The issue of Banks in SL.

I have been roaming through SL for the last few days and have one question about SL banks in general:

WHO USES THEM?

Even though some of these are offering rates close to 36% per annum, how can you trust them to return the money back to you? In the RL, banks are heavily regulated. They take deposits and lend them out to businesses who need capital. But in SL I don't think there is any way for the banks to earn interest on the deposit they take in. let alone 36%!

How can banks LEND money out? There's no contract law in SL and there's no enforcement. If you lend someone(or the bank) money and they don't return it, the best LL can do is kick them out of SL.

So that pretty much leaves three options for the banks and that's to

1) Run a pyramid scam, (too complicated to explain here)
2) Speculate themselves in SL
3) Convert L$ into USD and bet on the depreciation of L$ so that they can buy them back later cheaper. (more than 36% cheaper)

Either one of these transactions are detrimental to the original depositors. I saw some posts stating that the Banks are functioning and are taking depositors. Is there any statistics to back this up?

---Tom

I personally wouldn't use an SL bank, for pretty much the exact reasons you've outlined. I might start one as a scam though.

Deposit your money into the first bank of Nep! 200% interest! Per Month! No, per week! Guaranteed!

Do you offer loans too? I promise to pay ya back..honest!

Somehow the name Clinton and banks just don't mesh into a sentence for me.

Tiger have you ever noticed you are repeating "TOO OLD" discussions of SL? Before posting "genious" thoughts please read old threads of the forums. At least the titles.
I(and many others) posted before, all of the banks in SL works this way:
"1) Run a pyramid scam, (too complicated to explain here)
2) Speculate themselves in SL
3) Convert L$ into USD and bet on the depreciation of L$ so that they can buy them back later cheaper. (more than 36% cheaper)"

But people prefers to deposit them. So, no need to repeat all discussions.
Again: please read old posts.
And one more thing? What do you think about copyrights?or telehubs?or other issues?
Will you repeat all of the threads?

hmm is that not what L&E is about? It's very rare I see a thread started in this forum that hasn't been discussed to death before.

Kaz,

If you agree with me, then you should realize that this is not a problem only for the depositors, it's a problem for everyone. If a bank is speculating on the devaluation of L$, it makes sense for it to drive L$ as low as possible and create a panic. Maybe that's the motivation behind some of the low prints of L$ on the exchange.

If you care about the future of SL, and LL for that matter, you need to keep these issues alive.

---Tiger

I agree, use search Tiger!

But... I use a bank in SL. I *know* it's based on trust and not contract law and it could all go south very quickly. If it does it will hurt, but not kill me. You may say I'm naive beyond belief, but I quite like a world where, in general, people live up to their promises. That said I didn't go and invest hundreds of US$, I put in a small amount of excess L$ and saw how it went. My savings in the bank are there, and now I trust it to save and earn me interest enough to store and swap out for my tier payments and a bit more.

You don't have a baseline on which to judge that of course - but although they could collapse tomorrow the bank I use has proven itself trustworthy enough that I don't lose any sleep about it.

As for pyramid schemes being too complicated to explain - get a life. Search around and you can find Ponzi's, pyramids and others explained in this forum, and links to the wikipedia about them and so forth. There's a lot of smart people in SL, get used to it.

Eloise,

I said " too complicated to explain HERE." Meaning "too much trouble to explain here in this post". As far as I can tell this is still an open forum. If you think it's too simple of a matter for you, you don't need to participate.

---Tiger.

And by the way,

"just because a bank has been here for a while, it will always be here" is the mentality pyramid scams are built on.

Sweet dreams.

---Tiger

A good pyramid scheme will operate a couple of years before packing up and leaving town with the majority of funds invested. Some investers actually make quite a bit of money playing in others pyramid schemes. It is when the inflow of cash no longer exceeds the outflow that the thieves flee the scene. A pyramid scheme counts on the greed of unweary investers and when too many wise investers start taking profits the whole thing collapses. While I have never been caught many of my friends have and I don't think I ever convinced any to take their profits and run because their argrument was always been the same. "But they have been here for years." Let the buyer beware.

