Any interest in a real SL bank?

Exactly. Re:
"1.4 Second Life "currency" is a limited license right available for purchase or free
distribution at Linden Lab's discretion, and is not redeemable for monetary value
from Linden Lab.
You acknowledge that the Service presently includes a component of in-world fictional currency
("Currency" or "Linden Dollars" or "L$", which constitutes a limited license right to use a
feature of our product when, as, and if allowed by Linden Lab. Linden Lab may charge fees for
the right to use Linden Dollars, or may distribute Linden Dollars without charge, in its sole
discretion. Regardless of terminology used, Linden Dollars represent a limited license right
governed solely under the terms of this Agreement, and are not redeemable for any sum of
money or monetary value from Linden Lab at any time. You agree that Linden Lab has the
absolute right to manage, regulate, control, modify and/or eliminate such Currency as it sees
fit in its sole discretion, in any general or specific case, and that Linden Lab will have no
liability to you based on its exercise of such right.
..."

This is interesting, because it parallels the evolution of banking in the RL back in, what? - 16thC Europe? In those days, there was little reason to trust one moneylender rather than another except by word of mouth.

In principle it could work on the basis that people lent money to you, you used it to buy and resell land and turn a profit, and then passed some of that profit back to the lenders in terms of interest.

But I'm not sure that anyone would see the need, considering the relatively small sums involved.

The only bank I would trust in SL is a RL bank with a presence in-world.

In all other cases I assume the worse possible scenario - ie someone running off with my L$.

Agreed. Without being insured, it's really hard to differentiate yourself from anyone else in the SL financial sector.

As for loans... I'd highly suggest you take collateral on them unless you want to find yourself out of money mighty fast. SL is no different than RL and there are people out there that will find a way to manipulate your system just as people do in RL. If you require people to own land and to sell that land to you for what you're lending them, you'll substantially cut your risks.

As for Ginko or any large bank -- you'll run into many of the same problems yourself should you have success at their level. It's not up for discussion, it's guaranteed. You don't get the same level of service from Royal Bank as you get from your local credit union... It has nothing to do with how they run their business and everything to do with the sheer amount of customers they have. If you end up with >100,000usd invested in your bank, you'll certainly begin to understand that getting people to invest in your bank and lending people money isn't as turnkey as it may initially seem...

Eventually, you'll need to make a choice... Hiring a CS team or letting CS lag behind. Obviously customer service will cost money... Now where is that going to come from? Either your pocket or ours...

On a totally different point... What makes you think people will trust you? You need to take collateral -- that's a given. But what if people don't trust you with their items/land, etc? End result -- your business fails. What if you receive far, far more "investors" than people interested in borrowing? Again, your business is doomed...

Attempting to establish a credible bank where credibility is nearly (perhaps even) impossible to establish given the lack of regulations in place is a daunting task. Just look at casinos... Would you trust that a casino in SL pays out at 75%/85%,etc? How do you really know it does? Play slots 10 times and whine if you don't win 70% of your money back? Maybe you were just having bad luck... Any way to really know? Of course not! And that's why most of us stay away from casinos or only use them for entertainment purposes -- not for "get rich quick" schemes.

If you wanted to take it to the extreme -- and I really do mean extreme... Why not set up the bank and invest the money you collect in RL. Set up maximum daily withdrawals so that you can cover your payouts and use the proceeds to invest in RL businesses/sectors which may be more promising. Interest rates would have to be <10%... It's just not rational to offer higher for a couple reasons -- 1. You can't find a guaranteed investment in RL for >10% so this really is no riskier in many people's minds than investing in energy for example should you quit/go bankrupt is the risk of investing with you. With energy, there's the risk that Alternate Energy catches on and all your oil/gas holdings become worthless.
Now, if you go around saying you'll guarantee 20%+, you're not fooling anyone (except the gullible few who still believe in "get rich quick" schemes -- sadly there are too many of them when SL has 2m+ users) and nobody will see you as being any different from the "Ponzi schemes" out there.

Let's face it -- Take your 20% and apply the Rule of 72 to it... We get 3.6 years for money to double.

So if I had say... 10K at age 30, at age 66, I'd have: $10,000*2^[(66-30)/3.6]= $10,000*2^10= $10,240,000.

I'm not aware of many (actually, nobody that didn't fluke it during the dotcom boom) who's turned $10,000 into $10,000,000+ over a <36 year span of time. That represents only a 20% per annum ROI. Is it rational that anyone would claim to pay such a rate AND actually pay it?

