Closing of Second Life Banks Distracts from Sources of Value

The recent announcement of the closure of the Ponzi schemes, er, banks, in Second Life seems to have generated more buzz than it merits. The response SHOULD have been “yeah, and what took them so long”.

The membrane has dissolved that divides most virtual worlds from the “real”. Financial instruments, currencies, payments, and values are not DIFFERENT because they take place in virtual worlds like Second Life. Some virtual worlds may try to preclude the intrusion of economics within their game economies as a way of preserving the “magic circle” of play, but even Warcraft which officially doesn’t accept out-of-world trading is fighting a losing battle. Just because something exists virtually doesn’t decrease value, and if something has value people will want to trade, through financial instruments or otherwise. If the membrane has dissolved, as it has nearly completely in Second Life (although work to allow processing micropayments using credit cards within virtual worlds, or to embed Web objects would help to dissolve it completely), then you can’t have pretend banks in virtual worlds anymore than you can have pretend banks in the real world. Regulations, as much as they can be cumbersome, are needed to preserve faith in the economic institutions – sub-prime crisis or not!

I’ve written about economics and the dissolving membrane previously: Changes to Virtual Economies and the Dissolving Membrane.

I’ve also written that on a platform where the economy is not meant to be artificially constrained by the code (value inputs and outputs are not controlled or constrained by the platform owner as they are in MMORPGs, because they avoid artificially stimulating or depressing the economy through economic sinks (such as NPC vendors) and other gaming mechanisms) then it’s important that the currency be dependable. In the case of the Linden, the exchange rate is being artificially maintained by the Lindens, and although this isn’t a bad thing, the lack of detailed information on how the exchange rate is maintained means that there is an invisible economic metric being hidden primarily in the value of private island sales. I asked whether Metaplace would follow a similar approach to controlling the exchange rate of the Metabuck: Metabucks…and the Linden

Avoiding Government Intrusion in SL

Having said that, platform owners also face the interesting question of whether economic activity is best measured in world, or only measured when translated into hard currency. Speaking from my own experience, measuring income and expenses within SL is challenging. First, my accountant thinks I’ve lost my mind. Second, it’s logistically difficult to do. And third, how do you report it for taxes? It’s easier to declare the value of earnings and expenses when they go into or come out of what can be termed a software-based service – easier all around, easier for the accountants, and easier to track. Tracking of in world profit and loss is more of a measurement of progress than a true accounting entry.

Allowing banks to operate within SL thus causes two problems – it sets up an assumption that if there are banks, there is sufficient reason to consider SL a domain of economic activity unto itself (with all the attendant reporting issues including but not limited to questions of where money is being earned – if I live in Canada do I declare money made in SL as earned in the US, for example) and thus reason for governments to start to solve the problem of whether earnings in Lindens is taxable. And if activity within SL is true economic activity, then only regulated banks should operate within that domain. Let’s leave government out of Second Life please.

The second problem is one of oversight. What is a bank? Who establishes it? And for that matter – if we ask that of banks, what about companies? Within Second Life it’s buyer beware – but as past scams have shown, the idea of in world banks is ripe territory for rip-off and Ponzi scheme artists.

Good bye banks, and good riddance.

Value – Driven by Collaboration, Education and R&D

All this hand-wringing about the shut down of casinos, the rare child AV coverage, and as Philip Rosedale pointed out in his blog posting, and with which I agree, the bad press around the failure of branding campaigns within SL, is at the price of ignoring where the true value is being derived in SL, namely in education, simulation (witness the series of Public Health simulation islands, NASA, etc.) and companies using SL to explore ways to collaborate, meet, and conduct R&D. This is the true economic engine of SL.

So long as companies and universities are establishing low-key but innovative projects, and through them users are having immersive experiences (even if they never leave those specific silos of experience) and thus overall hours logged continue to grow, islands continue to be bought, and more importantly NEW MODELS AND TOOLS are being created, then SL will continue to thrive. As the platform stabilizes, these works on collaboration and education will provide valuable lessons, tools and approaches for the future “big brand experiences” and, perhaps, in their wake, a few real world banks who open virtual branch offices.

Service Providers the Economic Winners

The economic winners at this stage of SL’s development thus become service providers and those who are willing to work in a contribution economy so that they can learn from, work with, and provide support to the early pioneers from the fields of business and academia towards an expanding view of what is possible on a platform as open-ended and filled with potential as one which has seen casinos and banks come, and now go….weeding and pruning a little as we go so that the soil is nourished for the experiments that will help fulfill Linden’s noble vision: “To connect everyone to an online world that improves the human condition.”