So Much for Caveat Emptor:
the demise of laissez-faire banking in the virtual world
the demise of laissez-faire banking in the virtual world
Courtesy of the WSJ, via Brian Ferguson:
Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits.The company now believes that (and I am translating very loosely here) transaction costs of the players to check out the banks' reliability, etc., are greater than the benefits from having no regulations of the banks.
Second Life is an elaborate online world where players create new identities for themselves -- images called avatars. These avatars can own land, run businesses and build homes. And there's a link to the real economy: To buy things, players use credit cards or eBay Inc.'s alternative payment service PayPal to convert actual U.S. currency into "Linden dollars," which can be deposited using pretend ATMs into Second Life's virtual banks.
The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world.
Category: Economics, Economics and Law, Gubmnt, Macroeconomics, Money Posted on
Thursday, January 24, 2008 at 10:25am
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First, the financial decisions of the players of Second Life are theirs to make. Just because there would be a central bank isn't going to stop thieves from ripping people off. People who make stupid decisions with their money is their responsibility. I'm not saying it's right that they were stolen from, but they should have given it some more thought.
Second, the solution to this problem does not lie in a central bank. This will only make matters worse as it will cause business cycles, recessions, depressions, etc. The ability to "print" new money is just going to make the game worse off than it already is.
Third, if Linden decides to have an actual bank hold accounts and act as a central bank, how does that violate property rights or the concept of a free market? This is the decision Linden decided to make with its own property. I understand that the bank in this case would be forced into the Federal Reserve System, but this could just as easily conceivably occur on a free market. So "laissez-faire" isn't dead here. This is just a really bad idea in my opinion and I would just take my business elsewhere.
The solution to this problem is Linden's implementing and enforcing rules against fraud and bank defaults. Private protection agencies could be formed to keep an eye on things and virtual private judges could decide cases for disputes. It depends upon what the customers want and the property rights of Linden Labs. Think about that if you ever decide to start up a Second Life account.