A Solution to the Linden Dollar Devaluation Issue

Does this seem like some sort of unholy union between Ginko Financial Services and the Anshe Dollar to anyone else?

Are you near Edinburgh? I need to replace my Hard Rock Cafe
Pilsner Glass..

A problem I forsee is with the uncertain nature of the virtual economy vs. traditional economies. There is no proof or even strong evidence that the Second Life economy follows all the traditional rules, leaving a lot of risk in what you are buying. Since you are offering to cash out in USD or GBP this is fine, but the reservation to pay out in a currency of your choosing leaves a situation where it would be more viable to force a pay out in L$ instead, so we need to focus on that aspect.

Lets say I invest L$100,000 in to a security worth GBP $500, at an exchange rate of 200:1. Shortly after Linden Labs makes some unforseen adjustments to the game which cause the exchange rate to drop to 150:1. I choose to liquidate, told I will be receiving Linden dollars, and am given L$75,000. In a normal market this would be fine assuming the performance of the security was good relative to the market deflation, but in Second Life no one has shown that the theoretical consumer price index strongly follows or is even correlated to the exchange rate of the L$. My own personal hypothesis is this non-correlation is because there are a lot of people who just play for fun instead of trying to recover their investment. People spend X real dollars on the game and game money, consider it a sunk cost and with no drive to try and recover their investment they have no reason to adjust prices of their goods to market factors. Right now there is an active topic where a lot of content creators state that they will not change their prices based on the exchange rate, which reflects this idea.

In summary, unless you are guaranteed that option of liquidating the investment to USD or GBP I would be apprehensive about this. Aside from that concern, I think this is a very brilliant idea, using non government backed currencies (L$) to subvert market barriers.

Disclaimer: I am a student of Financial Market Economics but am not (yet) a CFA, and am not an authoritative voice on investment risks and planning.

I have to ask.. what on Earth are you talking about?!

What you're not considering here is that the L$ you gave and the L$ you got back later still has the same VALUE. That's what's important. In your hypothetical scenerio, it's unfortunate that you invested, because L$ valuations went way up, causing you to get less L$ with the same value. Holding your L$ investment would have been better, in your hypothetical.

However, in the real world, where L$ prices are going down with no bottom in sight (), you would be given MORE L$ when you liquidate, which still holds the same VALUE (assuming the same scenerio, with no change in the underlying security value) It is SO CRITICAL in times of economic recession, that we find ways to preserve the VALUE of our wealth. Otherwise, we could end up in the virtual soup kitchen when our L$1,000,000 is worth $1.75 instead of $4,000.00.

This is an AWESOME step in the direction of a resident regulated economy. I applaud it. The developer's confidence in its legality has given me cause to re-examine possibly launching a similar system, which I put on hold some time ago due to legal uncertainty.

Question.

On any future redemption would Paulismyname be prepared to pay out in Pound Sterling (or US Dollars) rather than Lindens?

Answer.

Broadly speaking yes I would. I have anticipated large redemptions may involve me in having to purchase substantial quantities of Linden Dollars that would in itself skew the market to the disfavour of the redeeming Avatar.

However there are some caveats. I would need a secure way of paying to satisfy all VOI issues (but a verified Pay Pal account can solve that issue) Also for small transactions Linden Dollars may actually be more preferable for all parties, but of course that is only my own opinion. Also may I remind you that it is your personal responsibility to account to your local tax authority if you deem it appropriate.

Finally I will only accept DEPOSITS in Linden Dollars