Virtual Banking and Economics

Continuing from a thread that was recently moved to the Classifieds forums, I'm drawing out the core issue of the matter for discussion here.

Do we really need player-run "savings banking" in Second Life?


Furthermore:

How can LL be compared to the Fed's role in managing the (US vs. SL) economy?




Here's my most recent take on the matter. Feel free to add your own.

My opinion isn't quite as wordy, but... I simply don't see the point. I can hold my own money.

Theoretically, if managed intelligently, you could put all the money in a land trust and have someone go land baron with it all.

I think the risk is too great though and should be managed by LL. If they walked away with the cash that would be a huge blow to the fragile sense of trust already existing in SL.

a savings bank? why? i don't a place to store money that can't be robbed.

an investment bank might be interesting. or a vc group. but that's risky, and if i weren't making significant amounts of money ($ not l$), why bother? and if i could make lotsa $, then why would i do it in sl as opposed to silicon valley? or some other growth area?

Hmm *need* is tricky word... do we *need* it? Probably not.

Each of us can securely hold our money..

If permabanned - or your account deleted that money would vanish.. but having things that way could be seen as a *good thing* - a check to keep people on the up and up..

Could a thing like that be desirable? For some I guess.. a safeguard against the above scenario...

If it could generate interest for customers and investors that would be interesting too.

But then there is the big question: How to keep em honest? Some form of contracts would HAVE to be in place - in the heart of SL - or I simply wouldn't trust em.

Siggy.

Contracts enforceable by LL would make this so much safer..

Please vote yes on Prop 39.

linden lab shouldnt get involved in player to player contracts

Why?

I too ask the question, "Why?"

Allow me to introduce a highly probable scenario…

Some unknown person, residing in Timbuktu, decides to pull a scam in SL, as far as banking goes…

He/she founds an SL bank with a modest $2500 USD. Services offered are limited to personal loans/mortgages and savings accounts with, lets just say for the purpose of this argument, a grandiose interest rate of .2% compounded daily (With a rate that high, your savings almost double, yearly!). Sounds too good to be true, right? Well, let’s save *how* such a bank could operate for later…but anyway…

Lots of people flood the bank with their $L cash because of the spiffy idea of seeing their money grow every day. So, let’s just say, after several months to a year (maybe a bit longer), ole Jack and his Ole SL Bank have about $15,000 USD from the SL community. Well, ole Jack’s making small to medium sized loans left and right and everybody is feeling happy, because in one year, that $L 17,500 Kippy Cancan invested in the bank will (if Kippy adds her $L 500 in weekly stipends) be OVER $L 30,000!! The bank’s not going to lower rates, because people like Kippy will NOT be happy with a mediocre gain, and all the smallest investors will withdrawal. Ole Jack isn’t in the red because, with such an AWESOME interest rate on savings accounts, he need only make enough money from the loans to cover the few people that actually DO (still at the .2% daily rate) decide to withdrawal (mainly the smallest investors with less to gain from having the account).

So, as little as $2500 USD sounds to start a bank, it COULD be done, even for less. Face it, everybody’s not going to withdrawal all their money simultaneously unless there’s really bad news…so their lies the key…keeping those smaller investors happy, but ESPECIALLY the big spendas of the community.

ON TO THE POINT…

At any point in time, when confidence is high, ole Jack could cash out, slowly (through GOM) or quickly (through IGE)…of course other options are available, but those are the most obvious…keeping just enough cash on hand to be out of the red. And then, on a calm, balmy Sunday morning…BAM!!!! You never here from ole Jack again…he’s hit the dusty trail. There are no laws—in any country—that I know of to prosecute unscrupulous bank owners in virtual reality banks using virtual currency that embezzle their own members.

Who is there to turn to? Linden labs? Not responsible. The Feds? Not responsible. FDIC? Could care less. Yo mama? Timbukwho?

The answer? No one at the present time is responsible for money invested in SL banks except the bank owner that stole it.

