SL Bank = Ponzi Scheme

In another post recently I made the flippant statement "SL Bank = Ponzi Scheme". This is actually a fairly serious charge so I decided to research the SL banks to see if I could back up the statements.

First, what is a Ponzi Scheme? Wikipedia is a great source for this and they say "A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits" to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business." (http://en.wikipedia.org/wiki/Ponzi_scheme). It goes on in a lot more detail, but this basically is the essence.

Can I then establish this to be true? First let's look at the banks. I chased down 4 SL banks and here are their declared rates or return and their annual rates:

Ginko - 0.14% per day - 66.4% per year
SLBank - 0.13% to 0.137% per day - 60.4% to 64.6% per year
NNBank - 0.25% per day - 148% per year
BRU Bank - 0.1% per day - 43.9% per year

I note that the Linden is directly linked to the United States Dollar and is liquid through the Linden exchange so it is appropriate to compare the SL Bank rates to major banks in the United States. The following are actually the best rates out there (Internet Banks), most banks (including my own local bank) pay a lot less:

Capital One - 5% per year
Emigrant Direct - 5.15% per year
ING Direct - 4.35% per year
HSBC Direct - 5.05% per year

Certainly, at first glance then the SL banks pay abnormally high rates. Perhaps they are more efficient than Internet banks. Maybe the bankers in SL have more experience than RL banks and therefore can be more efficient. But no matter how efficient you are, you cannot pay out more than you take in.

Banks make money a number of different ways, but the primary mechanism is to lend money at higher rates, making a profit on the difference. This means that the SL banks must lend money at rates higher than what they are paying, i.e. at rates anywhere from 45% per year to a whopping 150% per year. So who exactly are they lending to, and more importantly why are these borrowers paying such usury rates?

Well, the SL banks have no transparency, unlike RL banks so we don't know who they are lending to, (if they are lending to anyone) or even what their assets are. But we can at least look to see if there is a market for their loans. Again, I note that the Lindon is liquid with respect to the US Dollar so we can compare SL bank rates with rates in Real Life. The prime rate in the US right now is 8.25%. Many of us can get loans at this rate or even less. Some with bad credit have to pay more, but anyone with a credit card can get a loan for less than 30% per year. So why in gods name would anyone want to pay the necessary rates the SL banks must charge? The answer is nobody other than a few suckers would pay those rates. There cannot be a market for those types of rates, in SL or RL.

Which means these banks are not getting income from loans. It's a market impossibility. So the only other source for income is the money residents are depositing in their 'banks'.

This is what a ponzi scheme is. It's using investors principle to pay other investors returns. Ponzi schemes are illegal in the United States and most of the rest of the world, because in the long run it must collapse and the investors lose all of their money. Note also that if the SL banks are actually lending money at these necessary rates, they are also violating state and federal usury laws.

Wow, interesting post Marla, thank you for sharing that information. This should be interesting.

I almost got a job working to secure a PHP script for a Ponzi scheme.
Luckily I saw through it. He called it a "High-Yield Investment Program" (HYIP) and made it sound like a "super-fast CD"
Yey Wikipedia!

So what would a reasonable, non-ponzi scheme, interest rate BE in Second Life?

Wht if SLExchange.com decided to put some of their income into letting people earn interest on SLEX balances so the owners could use the funds to pursue some other developments, like loans, etc?

What would be a rate that wouldn't make people yell, "SCAM!"?

Like bank rates. 5/10% APR at a max.

Are you asking what to charge on a ponzi scheme such that alarm bells won't ring? Sorry, I can't help you there.

An interest rate doesn't create a ponzi scheme, it's just an obvious indicator of a ponzi scheme.

Before you went to all this effort did you read the post about how SL Bank makes it's profit? Are you denying those claims?

The question may more interestingly be considered this way:


Who needs to borrow money at 40% to 150% interest a year?

For that is what these 'banks' are doing - borrowing money (from clients) at an insane, ridiculous rate.

A guaranteed recipe for financial suicide - unless, of course, you have no intention of paying the bulk of it back.


But wait - they have an incredible profit engine somewhere, you say?

If they are doing *so* well, then why do they need anyone's Second Life pocket money?



Ponzi schemes are known for suckering in the average Joe, always have, and always will. There's no explaining it to the greedy masses; they will make up elaborate justifications no matter what, right up until that last fateful day the scheme fails.

When the first Second Life Ponzi scheme pops, let's hope the United States Feds don't bust Second Life with it.

Uh, no... ?

Shouldn't the title be something like "SL Banking is a" or "SL Banks are a" since you are talking about the SL banking system is general as it stands right now? "SL Bank is" sounds like you are singling out the one individual bank as a ponzi scheme. In fact, I pretty much thought you were, then couldn't figure out what your point was when their interest rate was in the middle of the pack.

Anyway, that guy is probably going to be pissed...

Good point, I changed the title a little.

Marla, I think you're off base here.... you are basically guessing how this company runs without any evidence whatsoever. I'm not defending SL bank, I don't even use em, nor have any experience using them.

