New World Notes

Can Russian Oligarchs Hide Their Wealth With Crypto? Analysis & Advice for Regulators From a Finance Expert

With global sanctions hitting Putin-aligned Russian oligarchs and their troves of ill-gotten gains, there's been speculation that these billionaires will hide their assets in cryptocurrency -- a suspicion perhaps heightened by the fact that some crypto firms are refusing to shut down access by Russians to their exchange platforms.

How realistic a concern is this, and how should governments respond? I put those questions to Bill Maurer, Director at the Institute for Money, Technology and Financial Inclusion at UC Irvine, and one of the world's foremost experts on alternative/experimental forms of money and finance:

"If you look at real-time transactions right now on fiatleak, you'll see that most of the trading between rubles and crypto is to Tether, a stablecoin that markets itself as fully backed by US dollars," he tells me. "That would represent a flight to stability, in contrast to, say, buying Bitcoin. It's also interesting since there's been a lot of speculation about what the war will do to the price of Bitcoin -- and my answer is, within the current pattern of trading, probably not much.

"Tether, meanwhile, is controlled by Bitfinex, a company that has moved around from tax haven to tax haven (from the British Virgin Islands to Switzerland), with questions about whether the reserves actually exist and where the reserves are really held. Pity the poor oligarch who is drawn to a stablecoin whose value may be based on nothing but thin air. Not."

The problem for oligarchs, he goes on, is that moving their fiat money to crypto means they'll have to keep it as crypto:

If Meta Couldn't Launch a Virtual Currency Because If Its Reputation, What Hope Does Meta's Metaverse Have?

Remember Libra and Diem, the virtual currency project launched by Facebook/Meta in 2019? (Here's what I wrote about it back then.) The Financial Times has a great inside story of what happened to cause that project to collapse. Basically, Facebook happened:

What emerges is a picture of Silicon Valley executives who thought they could charge into finance and make billions, if only they could surmount technical and regulatory barriers. What they failed to realize was that the very fact Facebook had conceived the idea, doomed it. As one government official involved in the process puts it: “Diem spent years trying to reverse engineer their project to fix all of its faults. But they could never fix being linked to Facebook. It was their original sin.”

Read the whole thing here, which ends by casually noting that Meta is now working on making a Metaverse. Left unsaid there is the painfully obvious point:

In a Virtual World Economy, User-Generated Content Prices Are Controlled by the Company, Not the Market (Comment of the Week)

Really interesting conversation on the problem of virtual currency in virtual economies last week kicked off by "Kyz", who explained how difficult it was for them to reliably run a successful business in a virtual world. Replying to the idea that the value of their content is decided by the market, Kyz goes deeper into the analysis:

That's true to an extent and there are parallels between virtual and real life markets. But there's more to it than just market demand and pricing.

For instance, my SL experience put an extra layer of cost into the mix. Linden Dollars are a product or were, to Linden Lab. The currency wasn't just added to the company as a convenience for users, it was acquired by Linden Lab from someone that discovered that virtual money was itself a product that could be profitable directly or indirectly.

The last part isn't quite accurate but the full story enhances Kyz's argument: Linden Lab reportedly made an offer to the user-made Gaming Open Market, which circa 2004/2005 was a popular platform for the community, then in late 2005, officially productized the Linden Dollar through the launch of the LindeX.

"I mean, I get it," Kyz goes on. "And if I ran a virtual world, creating an extra revenue stream from currency is something I wouldn't lightly ignore." But for content creators like Kyz trying to monetize on the platform, this led to additional hurdles and regulations:

Our Payment Systems Are So Bad, Making the Metaverse Might Mean Moving to Blockchain Systems (Which Have Problems of Their Own)

'I'm blogging Matthew Ball’s must-read, nine part metaverse primer over the Summer; my take on Part 1 (introduction to the framework) is here,  my coverage of Part 2 (hardware) is here, with Part 3 (networking) coverage here, Part 4 coverage (computing) here, Part 5 (virtual platforms) here, and Part 6 (open standards) here.

Part 7 of Matthew Ball’s Metaverse framework, on the challenge of payments facing the Metaverse, is the most daunting so far, veering into some thick if necessary weeds to hack through. If I had to summarize the whole thing in a single sentence, it would go something like this:

The payment options we have to deal with are so inefficient, unfair, and monopolistic, we may never get a Metaverse worth the name unless we switch to a blockchain-based system -- even though that has problems of its own.