How sad. I call, and urge others to call on Linden Labs to accept responsibility for such grave business related concerns. I recently posted a poll, “Do you have a Ginko Financial Savings Account?” (Ginko, I believe, is the most prominent bank in SL, and with it came much of the data in my scenario) Almost every post was negative, expressing that very concern made clear in the before mentioned scenario. “Who is responsible if the OWNER is the bad apple?” Clearly, SOMEONE needs to take responsibility in ASSURING the good and trusting people of Second Life that THEIR money is in good hands. The question is who. I would love to put my money in a SL bank to see it grow, and have already done so to the tiny tune of $L 17K. So naturally I would share the same concern that keeps many from establishing an account in the first place. The fear needs to end. No matter how altruistic and trustworthy bank owners may seem, there need to be laws or actual RL cooperate entities that bear the ultimate responsibility in insuring SL monetary deposits. Hopefully, we can ALL agree to that point.

(Yawn) I’m a bit sleepy here, its 1:30 AM EST, so, let me just leave you with that small bit to chew on and zip on outa here.

I can identify with everything you say except this demand for what there "need to be".

From the point of those keen on casino gambling, there "needs" to be "someone" set up a booth at the entrance of each casino with corporate entities that bear the ultimate responsibility in protecting the customers from any possibility of making gambling losses during their visit.

Unless the non-gambling population are to stump up via the government, this could only be done via an insurance system. And of course the premiums would have to be exactly high enough to wipe out the losers losses.

I calculate that, in a typical situation, the premium would have to be 50% of stake to pay back the losers their losses. To pay back their losses, and the insurance premium, the premium would have to be 100% of stake, thus reversing and nullifying the entire transaction.

This is obvious if you think about it, and applies equally well in the situation you discuss. To eliminate all risk of loss, either a third party takes on your risk, leaving you free however to enjoy the gains you thus only pretended to take the risk to get, or you cover it yourself via insurance, in which case wiping out the risk wipes out the possibility of gaining from it.

Thus, an appeal such as yours is either an appeal for someone to potentially donate you free money, or it will result in the disappearance of the very opportunity you want to take.

If the opportunity for gain is to remain, so must the risk, and the role of the authorities could only be in insisting on adequate warnings, to make sure those risks are understood.

That made absolutely NO sense, whatsoever. How can one compare GAMBLING insurance to DEPOSIT insurance? People that gamble in RL, unless they are highly skilled, expect to lose money. They may not want to, but the house has an advantage on every single game, so much so, that all the unskilled/unlucky players MORE than make up for those minute few that actually profit. And as those MIT students found out a few years back, casinos EXPECT to win, and when they don’t, they watch you REAL closely and then, before you know it, BAM!!! You’re blacklisted from all of Vegas because you play too well. Gambling, in the purest sense of the word is recreation, not investment.

Ask Suzie Orman, people put their money in banks because it GROWS. Unlike that that’s stuffed in a mason jar under you bed with your .22 lying beside it. So, as the people in SL need something to do with their money, other than keep it in their wallet, BANKS have fulfilled the demand that is obviously there, as Ginko has over $L 3500K in total assets, far faster than the means for insuring the cash (like the FDIC) and making the banks, NOT the bank owners, fully accountable for the deposited cash. I stand firmly in the statement made before, (resound trumpets in fanfare) “No matter how altruistic and trustworthy bank owners may seem, there need to be laws or actual RL cooperate entities that bear the ultimate responsibility in insuring SL monetary deposits.”

It's interesting, becuase the bank also loans out this money, and has to trust that the people taking these loans will pay it back. So, the people depositing their money don't trust the bank owners, and the bank owners don't trust the people taking out the loans. With contracts enforceable by Linden Lab (or some player body that is given temporary power by Linden Lab to settle contract disputes; maybe something like this) the players could trust that their deposited money would be paid back up to a certain amount if the bank "failed" (in SL's case, most likely, the bank owner disappeared), just like IRL by the FDIC, and the bank owners could be sure that their loans would be paid back.

Right on the money, Mr. Miller!

The question is thus: would SL gain more benefit from insuring and enforcing legal contracts than they would from not enforcing them? The only real advantage I see is that SL business dealings gain a patina of credibility, which might help growth in SL. On the other hand, I see this as being a very extensive function which would require many new employees and a great deal of resources. Are the costs offset by the benefits?

