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  • CFO.com | US

When Virtual Crises Turn Real

A run on the bank at the increasingly popular Second Life shows how an online "universe" needs regulation, too. But how to regulate it?

“A Full-Blown Panic”

The Ginko crash demonstrates how risky Second Life markets can be — for virtual investors and potentially for Second Life itself. Many users who chat feverishly in online forums have argued that Ginko was a Ponzi scheme all along, offering ridiculous returns and paying them with other investors’ money. Last Thursday the bank posted a note on its Website acknowledging that its coffers of Linden dollars were empty. A wave of withdrawals led to a “full-blown panic depleting even our last line of cash reserves,” wrote Andre Sanchez, the real-world individual whose avatar is Ginko’s CEO. Now the bank is handing out cheap bonds and asking customers to hold tight until it recovers. Ginko owes upward of $750,000 (yes, real dollars), and some customers who invested heavily — hoping to reap whopping 48 percent annual returns — lost as much as $10,000.

The bank’s collapse came as the Second Life economy was stalling. Users started logging off when they could no longer play poker, baccarat, or slot machines. Banning gambling, which represented up to 15 percent of the Second Life economy, led to a drop-off in usage among Second Life’s nearly 9 million registered “residents,” John Zdanowski, chief financial officer at Linden Lab, told CFO.com in an interview. This was compounded when an avatar staged a heist at Second Life’s World Stock Exchange, an equity market of in-world companies. When an ex-employee of the avatar-run exchange used inside knowledge to steal deposits, several newly listed companies were scared off and users saw how their investments could quickly vanish in a world without regulations.

“There are not regulations because the real world already has regulations and laws,” said Zdanowski, who also runs the Second Life economy. “It’s the responsibility of every individual to make sure they’re complying with their own laws.”

But the medium is kept very open by design to attract users and to encourage innovation. Gartner recently warned that real companies setting up shop in Second Life and other virtual worlds put their brands at risk. Companies from IBM and Wells Fargo to Microsoft, Coca-Cola, and Best Buy have all bought real estate in Second Life, thinking they could attract attention, boost their brands, and benefit from a new advertising “space.” Many, however, have since closed their virtual offices, finding such a Wild West environment too unpredictable and insecure. An anonymous world where anything goes can seem risky for real-world corporations. “It’s all pure acts of faith,” says Robert Freedman, who is writing a book about Second Life business strategies to be published by McGraw-Hill. “There’s no one to be held accountable if something goes wrong.”

Earlier this year in Britain, the Fraud Advisory Panel and the Institute of Chartered Accountants warned that Second Life was rife with risks of credit-card fraud, money laundering, and identity theft, and could even be used by real-life terrorists to mobilize funds or to plan attacks. With $20 million worth of Lindens being exchanged in the second quarter and more than 45,000 profitable Second Life businesses, criminal activities could be hard to track amid the chaos.

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