::fibreculture:: Second Life banking closure

[Ned Rossiter]

[is anyone on fc doing analyses of online game economies?  this topic  
would make a great issue of fc-journal - be great to see some  
proposals, or postings about this. Ned]

Jitters in Second Life as bank shuts doors
Stephen Hutcheon
August 10, 2007 - 11:46AM
The Age
http://www.theage.com.au/news/web/jitters-in-second-life/ 
2007/08/10/1186530581488.html?page=fullpage#contentSwap1
The biggest bank in the virtual world of Second Life has closed its  
doors after a run on its deposits, putting at risk hundred of  
thousands of real dollars of savings and investments.

On Thursday, Ginko Financial - which is owned by Brazilian from Sao  
Paulo whose real name is Andre Sanchez - stopped accepting deposits,  
froze all withdrawals and converted account holders' balances into  
"tradeable debt securities" called Ginko Perpetual Bonds.

The bonds can be bought and sold on the World Stock Exchange (WSE),  
the largest of three sharemarkets in Second Life. The exchange is run  
by a Melbourne-based man whose real name is Luke Connell.

Ginko attracted deposits by offering to pay 0.10 per cent daily  
accrued interest, which equates to a 44 per cent annual return.

The bank claimed to have 18,000 accounts and deposits amounting to  
$US700,000 ($A800,000) in real money. The in-world currency in Second  
Life is called the Linden ($L) and it is freely convertible into US  
dollars at an exchange rate of $L270 to the dollar.

The idea of unilaterally converting deposits into bonds is to buy  
time for the bank to replenish its cash reserves. Account holders can  
still opt to withdraw their funds, but instead of receiving par value  
as a depositor, they will only receive the market value of the  
security. Currently, they are trading at a steep discount to their  
face value.

"There are a lot of people who put money in there and they are not  
going to get it out again," said Robert Bloomfield, a professor of  
management and accounting at Cornell University and a close observer  
of the Second Life economy. "For some of those people it's enough  
money that it's actually meaningful to them."

In a note posted on the Ginko Financial website and on its network of  
virtual ATMs, the bank said it had been forced to take the action  
after a run on its deposits that was triggered by a recent decision  
by Second Life's owners to ban gambling in the virtual world.

San Francisco-based Linden Lab ordered the ban after reportedly  
inviting the FBI to examine gambling activities in its 3D world.  
Legislation passed in the US last year makes it a crime to use credit  
cards or online payment systems to make bets on the internet.

The Ginko notice said the bank began "experiencing a wave of  
withdrawals" after the ban was announced on July 26.

"This led the funds we keep in reserve for day to day use to be  
exhausted, which evolved into a full blown panic depleting even our  
last line of cash reserves and resulting in the current situation,  
with about L$50,000,000 [$US185,000] queued up for withdrawal."

Faced with having to conduct a fire sale of its assets, Ginko instead  
opted to convert the deposits into bonds - a course of action that  
would not be open to banks in the real world.

Ginko has long been criticised as being a scam and Linden Lab has  
also been accused of failing to use its powers to bring the bank into  
line.

But Luke Connell, the CEO of the World Stock Exchange and its parent  
company Hope Capital, has defended the move, saying it was necessary  
to avoid a banking collapse.

"You don't want to have Ginko crash because if it does, it makes the  
entire Second Life economy look bad," he said.

Ginko is the largest shareholder in WSE's parent company, Hope Capital.

Investor confidence in Connell's exchange has also been tested in  
recent week with news that a former employee defrauded WSE of $US12,300.

Connell says the money has since been identified and sequestered by  
Linden Lab and some of it has been returned.

He accused some members of the Second Life community of spreading  
rumours about the viability of his exchange in an attempt to  
undermine him.

In particular he pointed the finger at a couple of companies which  
had intended to float shares on the WSE but which subsequently  
withdrew their IPOs after failing to attract investors. Connell said  
they blamed the cancellation of the floats on troubles at WSE.

"At the end of the day at the WSE, everything is exactly as it should  
be," he said.

He said in the interest of transparency he would be handing over data  
on trades, dividends and stock issues for firms listed on the WSE to  
Professor Bloomfield who is conducting a study into Second Life  
financial markets.

Two smaller Second Life exchanges have already begun supplying the  
information.

Professor Bloomfield intends to analyse then publish his findings  
which he says should help boost confidence and ultimately attract new  
investors and listings.

He said while some of the exchanges were getting better at making  
disclosure, the banks were not. "You just have no idea what's  
happening with the [depositors'] money," he said.