SL is much like the Wild West of the US in the 1800's. Ginko is a new idea in that they offer a banking service that no one else does. In the West many banks started out and failed. Maybe some of them were scams, but I believe most were genuine. Some even succeeded greatly, look at Wells Fargo. We can speculate all we want. LL will not be a governing body in SL. If they become a SL FDIC then they would have to impose regualtions and form binding legal contracts with Ginko. I don't see this ever happening. Lets just say they did, LL now insures all deposits up to 100,000 in L$. What about all these other professions that need regualtion as well? Why not have them setup a gambling commission to investigate and regulate the gambling inside SL? Or have something similar to ABC, that would go around and investigate clubs to make sure everything is on the up and up.

LL needs to not get involved if they want to promote this free area. As soon as LL starts policing anything other then TOS violations we start loosing what they are selling.

Before anyone gives money to Ginko they read a notecard saying they are "Investing" their money. The notecard also says the money is not insured. If people still want to risk their money and deposit it into the ATM then that is their investment choice. If Ginko runs out in the middle of the night, well, everyone who has money there can persue Ginko in a legal fashion if they so desire.

Binding contracts would be nice to see, although i'm not sure how someone would enforce them. Either way, the only thing we can do to protect us from a scam of this nature (im not saying its a scam, im just using the words as a what if) would be to have the money insured.

If we have binding contracts whats to keep Ginko from selling all their money to IGE or GOM? Nothing. And what will LL do? Persue legal action? Thats the same thing SL residents can do now.

Basically either you trust them or you don't. Nothing anyone says is going to waiver your trust either way. Everyone already has their ideas and trusts established. If you don't trust them, then oh well, don't put your money in there. If you do, then go right ahead. In the end it won't make one bit of difference either way.

I believe we can learn something from what has been said here.

SL has grown, and grown, and continues to grow in both population and as a bustling market of commercial exchange and investments contiguous with RL. What you’re proposing, Joe, is near total anarchy and an extremely limited mutual network of trust between the Creator (LL) and the Created (you). As LL controls every aspect of the medium through which such virtual monetary exchanges take place, and as stated in the TOS “6.4 Second Life Currency…You agree that Linden has the absolute right to manage, regulate, control, modify and/or eliminate such currency as it sees fit in its sole discretion, and that Linden will have no liability to you based on its exercise of such right,” LL has accepted responsibility for the currency all along…so that makes LL responsible for embezzled currency as well. Permabanned accountholders don’t get the opportunity to retrieve their holdings. Why? Because it belongs, has always belonged, and will forever belong to LL. If it actually *BELONGED* to the player, LL could easily wind up in court and be forced to pay the plaintiff a USD equivalent.

THEREFORE, what currently exists IS a certain level of trust between the Created and Creator to the extent of LL holding your av’s $L in LL’s servers. As stated in the TOS, you and I, as players, agree that LL is has 100% authority for the currency they set up. So if someone steals your hard earned cash, LL, not you, actually loses it. And LL doesn’t care, because SL will still go on and SL currency has ABSOLUTELY NO VALUE to LL anyways.
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Think of it like this: You live in Timbuktu. You get a job (join SL). Your boss (LL) says that any money ($L) you make stays in HIS bank account (LL servers), but you can spend it or do whatever you want with it. And as you are living in Timbuktu (away from the LL servers), there are no banks in town (like you could transfer the actual data from LL’s database to your own), but your boss and all your coworkers have computers (SL based accounts on LL servers) and do the online banking thing (normal in game spending and with third parties like IGE or GOM).

STAY WITH ME! It gets better!

Well, you decide to transfer some of your money from your sub-account to a coworker’s because the coworker says he/she can invest it in this other place and make you more money. ALL employees’ sub-accounts are of course under the one BIG account though (LL). You happily invest your cash, which is really your boss’s since it’s in his account.

Uh oh! Your coworker transfers all his/her sub-account cash into a third-party’s account, quits, moves to Paris, and collects the cold, hard dough…OVERNIGHT! It was YOUR BOSSES MONEY, legally, but YOU EARNED IT!! You can’t sue your boss because it was in his name, HE WAS RESPONSIBLE FOR IT. But, your boss doesn’t care, because it was yours to lose
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IN CONCLUSION, we need to all picket LL HQ and call for a revision to the TOS! The People need exclusive rights to the currency in LL’s servers, not LL. That, and only that, since LL is a US based corporation, would make LL legally bound to protect your and my accounts, both in and out of the bank, in the case of fraud.