To break Ball’s case down into more detail (with some analysis of my own):

• Current/traditional payment systems incur transaction costs and time delays.
• Virtual world-based payment systems, built on these payment methods, are even more costly and slow.
• At the same time, distribution platforms (consoles, Apple, etc.) lock in consumers and developers while hitting the latter with high fees, while also locking out payment competitors. (This is, by the way, starting to change.)

With mobile so dominant, and so necessary to achieving mass market growth, current Metaverse platforms end up paying most of their money to Apple and Google Play. For instance, while ROBLOX’s revenue sharing deal is reportedly harsh for their creators (especially as most of them are kids), the company itself takes a huge hit from Apple:

Upland, Blockchain-Backed Mirror World, Attracts Hundreds of Thousands of Players, Earning Cryptocurrency Worth Many Millions USD Every Month

San Francisco HQ of Tilia owner Linden Lab already owned by an Upland high roller 

Let's briefly check in on Upland, the virtual real estate acquisition game that's sort of Monopoly meets a mirror world, where virtual real estate is registered on the EOS blockchain, and is the first paying customer for Linden Lab's Tilia payment service. Since I wrote about it in June 2020 (shortly after launch), it's become an online world with a pretty large virtual community -- and some nosebleed-serious real cash flowing between its users.

According to Sensor Tower, the game's app garnered 100,000+ downloads and earned $200,000 last month on Google Play alone, but that's only part of the story. Upland's website (where the game can also be played) racked up over 5 million views last month, according to SimilarWeb; I'd estimate that as monthly active players in the mid-six figures. 

But the level of transactions already happening in Upland are even wilder:

This user-run site tracks Upland transactions and leaderboards, and they're fairly amazing. Last month, for example, the top 100 Upland players earned proceeds worth several million USD.

"You need to understand that they marketed to the Crypto and NFT guys," as Upland player Octavius explains, "many of which are a new fairly wealthy group of crypto money."

Why Linden Dollars Succeed as Currency Where Bitcoin Cannot: Stable Exchange Rate

Good points from reader Erik Mondrian, on how Linden Dollars help drive the success of Bitcoin, and why L$ is still more often used than BTC to buy goods and services:

The other issue that I think is important to bring up in this context is exchange rate, which weighs the scale even further toward the Linden Dollar. Thanks to its rate remaining relatively stable, Residents can pretty much assume that 1 USD will be worth about 250 L$—now, tomorrow, next week, next month, and next year—an assumption that has a lot to do with the health of the Second Life economy and the willingness of people to accept and rely on Linden Dollars as a form of payment and stored value.

Contrast that stability with Bitcoin—its infamous fluctuations and the astronomical rise over the years in how many thousands upon thousands of US dollars you'd have to pay to get just 1 BTC—and it should be obvious why using the latter as a currency is ridiculous. It's much more like investing in the stock market and then hoping that enough other people will want to buy in that the value of your "asset" keeps going up. (And also hoping, of course, that a certain billionaire CEO doesn't tweet something that sends its value falling again.)

Seen in that light, comparing daily transactions is almost beside the point, since these two "virtual assets" represent entirely different expectations and mindsets. Bitcoin evangelists, like those cited in the article above, celebrate the so-called milestones of BTC reaching ever higher exchange rates and total amount invested. Meanwhile, in Second Life, we use the reliable ol' Linden Dollar to do what people tend to do in any society with a functioning currency: buy and sell goods and services (and pay our rent), trusting that the money we use to do that with will still be worth more or less what we gave or got for it the next time we're asked to open our wallets.

The key reason that Linden Dollars remain stable against the US dollar, versus Bitcoin?

Should the Federal Reserve Create a Virtual Currency? Former Linden Lab Exec Gene Yoon Has Advice Based on Managing Second Life's $500M+ Virtual Economy

The United States Federal Reserve is seriously looking into the idea of creating an official US$ virtual currency -- a move, as Politico explains, "that could shake up banks, give millions of low-income Americans access to the financial system."

Before doing that, however, the Fed might want to read this white paper memo addressed to Treasury Secretary Janet Yellen, written for the Aspen Institute's tech policy hub. It's authored by Gene Yoon, who has some important if remarkably quirky experience with virtual currency, as a lead executive with Linden Lab during Second Life's peak period of economic growth.