If all this has been rehashed before I'm sorry, I'm new and this was the first time I saw this subject.

Currently who uses them?
A- A few customers who must put total faith in the bank. At present, the bank's only penality for failure is loss of confidence.

How can banks lend money out?
A- There are several ways, but you correctly point out all 3 methods are inherently unstable. Banks using #1 and #2 have often failed quite quickly and miserably. Banks using #3 and RL short term USD instruments have held out longer, but I still view them as quite risky.

How do you provide rock solid banking in SL?
This question has been my obsession for about 3 months, so I offer what I think, for what it's worth:

The first problem is that you *must* provide contract enforcability. This tool allows many other types of business to thrive. I truly think that Frank Lardner has solved this problem: /148/86/78317/1.html.

Neualtenburg will be serving as a testbed for that idea, using corporation $L escrow with the city and possible land forfeiture as security when defaulting. Binding dispute resolution must be handled by an objective 3rd party, like the NB SC or maybe the arbitrators of Nota Bene.

The second issue is simple banking 101. Banking is essentially loaning money at a higher interest rate than that at which you borrow. To provide interest on customer deposits, the bank must have a source of income usually in the form of mortgage and loan payments. Throw in a few small service charges and you have your local S & L.

In reality, it gets quite a bit more complicated. I think I've found a way to do the mortgage side. One problem with SL mortgages is that tier (think property tax) is quite large when compared to tax in RL real estate (2-3%). So the chief cost to the buyer is tier, not price, necessitating short term mortgages by demise which may require the lender to pay tier. This probably works best on managed, zoned sims like those owned by Anshe Chung. (http://en.wikipedia.org/wiki/Mortgage#Mortgage_by_demise)

The bank must make sure sufficient reserves are kept (reserve rate) to cover deposit interest. This is typically a small percentage in RL (2-3%), but should be larger in SL because of the lack of LL based FDIC. NB could act as FDIC in this case insuring depositors up to, say $L 5,000 per account using the bank's city escrow. The other problem is risk adjusted assets and liquidity. The mortgage holder does not want to default and have the bank foreclose because both parties lose money in that scenario. The mortgage holder loses equity, and the bank takes a loss due to the low forced sale price of the property. The bank needs to stay liquid and avoid tier, so must sell foreclosed land ASAP.

A bank doesn't want to offer savings accounts until it has collected loan/mortgage payments or service chages on escrow accounts. It also likely needs to set a limit on deposits and/or who can deposit to avoid a run on the bank where everyone withdraws all savings funds at once. In RL banks take as many deposits as possbile but then scale the saving interest rate up/down to keep enough legally mandated reserve. Then banks compete on interest rates. In Europe, from what I understand, banks and large corporations adjust a large reserve escrow fund held with the state to cover potential liabilities. You also have to watch the volatility of the $L as a currency.

Diderot Mirabeau of Neualtenburg has put together a "Roadmap to Licensed Banking". Post #7 in: /103/e3/91174/1.html
This has been adopted by the Neualtenburg SC.

Here's some legal infrastructure already in place: (see laws 4-14 and 4-15)
http://aliasi.us/nburgwiki/tiki-index.php?page=Neualtenburg+Code

An alternative to traditional private banking which has to my knowledge *never* been tried is Co-Ops or Credit Unions.

I and several other parties (such as Lee Dimsum) are interested and plan to try banking. It certainly won't be an overnight success. Any thoughts, comments, questions and especially debunking are welcome! Thanks!

ginkofinancial pays .12% per day. This is a rate of 43.8% annually WITHOUT compounding.

Calculating in compound interest, this is an annual yield of 54.92%

Its staying ahead of Linden inflation!

I'd be interested in how they can do that without taking a huge speculative risk. I suspect the bank is backed by invisible external funding.