Fair enough. If you got that impression I am at fault for not being clear enough.
One more try. The "bank" we are mostly discussing is offering 0.2% per day. Such a high return is ludicrous in a banking context, and is in fact more akin to gambling. Such high potential gains inevitably imply very high levels of risk, either of failure or fraud or both.

A guarantee of the security of such deposits would therefore have to come at such a high cost as to substantially reduce the potential gain. Lessening risk can only be done by lessening the gain it offers.

This would happen in several ways. The "insurance" way, where the premium would be so high as to kill the value. Or the "approval" way , where no deposit with high risk would be approved for protection, in which case the 0.2% would never be approved, and so would be outside any protection. Which is where, as an offer for gamblers, it belongs.

Any more sense this time? I'm hoping the reason for your previous confusion was that you hadn't made the connections between 0.2%/day, high risk, and thus the "gambling" I was discussing. If so this should be a little clearer.

Let me know how I did. Still not clear as crystal though, is it?

That was a bit better, Ellie

However, what/who funds the FDIC?

ANSWER:
The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With insurance funds totaling more than $44 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.

If the banks wanted their members to feel more confident, such an organization would have already been set up. The reason for the absence of such an org is obvious, liability. IF a bank were to fail, it would HAVE to be a legitimate failure, NOT a corporate scandal. Only under the first doomsday scenario would the insurance org be responsible for repaying the members, and in order to assure that the fall was not fraudulent, the org would have to be granted access to the banks accounting practices and such. I inquired the GF Ambassador about receiving such information as a member and my request was denied. The banks don’t want other people looking at their books. Why? Because they’re hiding something? POSSIBLY!!

This is interesting because LL says that each player keeps all IP rights to their creations. So if I trade a creation i've made for something else, say L$, should I have the right to keep the L$?

Anyways, this isn't what I should be saying. I don't think my post was based on anarchy. I was just saying that LL would not be likely to get involved in insuring a business in SL.

I also said that if LL would start to regulate one type of a business, which is what would have to happen if they became the equivalent to the FDIC, then they would need to start regulating more business models. This would be only fair, right?

If Ginko needed an FDIC then they would have made one, either by using an alt with money or by looking at a venture capatalist. But they don't need one. No one is going to loose their life's saving and house because Ginko disapeared in the middle of the night.

I think their is a need for banking services in SL. People can earn interest on their money, and the banks can loan out some money to help people start their own business or what not.

SL is much like the Wild West, people said "I'll never put my money in the bank!" and look at what we have now. You can't wipe your @$$ without your bank knowing. I don't think it's the best system, but I think we will start seeing more and more of this type of service in SL.

Soon enough we will have credit reporting agencies, better business bureas, and possibley liens if we get contracts.

Intellectual property is different than currency. That refers to the actual CREATION by the Created (you and I) of SL-tangible goods and product not already in existence. It deals with the whole modify, copy, transfer thing. Basically, if you make something and sell it or have it set NOT to be copied, transferred, or modified—all of which SLers may easily do given the SL tools available—then someone else can’t come along and steal your idea and profit from it…like tringo, for example.

Currency, however, is different…even the actual data that you create is…all according to a fundamentally flawed TOS that makes LL immune to any and every damaging event that could possible occur that involves inventory, created items/structures in a sim, and don’t forget…your precious $L! As quickly as inventory disappears—and it does—your hard earned $L could one day be vaporized by anyone, and LL won’t even bother to look at you…as I further exemplified above, YOUR money may be in LL’s servers, but it’s YOURS to lose.

This should make us all wet our pants and scream, “I REPENT, I REPENT, GOD SAVE MY BLOODY, DAMNED SOUL FROM LL!” With billions upon billions of $L in circulation in SL, how do we know that LL isn’t some big bank that’ll one day vaporize along with our assets, in coordination with GOM and IGE? It could be selling small chunks of $L to GOM right now, as Anshe Chung, for all we know The TOS certainly make that a VERY real possibility!

The above was a message brought to you from "entertainment only"

Two words:

Land bank.

Two more words:

Nuanced mortgages.

Who made this a two word thread? Is it official!?!? Oh well, I guess I'll join in the fun

Two Words:

Your point?