It's not even a question whether some of the banks in SL will eventually fail, the above math has irrefutably proved it. Even your 6-7% hypothesized rate is quite high by bank GIC standards... The U.S. economy is predicted to enter a recession later this year, something which will likely yield even lower GIC returns and hence increase the demand for something along the lines of what you're offering... But the question is: How exactly will you do it?

Sadly, an "I'll get back to you in a bit on that one" isn't a sufficient answer. If you're worried about someone stealing your idea -- my answer is: It'll happen anyway. What makes you think people would be less apt to steal your idea once you've finalized your setup than right now?

I make alot of money in the domain name field myself... It's a very speculative field and there are plenty of people out there who just look for what names other people have registered/bought to determine which names they should register or buy. That's why a clever domain speculator who wants to target a name towards a third party for an enduser purpose will often buy out all extensions -- because if you leave any possibility for profit, someone will come along and take it.

The same goes for your bank... Like me with domains, I'm not trademarking them, patenting them, etc. I'm just registering them through an ICANN accredited registrar. If you're not patenting your business idea -- something you'd likely have a very hard time proving in court anyway should someone ever infringe on whatever patent you cooked up -- you have no ability whatsoever to protect your idea from being taken and used by someone else -- perhaps in a better way than you're planning on using it.

Will this work out for you? I guess that depends on what level of success you're hoping to achieve. If you truly believe you'll get Ginko level investments with returns of 6-7%, I'm sorry to tell you, you won't. Many (relatively speaking when considering a 2m+ userbase) people are foolish by nature investing large sums of money in things that are far from guaranteed -- perhaps it's the risk factor that people enjoy about investing in Ginko. However, one thing is certain in my mind -- and I'm sure the minds of many readers... Why on Earth would I invest in a SL bank when I can invest in a handful of stocks from reputable companies who've been in business for decades and get very similar returns? Ginko is different... Ginko promises returns which are far above what one could expect to make in the current market atmosphere... But 6-7% is a different story. I applaud you trying to go the honest route but to be honest, I just don't know if SL is there yet. I do remember reading about another MMO called Project Entropia auctioning off RL bank licenses... Should SL ever do something along those lines, a business venture such as yours may have a whole new purpose and garner a far, far different reaction.

For the time being though, I'd recommend you invest in land rather than a bank -- a private island with tenants is without doubt the best guaranteed investment you can make in SL...

LL tolerate only banks like Ginko for a few reasons:
1) they play by the rules of LL and have no intristic value in RL
2) they provide "sinks" to keep exhange rate in bay
3) they will be black sheeps in the upcoming LE
http://secondthoughts.typepad.com/second_thoughts/2007/01/if_you_were_abo.html
(LE is designed as a curciut breaker for upcoming the second Dutch revolution).

"History repeats itself, first as tragedy, second as farce."
-- Karl Marx

We still don't know if this guy is talking about a savings and loan or an investment fund. 20% returns are not abnormal in the world of hedge funds. If he showed his RL credentials and laid out his plan for a fund, I'd be willing to hear him out. The whole savings and loan business model does not seem feasible at this stage of SL's development, but you could put together an investment fund that could make significant returns. But first and foremost, trust is what any bank/fund needs in SL.

I have a fair background in finance and I have pondered long and hard about Second Life banks, namely Ginko.

There are a few possible solutions to how it has been able to pay such unbelievable amounts of interest over the 2 odd years it has been up and running. Allow me to go through them with you all. And I am not sure it can be duplicated unless you are either running a Ponzi scheme or have almost unique talents. but ............

1) Ginko is a pyramid or Ponzi scheme that in general is dependent on new or abandoned deposits to continually fund it and pay interest

2) Nicholas, the Ginko owner, has some almost unique talents. That is he is able to devise trading systems that are able to exploit arbitrage in either sporting events that can be gamed on, or trading on the world stock markets via currency (FOREX) or options, warrants, CFDs, or perhaps spread betting. I am aware of experienced private investor traders who can achieve a return of between 5% to 10% per month on capital (although most who try fail)

3) Ginko is owned by a consortium (or perhaps a single avatar) who owns large numbers of Sims of which they rent out to avatars. The capital within Ginko is used to obtain gearing on their Second Life investments. I have done my sums on this one, and if you ignore the initial cost of the sim, and focus on rental income (dwell historically) and some other inducements such as continually selling the same land on Islands on a front end loaded basis again and again, the sums DO possibly stack up.

I am inclined to believe he may possibly have some system that HE BELIEVES works, because of two distinct reasons. They are...