Hello,

We are opening a bank in about a week. The bank is being run as an experiment by students at a major research university. The interest paid to depositors is made by pulling money out of SL to avoid inflation and then placing the money in high interest investments. Interest on our portfolio has averaged 27.85%/year for the past 4.5 years, which is very high. Our interest rate is based on our demand for money and other market fluctuations. The bank, named SL-Bank which works as an acronym for both SecondLife Bank and Savings & Loan Bank is expected to run through 2007. SL-Bank will give citizens of SL a way to further diversify their portfolio.

I am posting our info card below for you to read. We are fine tuning our software now and will be opening in a little over a week when final exams and dissertation defenses are completed for the year. We will post a small announcement here when we open. Stop by and visit! Even 100L grows over time.

--PASTE INFO CARD--

Welcome to SL Bank!

***Quick Guide***

Please type the commands below in chat. Others are unable to hear your commands or responses from the ATM.

Opening a Savings Account:
Simply "pay" the ATM. Your account will be credited. (Right click the ATM. Select "Pay," enter amount and press "Pay."

Depositing:
"Pay" the ATM. Your account will be credited.

Withdraw:
/4withdraw AMOUNT (For example /4withdraw 100)

Check Balance & Interest Rate/Rewards Tier Status:
/4balance

***End of Quick Guide***

Interest:
Interest is added to your SL Bank savings account at midnight Eastern Time everyday. The interest paid is based on your average account balance for the day and the interest rate. The interest rate is based on which rewards "tier" you are in. Your rewards tier is based on your average account balance for the day. Yes, you do earn interest on previously earned interest paid. Interest rates may change at anytime.

Tiers are as follows:
L$ 0 - 1,999 Standard .12%
L$ 2,000 - 9,999 Silver .121%
L$ 10,000 - 24,999 Gold .123%
L$ 25,000+ Platinum .127%


About Us:
SL Bank is being run by a small group of economics students at New York University (NYU). 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. If after the project is complete we decide to close the bank, any balance in open accounts, including interest earned, will be paid to those account holders.

Risks:
Although there is no Central Banking System in Second Life, and with the push of a button Linden Labs could send the economy of Second Life into an immediate, unforeseen tailspin, we have minimized the risk of loss by investing our deposits in a low risk, diversified portfolio which includes mainly out of game, but also some in game investments. SL Bank, affiliates and/or bank employees cannot be held responsible for loss of investment, although we will try our hardest to avoid any. This is much the same in real world banking, only we have no Central Bank in SL to impose "in vault holdings" and thus insurance for the banks found in Second Life. Although the risk to depositors is low, it does exist, as with any investment, even a real world savings account. By opening an account, you certify that you understand these risks and are willing to take them.

Advice:
The best advice is to "not put all of your eggs in one basket." By diversifying your in game portfolio you can minimize risk. By investing in different in world banks, items, land, and projects, you can minimize the impact caused by the possible loss of value of any one investment, while still earning a nice return.

Large Withdraws:
A good number of Linden Dollars will always be available for immediate withdraw. Withdraws over 10,000L$ may encounter short delays. These delays can be avoided by sending an instant message to a bank manager at least 24 hours beforehand. Trying to avoid the withdraw limit by making many small withdraws in a short period of time is a violation of SL Bank terms and could result in the termination of your account.

Also note that some smaller withdraws may have a short delay if the "vault" runs low on available Linden Dollars. This happens when several people make large withdraws in a short period of time. Contacting a bank manager will get this resolved quickly.

You can email any questions, concerns, comments, etc. to: [email]help@SL-Bank.com[/email]
Or you can contact our in game Bank Manager: Teufel Hauptman

--END PASTE--

Kind of like Republican and Integrity?

That sounds interesting, particularly as it's going to be backed by a RL organisation. If I had any significant amount of money I'd participate in it. On the other hand, I don't, so it's probably not worth either of our whiles

Are the data collected going to be published publicly? I'd hope so... anonymised, of course.

