Trust Collapse: Lindens Prohibit Unregulated Banks, Community-Based Lending-- But Why?

A late night run on an SL bank-- note reassuring service message, customers, protesters, Soviet flag

Like that scene from It's a Wonderful Life except with club babes, a sentient squirrel, and the Spanish guy from Street Fighter II, there's at least one run on a bank going on in-world right now. Residents who've put Linden Dollars in one of the many in-world virtual banks must withdraw their funds by January 22 or risk losing them, since that's when the Lindens just announced they'll ban all such services.  Unless, that is, a bank's proprietors can prove they're regulated by a real world government body.  When I arrived at this particular financial service, many were waving protest signs, but Massively's Tateru Nino (who got there earlier) told me she suspects this is diversionary damage control:  "There was a [bank] staffer here setting up a petition, and calming people, and directing blame at Linden Lab," she tells me. "It feels like a fabricated protest from where I'm sitting."

But why is it happening now?  "Since the collapse of Ginko Financial in August 2007," Ken D Linden explains in the announcement, "Linden Lab has received complaints about several in-world 'banks' defaulting on their promises."  He also cites banking activities, the law, and protection of Residents and the in-world economy's stability. That's all certainly true, though I can think of at least one other motive: the way CEO Philip Linden described Ginko, about a year ago:

In an October 2006 interview with Adam Reuters, Philip compared Ginko to the Grameen Bank of Bangladesh, the microfinance lending system founded by Nobel prize winner Muhammad Yunus.  While the analogy may be an apt way to describe other in-world loan services, Ginko's subsequent unraveling made the comparison dubious.  But the description also implied general Linden approval for bank systems with high interest rates-- and in my opinion, would make the company a target for lawsuits filed by disgruntled Residents who felt cheated by another bank collapse.  (Indeed, in the Bragg real estate suit, the company's own marketing rhetoric was turned against it-- which may be one reason it ended in a settlement.) I suspect this new policy likely protects them from such lawsuits.

In any case, what is true is how the policy also diminishes a Second Life cultural value: the trust users are able to generate with each other from simply their in-world behavior, without even knowing each other's real life identity.  This was the reason Philip made the Grameen comparison in the first place: "If an avatar is attached to the community," he told Adam Reuters, "there is a dollar amount associated with the risk that they would be ostracized." 

Now, however, trust among avatars is not enough.  You will also need written proof that your virtual currency service has a license to operate from a real government agency.  Preferably one on hardcopy.

My take, at least-- what's yours?

Comments

[Cyn Vandeverre]

Looking at this from the point of view of the trust relationship is interesting. No other posts I've read address it.

Thinking about that further, though, how much interaction is reasonable before one trusts someone else (in RL or SL?)

I trusted my land baron after about a month of seeing his actions in building up his area, his various artistic endeavors, the regard other residents had for him, and his covenant. But my ultimate investment, back then, was about $50 US.

How much more would I want to research and check someone who promised to take large sums of money? I suspect that there are a lot of people who didn't do their due diligence before extending their trust, or perhaps operated with RL expectations that something called a Bank had all its ducks in a row. In RL, we don't have to extend trust to banks, because they've already been vetted by the law.

So I don't think that this is an issue of reducing the trust amongst everyday avatars in SL. I'm not likely to trust other avatars less.

[Benjamin Duranske]

Rosedale was just wrong about Ginko. Not a huge deal, really -- if you take a lot of cuts, you're going to whiff once in a while -- but he was just wrong. And not just back on '06. He said similarly positive things (including that projects like Ginko had "a lot of transparency") as late as August 2007, as Ginko was collapsing.

http://www.your2ndplace.com/node/358

Back to that in a second... First, a few thoughts on "trust."

It is pleasantly idealistic to think that "trust" in banking would be sufficient in a pseudoanonymous virtual world when it hasn't proved to be sufficient in real life, but why would you think that? The reason real-life banks are licensed isn't just because bureaucrats like to move paper around, it's because most people aren't sufficiently organized, honest, and intelligent to manage money for other people, and because even with real life face-to-face meetings, humans are still lousy about "trusting" the wrong guy. Add in pseudoanonymity, and the ability to make yourself look important for a cash outlay of about fifty dollars, and virtual world banking just becomes a playground for thieves.

So take another look at Grameen (which, remember, we're only talking about because Philip Rosedale made a bad analogy once).

Grameen works not because of trust, but because communities put pressure on their members to repay Grameen loans. The way it work is this: loans go to individuals in a community, but the individuals must belong to five-member groups who oversee repayment. Any "trust" there flows from the bank to the borrower, not from the borrower to the bank. I'm not sure how much of that is "trust" anyway. Instead of collateral, Grameen demands community monitoring. It looks to me like they are paid back at a high rate because of the desire to not appear a deadbeat cheater in front of your close friends and family. Presumably they would not be paid back at such a high rate in the absence of the community participation feature. So trust is there, for sure, but it's easy to overstate that aspect of Grameen.

At bottom, "trust" is probably not a feature I want in a banking system where "real money, that's right, real money" (Linden Lab's words) is in play.

