So, say you decide you want to make a bank in Second Life. I mean, hey, people have money, right? And, well, what do people do with money in RL? They put it in a bank! So, there you go. Simple enough. Make some ATM machine models, a sleek building, promises of wild 100% interest compounded annually, and you’re good to go.
Until, you know, people decide they want to pull their money back out of the “bank”. Whoops.
After considerable thought, we have concluded that the only way forward from this is to convert, compulsorily, all customer deposits into a tradeable debt security called Ginko Perpetual Bonds. These bonds, listed on the World Stock Exchange (www.wselive.com), will allow Ginko Financial to recover from recent events by removing all pressure from our cash reserves while providing accountholders with a way to cash out on an open market.
World Stock Exchange being… um… another wholly virtual and fairly troubled entity within Second Life. There’s lots of adjectives that could be used here for this whole thing, but what probably comes the closest: Ponzi scheme.
Linden Lab’s traditional response to all of this is that they don’t regulate anything, and no one should treat these “banks” and “stock exchanges” as anything other than mini-games, on the order of your office’s fantasy baseball pool. Well, assuming the guy who took your money lived in Sao Paulo, Brazil. Philip Rosedale, Linden’s CEO, was actually asked about this in a recent online chat:
[14:19] Jay S.: lol, is there any new policy concerning the Ginko scandle, Ie it looks more like a ponzi scam
[14:19] Philip Linden: jay we haven’t created any policy thusfar on bank, etc.
[14:19] Philip Linden: we try very hard not to make rules we do not need to.
[14:20] Philip Linden: We haven’t made any about banks
[14:20] Jay S.: ok
[14:20] Philip Linden: I would note that there is a lot of transparency around projects like Ginko
[14:20] Philip Linden: moreso that in the real world
As Nobody Fugazi commented,
Phil says Ginko Financial is transparent. Meanwhile, a two fingered sloth in Suriname is awaiting powdered goat milk. One of these statements is true – pick one.
For more on this, check out Nobody Fugazi’s blog, and especially Virtually Blind’s complete coverage (written by Benjamin Duranske, attorney and SL commentator). He’s been writing about this strangeness from the start, and most notably got Ginko’s elusive owner in an interview (the one linked above). Matt Mihaly has his own commentary up here.
Prokofy Neva also has a few articles on this, which as best as I can tell alternate betwen laughing at people foolish enough to invest in Ginko and furious that something might actually be done about it.
Putting your money into a pixelated online object hooked up to an anonymous avatar is about as risky as putting it in under a park bench in Central Park — it could be gone by morning. And yet…it has worked better than people thought, in this “fastest growing economy of the world” precisely because of the fast rate of growth and the incredible volume of Lindens. There *are* usually enough Lindens to pay withdrawals, offer high interest — and keep it going for years! People like Benjamin Duranske quick to scream “Ponzi” are completely — witlessly — neglecting to notice that the RL original Charles Ponzi started and tanked and was in jail in a mere six months from December 1920 to the summer of 1921, even in a world without the Internet. Ginkos, however, has lasted for more than 3 years. That simply has to be *explained* and not merely screamed at witlessly.
No, actually, when someone takes your money and doesn’t give it back, yes, screaming witlessly is a valid option.(I’d say more, but I’m still mad I didn’t make his enemies list.)
Oh, and can it get worse? Yes, it can get worse.
As more and more people sell their L$ on the LindeX, Linden might choose to maintain its L$270=US$1 peg for some amount of time, but operating under the assumption that it has not maintained 100% US$ reserves, it will eventually run out of US$ or decide to stop selling them, and the L$ will depreciate rapidly. In either outcome, residents will discover that they possess less wealth than they perceived they had during the time leading up to the crash.
To summarize, it appears very likely that Second Life will experience at least some form of economic recession.
See, no one ever demands that Blizzard puts the Azeroth GP on the gold standard.
#1 by Nobody Fugazi on August 9th, 2007
Thanks for the hat tip. Ginko is pretty much done as a financial institution; I’ll write more about it within the next 24 hours.
This was just the start of a serious change in the SL economy, and it is going to hurt a lot of people. Some people have lost millions of Lindens (think $5,000 US ) in Ginko with a desperate attempt at an illusion where the strings and mirrors are easily seen. People are going to be angry and/or sad – some already are, and with good reason. While it is easy to say, ‘ha ha – told you so’ – the lesson has been learned. I say this not because of your post – very even handed – but because it is a good post, and one that people should read.
A victim of ignorance is still a victim. Too often the cheap seats forget that. I wonder what the folks in the nosebleed section (Linden Lab) are going to do or say – because this is a big issue. Bigger, perhaps, than the issues of land.
Oh, and btw – I am an author on SL. The release was done without fanfare or sim-crashing events. That one is very basic, for new people. Another one should be out in the next month, more advanced for connecting SL to the web.
#2 by yunk on August 9th, 2007
Prokofy Neva just perfectly DEFINED what a Ponzi scheme is, and then said it’s NOT a Ponzi scheme? Hello! Logic? Math? where are you? Not in Neva’s head.
The rate of input of lindens doens’t matter, because there are only so many humans on the planet, eventually you run out, though most ponzi schemes run out way before then. The rapid influx of players only lets the Ponzi scheme run a little longer.
#3 by VonKaiser on August 9th, 2007
I think the best line I’VE EVER HEARD EVER is the following:
[14:19] Jay S.: lol, is there any new policy concerning the Ginko scandle, Ie it looks more like a ponzi scam
Mostly because it starts with lol. I’m imagining a future where the Chairman of the Federal Reserve comes out and says, and I quote “lol, we’re broke.”
The following depression would indeed be hilarious.
#4 by Rasputin on August 9th, 2007
I think I found the major problem here:
Second Life isn’t as important as they’ve led the media to believe.
