High risks, high rewards in virtual finance
By Eric Reuters
SECOND LIFE, Dec 4 (Reuters) - In many ways, the SL Investor’s Bank (SLIB) is like any financial institution, with ATMs, mortgage applications and friendly staff. But the bank offers rates that would make a real-world investor stagger: more than 92 percent annually on a termed deposit.
The promised returns assume, of course, that the bank will still be solvent when the investment comes due. And as SLIB manager Tyrian Camilo readily admits, very little is certain in the risky world of Second Life finance.
“Second Life banking isn’t safe, by any means at all!” said Camilo, who claims to manage L$12.2 million (about US$46,000) in assets. “It’s almost as insecure as it can get!” He declined to give his real-world name, but said he shares it with major clients.
Even as Linden Lab shies away from acknowledging the “virtual economy,” over the past year Second Life has acquired many of the instruments of a sophisticated financial sector. Businesses can raise funds and put their shares up for sale on several competing stock exchanges, or issue bonds and take on debt. Banks accept Linden dollars, invest the money in Second Life stocks, and promise massive returns. Get-rich-quick stories abound.
But there is a clear downside. In August one of the largest banks, Ginko Financial, went belly-up after the Second Life gambling ban caused a panic among investors, and the institution was unable to meet withdrawal requests from angry customers. Midas Bank followed. Earlier this month hackers made off with US$11,500 in a series of heists against at least five banks.
How do banks like SLIB cover the outsize returns they promise to investors? Camilo said he uses his depositor’s money to invest in other banks, in Second Life real estate, and in virtual stock markets. “Good stock investments can run even close to 100 percent in a week,” Camilo said.
But to veteran observers of Second Life finance, who have heard similar rationales from Ginko and other failed banks, the purported business model rings false.
“It looks like a Ponzi. It smells like a Ponzi,” said Taran Rampersad (Second Life: Nobody Fugazi) of Second Life banks. A Ponzi scheme is a fraudulent investment vehicle where early investors are paid large returns with the deposits of new investors, until new investors can no longer be found and the investment collapses.
Rampersad is the co-author of Your2ndPlace.com, a blog which tracks Second Life finance. He used to invest in Second Life himself, until losing L$200,000 (US$740) in the Ginko scandal.
While wary and no longer an investor, Rampersad isn’t wholly negative on Second Life finance. “On one hand, I want to tell people that they should run away screaming from some things,” he said. “On the other, I do not want to tell people they should trust no one.”
Luke Connell (Second Life: LukeConnell Vanderverre) of Hope Capital, which controls the World Stock Exchange (WSE), denied that the banks are Ponzis.
“The banking business model in Second Life is really more of an investment bank model than conventional real life banking model,” Connell said. He claimed that banks generate their interest from profits from activities such as trading virtual stocks, not on the backs of new investors.
Many of the banks have a complicated relationship with Hope and the WSE. Banks listed on the WSE compete against Hope Capital for customer deposits. Cross-investment is common. Midas Bank collapsed in a complex deal in which it invested in bonds from Hope.
Connell admitted fraud is rampant. He estimated that 10 to 20 percent of businesses that listed on the WSE file for initial public offerings, raise money, and then vanish from Second Life, leaving investors in the lurch.
Collapsing investor confidence and a slowing rate of growth has led Connell to look outside Second Life for fresh capital. Hope plans to debut its own currency called the “WIC” to attract outside investors to in-world stocks.
“There has been no major wave of new users since the gambling ban. New capital entering the market has been limited,” Connell said. “It is for this reason I began working on launching the WSE to general Internet users.”
With no equivalent to the Dow Jones or S&P 500 index, it is difficult to track the overall performance of the stock exchanges. Repeated inquiries to WSE staff failed to determine the market’s direction over the past year.
Not all banks generate their interest from investments in virtual stocks. Thanh Ho (Second Life: Arbitrage Wise), who claimed to have L$80 million in deposits (US$300,000) at JT Financial, doesn’t invest deposits into virtual stocks at all. Ho covers his 44 percent interest by investing the money in a variety of private business ventures, including banner ads on his ATMs.
Mike Lorrey (Second Life: Intlibber Brautigan) of BNT Holdings also said he covers interest on L$4.3 million (US$16,000) in deposits without investing in stock. He sees building a banking relationship with thousands of customers as laying the foundation of a future wide-ranging virtual financial empire.
“Since Second Life economic growth for the past year has been 1000 percent, offering 44 percent, or even 72 percent on your money is actually rather miserly of the SL banks,” Lorrey said.
Linden Lab insists that Linden dollars are fictional, and despite the ability to cash out “game tokens” for real money the financial industry is a mere simulation, play-acting. And for many Second Life residents, the game is fun, as customers continue to deposit to virtual banks and watch their account balances grow.
Rampersad enjoys it too, but offers players a warning: “Investment in Second Life is high risk. Period.”
