Banking ban (UPDATED)
(First paragraph revised for clarity, to include needed information. Also see updated Other Posts listing at bottom.)
Linden Lab today announced via the Big Blog that they were ordering a shutdown of all banks offering interest or any other form of return on investment to depositors, unless they can show that they are appropriately on record with a RL banking regulatory body. This follows the series of Grid banks that have failed in recent months before I arrived in world, including Ginko Financial in August.
Truthfully, this is not a surprise, and should have been expected by the Resident community at large, even those individuals and businesses that have invested in the banks. The Lindens, after all, are not a government, but a private corporation. Despite my blithe contention a month ago that they are, in effect, the despots and tyrants (in the old-fashioned senses of those words) of Second Life, they are not running SL for the sake of running a virtual world that we get to play around in. They’re trying to make a profit themselves. But they’re also responsible to the RL government for obeying laws; and part of those laws pertain to the running of financial institutions. If Residents started losing tonnes of money on wobbly banks and Ponzi schemes in world, and then complained to the SEC, the Federal Reserve, and any other national or state institutions — and those are just the ones in the United States! — what choice would LL have but to either force closed all Grid banks, or pay hefty fines to the governments? In addition, this covers LL’s rear from being sued in civil court as indirect parties to fraud cases.
To those who are complaining about an arbitrary move by LL, with little or now warning, I suggest you consider these points:
- We own the intellectual property, but the Lindens own the Grid; they have the right, in the end, to pull the switch if they choose to and make the whole of SL so much etherware, because they own Second Life.
- Any investment, anywhere, involves risk — even something as safe seeming as banks. SL banks are wobblier than most (outside, perhaps, of Russia during the days immediately following the collapse of the Soviet Union). LL didn’t make you invest your money; you chose to. If you get burned in a banking run, it’s your problem. It’s a little principle of business called laissez-faire — along with another concept: caveat emptor.
- The extreme interest rates offered by some SL banks should be a tipoff that these banks need to be regulated; and the people who have the regulation mechanism in place are the RL governments. Besides the simple fact that no reputable (and sane) RL bank would offer such high interest, rates of 50-95% annually on simple deposit savings haven’t been seen since the late Seventies, when RL inflation in America was growing out of hand, and banks were offering daily interest — compounded! — to lure depositors. It took the Federal Reserve yanking on the choke collar to bring that inflation under control. Now imagine inflation like that running rampant in world. The linden is relatively steady now; how much would we bitch if it were caused to become unsteady? Prices through solid roofs, never mind the phantom ones, all our gaudy clothes and cars becoming unaffordable, etc. Forcing the banks to obey standard banking laws — and be RL liable to investors under those laws — is probably a very sound economic move on the Lindens’ part.
- If Linden Lab got caught up in a civil or criminal action, and ended up having to pay out lots of real U. S. dollars in fines or settlements — not to mention legal fees — they might be forced to shut down anyway, and all carping about lost capital would be moot. £500,000 equal only some $1900 U. S. at current exchange rates. Compared to the hundreds of thousands — or millions — LL would face in liability actions in various courts, which matters more to the business? It’s said that in show business, there’s the show, and there’s the business. In Second Life, there’s the lives we lead, and then there’s the Real World — which bites a lot harder.
Think about all aspects before you take LL to task for this action. This just might mean the saving of the Grid in the long run!
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News and Blogs (updated 1/9, 6:10 SLT):
- Reuters (Eric Reuters) — “Linden bans Second Life banks”
- New World Notes — “Trust Collapse: Lindens Prohibit Unregulated Banks, Community-Based Lending– But Why?”
- Kabalyero — “Say Bye-bye to Banks”
- Prakhar Agrawal — “Banking Banned in Second Life”
- SLNN — “Opinion: Blame it (financial panic) on Garret”
- Virtually Blind (commentaries in virtual law)
- Massively — “The SL Banking Ban — Fear and Greed”
- C/NET News (Daniel Terdiman) — “Banks banned in Second Life”
- Strange’s Second Life Blog — “Second Life bank ban”
- Transumanar — “SL banking ban — hot comments”
- Second Thoughts — “Linden Lab rolls up the banking scams of Second Life”
The SLogosphere is either getting up to steam, as the expanding list of blog articles suggests, or I just needed to use more than one technique of looking for scribblings on the subject (grin). In any case, there’s plenty of discussion (read: venting) in the Linden-run Forums. Search on “banks” for a taste, and be prepared for some extreme opinions. (Registered payment info required!)
Previous post:
I agree with Linden Labs with this move. If anyone wants to operate a bank in Second Life then it is just right that they provide proof that they are legitimate business. ;)
A well-argued post. I agree with you entirely.
I would be curious to know whether the legitimate (and highly regulated) RL banks in SL – like ABN Amro or ING – have yet launched inworld financial services. I recall that both of these banks, when the first entered SL, spoke of offering loans, mortgages and so on. However, I have not read about any services actually appearing.
A point I always make when the subject on money in SL crops up is: read the SL Terms of Service (ToS). These contain dry and seemingly uninteresting swathes of text. However, buried in there you may find some interesting nuggets. The sections dealing with money I recall finding particularly illuminating.
I’d wonder if they think the return would be too small for their notice, and the risk too extreme with a lot of small investors/businesses that are working with, essentially, pennies in RL worth. ‘Tis true that big businesses tend to think big when they get to that size, and forget about the little folks.
After reading this, I went and looked them up. For those unfamiliar, the Terms of Service are on Second Life’s site. But the key language is this:
That rather gives them the right to do what they want, I’d say. If they wish to limit or deny the ability to run a bank, they can. Both bank managers and depositors can, to borrow from Anne McCaffrey, chew it raw and swallow.
Harper -
I know that I haven’t touched on the subject, because you and other bloggers have it covered. This post is very well written and I have to agree with your opinions on the decision by Linden Labs to shut down interest bearing accounts and banks within Second Life.
The idea of RL banks offering SL services is a pretty interesting one. U.S. RL banks are highly regulated, monitored and audited by the U.S. Government. Fair lending practices would have to be considered as well as some sort of identity authentication to open accounts because real dollars are involved. These points don’t even begin to name the criteria needed to stay out of trouble. If it can be done, I will find it really interesting to follow how it gets done. I have to agree that the risk just may not be worth it.