There, I said it.
I forget the article I read on this subject last night, but they said, in all seriousness, THIS MAY AFFECT 8.5 MILLION PEOPLE IN SECOND LIFE. dunh-dunh DUNNNNH.
Except that there aren’t 8.5 million people in SL, there are 8.5 million characters. It’s the old chestnut of trying to extrapolate how many actual, INDIVIDUAL people are playing.
The reality is, there’s not as many as they’d like you to think.
#5 by Prokofy Neva on August 9th, 2007
Broken Toys isn’t important enough to become an enemy.
1. The Ginko scheme had the characteristics of a Ponzi scheme, but there has been one significant difference: it didn’t collapse within six months, with the owner having taken the funds, instead, it lasted 3 *years*, with the owner making bad investments. And the challenge then is to *explain* that. The run on the bank was fueled as much by “Virtually Blind” Duranske and the real media as it was by the casino ban in Second Life. The point is that when a “Ponzi” has a good, long run, and people in the community were willing to keep depositing and even engage in altruistic behaviour and make CDs for 90 days to enable others with small amounts to cash out, and when you have the owner making as many statements and explanations and public appearances as the Ginko owner, you have something more complex taking place, and it’s worth looking at, and not sneering with all the predictably gloating vindictiveness that events like this cause from people who hate virtuality because they fear it.
2. The scheme didn’t run “a little longer” — it ran 2.5 years longer than the original Ponzi, and in fact weathered scandals and challenges like this in the past. The influx of new people isn’t the only factor that kept it afloat. Again, it’s more complex and the behaviours of people in virtual worlds were more altruistic than one might imagine.
3. Linden Lab should do nothing. They have a policy of not mediating resident disputes. To engage in intervention would imply that they have some banking regulatory power; they don’t. They either shut down all resident financial activity and scrupulously maintain only their own central bank or…they don’t. If someone feels they’ve been defrauded (and the risks and obligations were clearly stated on notecards), they can go to RL lawyers or authorities. Good luck with that one.
4. The article at mises.org has a number of things wrong, and the growth rate, even though it’s falsely stated to be 8 million members, is still significant enough that there are many new buyers of the Linden. Linden Lab also sells the Linden — or doesn’t — at times when the value falls. They’ve kept it remarkably stable through the casino cashout, but it’s by taking less revenue themselves.
5. Ginko and WSE are institutions that were mainly propped up by a handful of very large investors, and then a very long tail of small investors. By no means do they make up “The SL economy” which is separate and robust enough to sustain a number of such banks, stock markets, investment schemes, etc. none of which are very credible, but some of which are working toward gaining more transparency. It’s important that RL regulatory agencies not be whistled in to harass these fledgling institutions by crusading litigators and “SL authors”. If someone has an individual case to make, make it; make even a class action suit. But there’s no need to precipitously forcibly usher in federal agencies that in fact didn’t show interest.
#6 by yunk on August 9th, 2007
The length of time means nothing.
Investment returns CANNOT come from future contributions. If they do at all, it is a ponzi scheme just waiting to collapse. It doesn’t matter how long it ran. That is the base definition. If it did that, it’s a ponzi scheme. No need for any further discussion.
It’s very a basic question. Did investment returns come from deposits or not? It’s yes or no, that’s all. You answer the question right here:
“altruistic behaviour and make CDs for 90 days to enable others with small amounts to cash out,”
They were using deposits to pay investors, not investment returns.
Match. Set. Game.
#7 by yunk on August 9th, 2007
oops switch that last line around
#8 by yunk on August 9th, 2007
OH and one thing: there have been other examples I have read about that had “altruistic” people really trying to help, who inadvertently set up ponzi schemes. This is ESPECIALLY prevalent among churches and other non profit organizations.
So, their motivation doesn’t mean much in the end.
#9 by VonKaiser on August 9th, 2007
I don’t think people really fear virtualization, I just don’t want a future where my elderly mother may be pelted with raining weiners on an otherwise cloudless, sunny day. Is that so much to ask?
#10 by Aufero on August 9th, 2007
@Prokofy
1) Ponzi schemes almost always involve frequent statements and appearances by the originator – they’re run partly on on the originator’s charisma and perceived trustworthiness and acumen. (And there isn’t a definition of the term that has anything to do with how long the scheme runs.)
2) Length and complexity are not the same thing. Early investors in ponzi schemes often reinvest later on, for a variety of reasons. Much has been written about this over the years, you might want to read some of it.
3) The phrase “sneering with all the predictably gloating vindictiveness that events like this cause from people who hate virtuality because they fear it” is ludicrously overblown and accusatory for the argument. Have you considered entering politics? Nixon has been dead long enough that his schtick might be successful again.
#11 by Benjamin Duranske on August 9th, 2007
Thanks for the nod. I’ve read Broken Toys for a while. Great site.
Aufero – Re: your second point, what I expect happened here is that a surprisingly high percentage of depositors just quit showing up in Second Life (or forgot about their second, third, and fourth “alt” avatars) and left money with Ginko. Anyway, when the argument against you is boiling down to: “but it lasted a long time!” I can see the towel sailing in from ringside. I mean… it’s not any less illegal to run a *successful* ponzi scheme.
#12 by JuJutsu on August 9th, 2007
“I mean… it’s not any less illegal to run a *successful* ponzi scheme.”
Unless you live in Neva Neva Land.
#13 by J. on August 9th, 2007
Real men make games in Garry’s Mod. Oh yes.
#14 by Baroo on August 9th, 2007
“Unless you live in Neva Neva Land.
Well played, sir. Well played.
#15 by Dartwick on August 11th, 2007
This same basic thing happened a year aor so ago in EVE.
Actually trusting people in vidio games is stupid.