"I had my time managing a 'toy' digital currency back at Linden Lab," as he puts it on Twitter. "At its height, the L$ was used in over half a billion real USD worth of transactions per year. I think the US Fed would be making a mistake in moving forward with this -- the mistake is only in going Fed-first. The United States has a wonderful advantage in 'the laboratory of the states' - experimental policies can more safely be trialed at the state level."

There is, Gene tells me, a specific example of something that happened with the Second Life economy that feeds into his advice to Secretary Yellen now:

Linden Dollars Helped Fuel Bitcoin's Early Hype -- Even Though L$ Are Still More Used Than BTC

Pretty interesting article from the news section of Bitcoin.com, explaining how Linden Dollars helped drive up the value of Bitcoin back in the early days of the cryptocurrency roughly a decade ago:

During these nascent times, a few fiat currencies were trading with Bitcoin. At this time, Second Life’s Linden dollars (L$) were also exchanged for large sums of Bitcoin as well. Linden Dollars are featured in the virtual world called Second Life, a game developed by Linden Lab in 2003.

When Bitcoin was kickstarting into higher gears in 2010 through 2013, Second Life’s L$ and the virtual world also saw rapid growth. Second Life’s virtual economy met Satoshi’s creation in April 2011, back when the company Virwox allowed L$ and BTC trading pairs.

Bitcoin had a fascinating relationship with Second Life users because L$ could be exchanged for fiat, which gave BTC an alternative fiat gateway in the early days. Not only did the two virtual currencies form a symbiotic relationship, but it also caused people to speculate on which virtual asset was better.

Without this exchange ability made possible by Linden Dollars, it's quite possible Bitcoin might not have achieved enough escape velocity to enjoy the euphoria it does today. Then again, "euphoria" never translated into Bitcoin becoming an actual currency used to buy actual goods and services on a mass market. As I'm quoted in the Bitcoin.com post:

How to Buy NFTs of Virtual Art Made by AI Artists Created by AI With ETH

... is a title to a post I never guessed I'd write even 12 months ago. But here we are. As to what the F it all actually means:

• NFT, for non-fungible tokens, are virtual items of perceived value (art, keepsakes, etc) bought and sold on a blockchain.
• Virtual art made by AI artists, in this case, refers to art made by "Taylor" and "Alejandro", two AI artists created by August Rosedale for his Mirage Gallery.
• ETH, for Ethereum, is a blockchain-based cryptocurrency that's theoretically more environmentally friendly than Bitcoin, but still only in theory.

They're being sold on Mintable, a community-run NFT marketplace. And if that's still somewhat intimidating but you're interested in the fairly delirious buzz around NFT, here are step-by-step instructions for buying the art of Taylor and Alejandro -- or for that matter, any other item on Mintable -- from August Rosedale himself. 

First, however, please caveat the hell out of your emptor purchasing decision beforehand. For instance, read this tweet thread highly critical of NFT's long-term fortunes.

That to one side, here's young Rosedale:

Animal Capitalizing: Creator of Game With Virtual World Economy Shocked By Real Money Demand for Virtual World Supply

Pictured: Animal Crossing character currently being sold on eBay

Anyone who's played and followed virtual worlds for any moderate length of  time could have predicted this would happen after Nintendo's Animal Crossing became a massive phenomenon -- but apparently, Nintendo itself didn't see it coming:

[I]f people want a certain villager, sellers offer the ability to either buy them with in-game money (either millions of bells or Nook Miles Tickets) or real-life money. The median price range is $10 (these are sold listings by the way), but popular villages like Raymond can go for as much as $25 or more in package deals. It's a practice that's been going on since launch, but only just now is Nintendo going to actually start looking into it. Speaking to J-Cast, Nintendo explains that selling content for real life monetary gain is a violation of their terms of service, and they will take action accordingly if they see it happening.

Notwithstanding that threat, there's a pretty huge marketplace for Animal Crossing content on eBay (with 15,000+ "animal crossing villager" items currently for sale), and Asian players started selling items for Animal Crossing goods via WeChat Pay and AliPay QR back in April. None of that's surprising. The real mystery is why Nintendo didn't anticipate any of that, and create some kind of Animal Crossing marketplace of its own -- or capture it via an auction system similar to what Blizzard did with Diablo III content back in 2012.