1) He consented to do a Reuters interview thus presenting himself and making himself available in the public domain. If he had reason to believe he was doing anything illegal he would have run a virtual mile from such publicity. That however is not to say Ginko will stand the true test of time, survival.

2) A lot of people do not realise this absolute verified FACT but the owner of the Ginko website is fully available in the public domain which includes his name, address, telephone number and zip code. As a point of interest that area is covered by a high resolution Google Earth map. Just enter the location and zip code to have a look for yourselves. Even if that owner is NOT Nicholas, it DOES provide a link back to him independently of Linden Labs that possibly could offer some recourse.

http://who.godaddy.com/WhoIs.aspx?domain=ginkofinancial.com&prog_id=godaddy


But what makes you believe you could achieve the same so called success to date Ginko MAY have. I pondered on this long and hard and came to the conclusion it would be too dangerous to try. And as a previous poster has commented only almost unbelievable interest rates will tempt avatars to trial it.

Sorry to be negative

Regards

John

Wow, thanks guys, I really appreciate your thoughtful replies. It has certainly given me pause as to undertaking this venture.

And I guess what I was considering would be better classified as an investment fund where I take the money into real life. And the major stumbling block is that money taken out of SL is considered income. I was considering that money put back into SL would be deductable as a business expense. Still the best that I could do would be a very tight window.

Again, your replies have given me much to ponder,

Regards,

Joe

I'm all for this effort, Uvas. But as you know, there are a lot of obstacles to overcome. The main problem with pulling the cash out into RL would be transaction costs. You can't buy and sell L$ at the same rate. And then there's exchange rate risk. There's really no easy way to hedge against this risk (i.e. there are no L$ futures presently). Good luck to you, I'm interested to hear more about your plan. What investments will you be making in RL?

I have been trading stocks since before the internet. Merril Lynch used to get 2-3% of my money on a buy AND a sell. Sheesh, what a racket!

The best thing that ever happened to me was Ameritrade.

I've been working with bonds for a few years now...as I get older I can appreciate the stablility. No more sleeples nights of the tech boom and bust

I just came across a new tool, and am trying it out as we speak. I will be tossing a few k into it to see if it can be a useful thing.

Off topic I know but paper trade it and back test it first Uvas old fruit. -

http://www.fraudsandscams.com/ponzi.htm

"The essence of a Ponzi Scheme is investment. The Ponzi operator typically represents that he has some sort of "system" that is either incredibly complex, or a proprietary secret. His system makes it possible for him to pay incredible rates of return. The elaborate office, exquisitely tailored suits, involvement with the church, and generosity toward charitable organizations are all classic window dressing.

Ponzi schemes do not decline and fall; they are typically hugely successful until they collapse. Everyone is making money, everyone who wants their money out gets paid, and everyone is happy until the regulators shut it down or something precipitates a run on the bank."

Sound like anyone we know? heh.

I think the real risk of offering an investment opportunity may mostly lie in abiding by the laws of your country.

Let's presume success, here.

If you truly advertise your service as a bank or investment fund, I think there are some reporting requirements you might have to meet (according to US law at least), even if $L are used in a 'poker chip' manner to make the investment.

Six or seven percent is pretty good.

If you ever were 'more worthwhile' than first life banks after all the transaction fees, you'll have to be prepared for the day that someone drops ten thousand USD worth of $L on you.

I could even see someone making a 'first life' front end on top of your second life business. Advertising say, 5% return.

If you stay small, like say, never getting over $L 50,000, perhaps nobody will ever care. But I see a transparently made 7% as something that can attract a lot of honest investors. Sure beats my bank rate right now!

Thanks all of responses.
I did eventually get the money back but now I am pretty gun shy on whole bank thing.

Oh yes, my income would be reported, no doubt about that. The only advantage I see is that I would have no overhead as compared to a brick and mortar bank, outside of a premium account for land tier. [5 bucks a month or so ] That would enable the slightly higher return. And maybe I would limit the amount you could invest, at least for a while, to keep the growth reasonable. and to keep me from being overwhelmed.

Oh, no doubt, income - but I think for transactions over a certain size, among certain classes of institution, the IRS gets automatically informed in the United States.

I know banks have to report these records; I'm not sure about investment funds. There are also other laws (applicable? not applicable?) about the availability of the money to customers - with banks there is a three day rule.

Most of these laws are left over from the Great Depression, when even many honest firms found themselves in serious trouble and tried a number of strategies to curb 'runs' on the bank.

Do you have any way of hedging translation (or exchange rate) risk? There are no ways to do this that I can think of at present.