Please note that neither NYU nor JP Morgan have any stake in this project or affiliation with this project. The project is simply being run by NYU students and the deposits will be invested in a portfolio which currently includes an investment at JP Morgan.

It is very likely the data collected will be released in one form or another. Please note that we are not interested in the banking system itself but rather in the society's responses to different interest rates based on risks, market conditions, competition, inflation and incentive. As economics is a social science, our study will focus on reactions of the people rather than on banking systems in SL. Although, economics is often applied to banking and finance.

How is the RL side of the investment being handled? Is it a case of buying into a RL portfolio with L$? Obviously there's fairly major tax implications & risk evaluation that hinge on it.

I agree with you tiger, this is why i am trying to warn you, you will lose yourself in the forums while discussing things again and again.

We call it happiness chain not pyramid:
/130/7e/71981/10.html#post751197

Exactly how we diversify our investments and with whom will remain confidential. Investment advice isn't free, you know?

Students at our school in the sectors of finance, accounting and economics are ranked as some of the best in the world. Many go on to work for banks such as JP Morgan, Bank of America, large tax firms as well as teach at colleges and universities around the world. We have full faith in our investment strategy. We are not, however, trying to maximize profit. As this is an experiment, our interest rates paid to our account holders will at times, fluctuate inconsistently with market conditions. This may be done for experimental purposes and could, at times, result in a loss for our bank. These losses have been factored into our investment strategy. Although we would like to be profitable, it is not our number one concern. The major concern is the retrieval of relevant economic habits of the inhabitants of the SL world based on the interest rates set, risk, etc. (as stated before) and the return of any depositor's initial deposit plus interest earned. Small loses due to experimentation can be returned through project sponsoring, grants or money from students themselves. The real risk to depositors is a total economic collapse in SL or the real world, during which most people would be worried about much more than their 5kL in a bank on SL.

The risks which you point out though, are a key variable in our analysis and how the citizens and tourists of SL respond to these risks are of much interest.

Granted it remains confidential. What I'm more asking is how this is setup RL wise. SL doesnt suddenly enter a 'bubble' where money ceases to exist, and the degree of openness & calibre of what your proposing has piqued my interest - so I'm wondering how you are handling liability/etc.

Due to the uncertainty of the economy of a massive multiplayer online world, it is just about impossible for us to insure your investment 100%. Because unforeseen forces could sway the market or Linden Labs could simply "pull the plug" on SL, we can’t guarantee your investment and thus to invest in our bank, like all other banks found in SL, the bank, the people running the bank and affiliates with the bank can not be held liable for any loss. We hope to build the confidence of citizens over time and through incentive, reliability. How/when/if deposits increase over time, how quickly, what period of the week, what is happening at the time economically, both in world and out of world, etc is of interest.

On November 17, 2005 I made a deposit in Ginko Financial largely out of curiousity as they were under fire for being a Ponzi scheme or a scam or some other kind of Bad Thing. Since that date, they have credited my account with the interest they said they would and on the occasions that I made withdrawls it took minutes from the request until it was in my SL wallet.

I speak only for my experience. I have no connection in any way with Ginko; I have no idea how they generate their interest nor do I care. My investment with them is small enough (for me) that if they were to evaporate tomorrow it wouldn't trouble me. I've not seen any complaints about their service after the - as far as I know unsubstantiated - claims that they were crooks back in November but I don't pay much attention.

I said "hello" to a Ginko staffer when I went to make my initial deposit; he said
"hello" in return.

Choices for banking so far:

- Put your money into a plain-as-day Ponzi scheme

- Invest money with students doing an experiment who don't care about profit

- Hedge investment in drama-free, filthy rich single sim of Neualtenburg

- Start a co-op or credit union with a bunch of anonymous net people.



Do we hear any other ideas, or are those the top four?


Besides the "sell $L" web page, which converts $L into stable USD for a fee.

Nah, can't be that easy can it?



*lights cigar*

Good luck, folks.