February 27 2008 / by Austra Zubkovs
Category: Business & Work Year: General Rating: 10
The era of financial regulation inside virtual worlds has begun. How we shape such regulation will have a big impact on our broader future.
It all began when just last month Second Life (SL) publisher Linden Lab banned all interest-offering banks and financial institutions within the game.
The new regulations came in response to numerous complaints filed against SL-based banks, most notably in response to last year’s Ginko Financial fiasco. Linden Lab recently posted their new policy stating that, “As of January 22, 2008 we will begin removing any virtual ATMs or other objects that facilitate the operation or facilitation of in-world ‘banking,’ i.e., the offering of interest or a rate of return on L$ invested or deposited.” Now, that crackdown is well underway.
The banks in question had been offering abnormally high interest rates without offering transparency regarding where the extra money was coming from. Many have likened them them Ponzi-schemes, which return significant interest to early stage investors at the expense of subsequent investors. When new investors dwindle, banks are left without ways to return the initially deposited money.
Ginko Financial, which offered a 40% rate of return, collapsed with over $75,000 of real USD left unaccounted, thus disgruntling a good number of avatars.
Linden Lab has generally taken the position of non-interference in-game, but in this case insists “there is no workable alternative.” Many bloggers have argued that it was only a matter of time before the State of California, under whose jurisdiction Linden Labs falls, would step in to regulate every aspect of finance in-world. Still, many users have been crying foul, saying Second Life was always intended to be rule-free, and one user has even gone as far as creating an online petition protesting the ban.
Yet it may be just time to face the fact that with the growing rate of Second Life and of real-money investment in-game, some regulation may be necessary.
David Jung, CEO of the real-life Apez Corporation, runs an in-world bank under the SL name Cenji Neutra. Jung believes the entire platform of Linden dollars is faulty and welcomes the new banking policy.
“It will improve the experience for residents and help avoid and future legal complications,” says an optimistic Jung.
One positive outcome has been the ongoing infusion of virtual worlds into the mainstream dialogue. The SL banking topic debuted on the front page of the January 23rd issue of the Wall Street Journal. Although the article was narrow-minded and and condemned much of the financial transactions as “pretend,” such coverage nevertheless demonstrates the increasing acceptance of these worlds. As the LA Times reports , “The Ginko debacle and Linden Lab’s response to it is raising fresh questions about the need for regulation over – not to mention the wisdom of – financial transactions in a place that doesn’t exist.”
What’s now clear is that no longer is virtual reality relegated to the realm of science fiction. As happened with all new communication technologies, ranging from broadcast television to the internet itself, some regulation will be necessary. Precedent informs that what we are witnessing in Second Life is just the tip of the iceberg in terms of virtual regulation.
This regulation might come in the form of platform legislation (as is the case here), government legislation, or user-regulation, such as the creation of the Second Life Exchange Commission, an independent agency that regulates fraud in the SL financial district and stock exchange.
But regardless of the mechanism, virtual regulation will occur—there’s simply too much promise and too much at stake for this not to occur. And how we deal with challenges like these will inevitably condition the type of world, virtual world or hybrid we evolve into.