This is NOT investment advice but it is possible to hedge against the US dollar, depending on the circumstances Gold is a classic dollar hedge followed by the Switz franc. But the Linden dollar has what they call a wide "vig" and that in itself makes life difficult. In essence 1,000 pips or so as against 3 or 4 ($L10 spread vis-a-vis a few cents on Forex) or in percentage terms 7%/9%.

If anyone else has any ideas on linden dollar hedging long or short they are welcome to post

I was talking about hedging against the Linden dollar. As there are no Linden futures that I know of, it seems impossible at this point. Correct?

The only problem I see with hedging it would be that you're then creating a very real risk of losing people's capital. And, unless you have a whole pile of real life money you're prepared to use to backup your SL bank with, what would you do if you lost say 3-4% on $500,000USD? Granted there's no real accountability that can be guaranteed, how could people trust that someone will take out 20k usd to pay for their 'mistake'? Sure it's unlikely, but I think you'll have alot of trouble with the "guaranteed" investment part.

I asked about this back in December: Currency hedging (exchange rate "insurance") -- any demand for it?

The real-world instrument that appears most suitable would be an NDF (non-deliverable forward contract). In RL, these are relatively obscure and are used mostly for emerging markets that have currency controls, where futures markets are not yet available (arguably this description fits SL).

In a nutshell, here's how it might work in SL: two parties A and B agree on a forward exchange rate of, say, L$ 275 = US$ 1 for 90 days from now, for a nominal amount of, say, US$ 1000. If the actual spot exchange rate 90 days from now is L$ 277 / US$, then A owes B (277 - 275) * 1000 = L$ 2000 at the end of it. If the spot exchange rate is L$ 272 / US$, then B owes A L$ 3000, and so forth.

Note, this is not a futures market, it involves an individualized contract between two parties. Note, in RL, NDFs are usually settled in the developed-country currency rather than in the emerging-market currency, but within SL it's simpler to do all settlement in L$.

The numerical value of the forward exchange rate has to be agreed between the two parties. In cases where a risk free interest rate exists for each of the two currencies, eg LIBOR or something similar for US$, there's a simple mathematical formula that suggests the appropriate forward exchange rate... if the forward exchange rate was anything else you could do cross-currency arbitrage. I guess no such thing as a risk-free interest rate exists in SL, so that makes pricing it a bit more problematic.

However, given the recent stability of the exchange rate, it's not clear that there would be much demand for currency hedging at the present time.

Thats correct as far as I know, no such thing as linden futures.

Although there are buy and sell orders sitting on the exchange way out of the normal range...

Yes, I believe you are right on both counts Uvas.

In essence that is a type of hedging because a order placed in the book is "live" (as I understand it) and could in theory be filled, either side, long or short. And of course there is reasonable escrow, in short you get the dollars (linden or US) you are buying or selling.

As for NDFs (previous post) it is an interesting idea, as I read the post it seems it would operate in a way similar to an options contract in real life, that is an agreement between two people to buy, sell, or exchange anything of fungible value at some pre determined time in the future. However there is the problem of enforcement in SL, maybe a neutral third person counterparty could set up such a system, although the calculation of margin and option pricing is a science or skill that even in real life requires a lot of experience.

I believe I should qualify my views on Second Life Banks in general to avoid any misunderstanding.

In general I am not prepared to "call them out" as a Ponzi scheme as I can (in theory) envisage several ways in which the nominal interest could be funded, but neither would I endorse them as potentially viable investments.

What however I can do is to consider an investment risk rating, in short I believe they are even more risky than an unregulated off shore Hedge fund. Regardless of any good intent there is an extremely high chance all depositors could loose all their money, and even more chancy, could in theory lay themselves open to action from other depositors in the event of a total collapse on the basis it always was a Ponzi Scheme and any profit made on prior exit were illegal as that profit only existed at the expense of others who ended up being defrauded.

I also wonder why Linden Labs allows it to run bearing in mind the stated fact nearly all investments from Ginko are placed in first life, outside Linden Labs control

But like any other very high risk venture one in ten thousand sometimes pay off, so my own view here could just be only have pocket money in them that you are prepared to totally loose without recourse, if you REALLY WANT to do it, and understand ALL the risks.

Regards

John

I think the bank idea is a non-starter as we already have linden accounts that do the job of a bank. People who want to make their money work for them in SL invest in land. Investments can go up as well as down, of course, and that includes money put into an investment bank. Most people who try to make a big fortune fail, but lose a small fortune in the process!!!