[Patchouli Woollahra]

"In God We Trust, All Others Pay Cash"

a cynical view of usury and credit, but a unfortunately and necessarily valid one in any world.

Having said that, there are other more important things in any world that mere certification will never reassure on.

All certification can do is state that the certifying authority is reasonably certain of this or that... there may be additional hoops in the way such as due diligence and examination of methods and means...

But at its core, is certification not merely a different form of trust based in slightly different grounds from what people do every day around the world when forming relationships?

[Laetizia Coronet]

This issue is at the core of what Second Life wants to be. As long as I can call myself a banker, a lawyer, a policeman etcetera, and play at being such in Second Life, then it is a game.
And whoever puts money into accounts of other gamers who say they run banks, is wholly responsible for doing so. Tough cookie. What do you need banks for, anyway, when all your game tokens (read the ToS, dear LL) are safe in a virtual deposit at a server.

[Sered Woollahra]

I don't know of any officially accredited bank being active in SL. Are there? Sounds like an opportunity for the Paypal crowd, they have achieved accreditation a while ago.

There is an officially accredited Dutch insurer active in SL, by the way. I have written about that here. They treat their SL office as a regular regional office, and sell real insurance for avatars and objects. But, read the fine print before you buy ;-)

[Cyde Weys]

I suppose it sort of made sense. L$ is effectively a real currency, unlike virtual currency in other games such as WoW which try to prohibit real-money trading. And in real life, any sort of bank that deals with currency needs to be regulated. It also needs to buy its FDIC insurance, etc.

It's probably best that Linden Lab made this announcement sooner rather than later. In-game banks are probably untenable in the long run unless they are actually regulated properly and offer realistic, sustainable interest rates. Yes, most of the in-game banks will end up dying over this, but that's not really a bad thing. The whole Ginko fiasco is evidence enough of the potential good that comes from shutting down unregulated banks.

[Ignatius Onomatopoeia]

Historical analogy: the wild banking panics in the 1840s "Old Southwest" (Mississippi River Valley) frontier led to reform and ultimately, a modern banking system.

I didn't choose the 1929 crash b/c as far as I can tell, we're still in the Frontier era in SL :)

Hard to imagine why ANYONE would put money into an SL bank. But then, it's hard to imagine anyone phoning a toll-free number for some of the "act now!" offers we all know, or for that matter, replying to the widow of the Nigerian Oil Minister, who can make you rich if you'd only provide an account number...

[Tateru Nino]

Saxo bank is already in Second Life. We covered them briefly here.

http://nwn.blogs.com/nwn/2007/03/post.html

They're not dealing in Linden Dollars, though - I believe their plans included FOREX trading primarily.

[Gwyneth Llewelyn]

Very good point about "trust", Hamlet. You forgot just to leave one aspect out of it: bankers (and their customers) trusted Linden lab not to interfere in resident-to-resident transactions.

There are actually a lot of real banks in SL, but none are offering saving accounts or investments in SL.

... Yet.

[Laukosargas Svarog]

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Quote: "...In any case, what is true is how the policy also diminishes a Second Life cultural value: the trust users are able to generate with each other from simply their in-world behavior, without even knowing each other's real life identity. "
---

This trust predictably disappeared when RL corporations started taking over. It's almost impossible to work on a large project now ( apart from one's own ) without revealing your RL identity. NDAs, contracts etc.

One of my favourite projects was building Lauk into an identity in her own right. I've always liked the idea of William Gibson style entities living their own lives in a virtual word. But I've given up now. Too much threat of RL litigation and no protection either from LL or anywhere else.

It looks to me like LL's effectively become corporate owned and directed. If it hasn't already, SL will soon turn into a mire of advertising and promotion. I also believe this is what the new corporate "owners" of LL actually want and possibly has a large part to play in obvious boardroom differences at LL. I can't see SL being "owned" by it's residents. Residents already have no power other than to be consumers. More and more RL laws will be passed, LL will tighten it's regulation to protect itself. Creative professionals will take over with corporate sponsorship and non-professional creative types will be squeezed into little cliquey cult groups.

A typically gloomy Lauk prediction but really based on personal experience which has gone from loving SL culture to loathing it in the last year.

[Poianone]

From Linden Labs' official blog: "We will not apply this policy to companies who submit a registration statement, charter, or other applicable license from a governing regulatory authority"
One question: are we sure that every certification realeased by every "governing authority" should be worth of trust? And who the governing authorities are?
To me, the situation witnesses the limits of the non-intervention policy pursued by LL. A strong monetary system is the backbone of every economic system; therefore, as the metaverse embeds an economc system - which is also partly real -, the ban of financial operators of SL lead to weaken the economy. Who will fill the gap? Real world banks? Hmmm... A better solution should be, to me, to persuade the major SL banks to create an institution - a central bank - that defines the conditions to operate in the metaverse. So, residents may trust banks that operate according to a "virtual patent", which also defines the conditions to offer financial services. And if you do not have this license or you do not respect these conditions, you are banned....