Cyberspace Not Immune to Economic Collapse

A few weeks ago, my teenage son showed me an online virtual world, aptly called “Second Life.” It is literally a parallel world where people can create perfect, dream lives that would otherwise be impossible in the real world. Let me tell you, it is very, very easy to get plugged in and hooked up on Second Life.

So far, Second Life has a “population” of over eight million. Players can buy property, whole islands if they wish, build mansions on them, find jobs, create companies and banks, and even gamble. Of course, even in cyberspace, people still need money to exchange goods and services. The virtual currency used is the Linden dollar and, unlike anything else in Second Life, it has a very real-world exchange rate. Namely, one U.S. dollar is worth about 270 Linden dollars.

According to very few available statistics, the size of Second Life’s money system is measured in millions of dollars. Each day, Second Life players exchange over US$200,000. As a result, many players have been able to make quite a real living out of very virtual jobs.

Unfortunately, even cyberspace knows of economic collapse. Earlier this year, the U.S. government banned online gambling. Second Life’s creators promptly followed suit, nearly shattering the game’s economic system in the process. You see, far too many players have made money from gambling.

Not surprisingly, with one of the major money supply taps drying out, “citizens” of Second Life made a run at the virtual world’s largest bank, Ginko Financial. They lined up before Ginko’s ATMs and tried to pull their money out, only to find out that Ginko’s assets had been frozen because the bank had declared insolvency.

The story behind Ginko reminded me of the worst pyramid schemes plaguing real world financial systems in the early days. Namely, Ginko is unregulated, as any other financial institution in Second Life, and, as such, it is not required to maintain minimum reserves or secure deposits up to a certain amount.

In addition, Ginko maintained ridiculously high interest rates on deposits — going as high as 40% — and was supposed to be supported by total assets of about US$750,000 being invested in debt securities. Unfortunately, Ginko’s founder, a player from Brazil, was not exactly a well-versed investor because all of the bank’s assets are now deemed worthless. And while some players lost only small amounts of money, some lost thousands of very real U.S. dollars!

Now, Second Life founders are trying to regulate the financial system. But, it’s too little too late for some of the players. It just goes to say that there can never be too much vigilance when it comes to your money, virtual or not. And if something sounds too good to be true, it usually means only one thing — it actually is!