Perhaps they aren't using the deposited money for loans, like a RL bank would.
Perhaps they're using the deposited money as a loan for themselves.. IE using the deposited money to buy land to then sell it... or perhaps becoming silent investors in SL (or RL) companies.... or playing the Lindex game.... point is, you don't know what they're doing. They're a private company, and your assumptions are not facts

Certainly, I do not know the internals that are going on, they are not transparent (which is scary in it's own right). But I can examine them as black boxes, looking at their environment in which they exist. This is exactly what I did. I was not using assumptions, I was using facts.

The possible scenarios you brought up have exactly the same problem.

Why should a bank borrow from SL residents at exorberant rates that run up to 148% when they can borrow money elsewhere in RL for a tiny fraction of that rate?

The answer is, because it is a scam.

Actually, there is one other possible answer, the bank owners are so incompetent that they utterly don't know the first thing about money or banking. But then the depositors will lose their money that way probably faster than if it was a scam.

TANSTAAFL

I neither use nor plan to use any of these banks, just reading this has raised interesting points.

If someone can loan for example 3,000 US$ from an RL bank and only pay back 3,000 plus 8% why on earth would they set up a system where they loan 300,000 Linden$ and pay back 300,000 plus 150% ?

There are possible reasons for an owner of such a bank not involving an RL bank - and hence requiring residents

i) Existing bad credit history
ii) Being a bankrupt
iii) Being underage
iv) Being in a country where bank loans are hard to secure
v) possibly getting a loan from the local bank to finance a game based scheme might be rejected.

If there is a way ( land sales, day trading etc ) that generates enough income to be able to pay back those sort of rates, wouldn't a sensible person set up their bank and pay out say 8%, keeping the other 140%.

i) If existing banks in SL are doing this then an "interest war" would break out and force up rates.
ii) Nobody in SL would be interested in an 8% return - everybody wants to be a millionaire - NOW.

Lastly two questions I didn't see anyone ask.

If the banks are paying out 150% how much are they making for themselves ?
( I am assuming they are not charitable organisations )

If a legal way of gaming the system exists that can generate that sort of return, why aren't some of the players who do invest thousands of dollars in SL using it, and why aren't some of the brokers and financial people who play talking to their bosses and pointing their companies ( with budgets of millions of dollars to invest ) to the gold mine.

Just my two cents, but personally I still believe in the adage "There is no such thing as a free lunch", so I am sceptical regarding the methods of such things.

You can currently park money in a paypal account at an APR of 5.02%. It's easy, though a bit expensive, to transfer Lindens into paypal and back again. So you could "invest" excess Lindens in a PayPal account. The actual return would depend on transaction costs, and these in turn depend on how much money you move. But transaction costs are fixed, and for a long-term investment they become relatively small compared to the return. So it seems to me 5% is a good estimate of what a conservative investment should return over the long run (years, not months).

I used to use one of the listed banks, but pulled out after i got that hard-to-pinpoint "bad vibe", for the reasons listed.

What, exactly, are they doing to generate 150% yearly interest? Or even 66%? I'm sure RL banks would love to know.

I know most of them aren't in the land business (the only high-volume high-profit business in sL I know of), so they must be using SL as "loans" to fund RL ventures. But what?

It's all very... shady.

A pure guess, but keep in mind while USD and L$ are linked, until very recently L$ was in continual slide of value vs the USD. Which means the rates you list should be corrected by expected L$ inflation, and as such can be considerably lower. (even to the point where 'investing' could actually mean losing part of your money) It would be a gamble on bank's part to plan their rates around this, but then so is most of businesses.

Also, if i understand it correctly, 'banks' in SL can run far broader range of investments, including ones which may yield profits higher than what RL banks can use.

finally, from SL Bank information notecard:

"This project is projected to run through 2007. The project is being used to study how people respond to different interest rates in an economy with infinite money and land supplies. Different aspects of Game Theory are also of interest. At no time will your identity or transaction history be made public. As this is a macroeconomic experiment, we are interested in actions of the whole society rather than the individual depositor."

i didn't bother to check the others but it's possible they (also) have some sort of goal behind plain 'making money'. Alternatively, this could be jus a coverup but then it doesn't make much sense for such scam to tell would-be investors the business isn't planning to stick around forever. Dunno o.O;

I just calculated the return from LindeX currency trading from the last 4 weeks. It was 3.5%. If the bankers were to take $5000 as tier 4 currency traders and get only 3.0% return 4 times per month that would be an annual return of 144%. I don't know how they are doing it but it is possible to get those returns inside SL.

Trouble is, that's not banking, that's speculating.

And still we have to ask the question, why pay residents such ridiculously high rates of return when the money can be borrowed at much cheaper rates (even if you have bad credit) from RL? I bet even the Mafia gives better rates than what they claim to be paying SL residents.

Not a single mention of Meta Bank? Dang, I need to ramp up the advertising.

Hello,

Please see the below link for answers to all your SL Bank questions. I can assure you that SL Bank is not any kind of scam.

/130/a3/123098/1.html

Cheers!

Ginko's bank pays .13% not .14%. They just never update their info card.

I don't ubderstand your interest in SL banks. Have you lost money in them or is it your opinion that they are scams and you are just warning people?

But what regulation states that SL Banks must "bank" and can't speculate?