of trust. If an avatar is attached to the community, there is a dollar amount associated with the risk that they would be ostracised,” Rosedale said. “There is a tremendous possibility that there will be blacklist or social pressures that do allow enforceable mechanisms.”
So is Ginko pioneering a new model of finance, or reinventing a new scam? As Chili Carson noted, in Second Life as in real life, there is rarely any certainty when it comes to money.
“Look at what happened in the U.S. in the Great Depression — there was no real assurance of anything,” she said.
(To read more of the Reuters interview with Nicholas Portocarrero, click here. To hear an audio clip of Philip Rosedale discussing the Grameen model, click here)
