Virtual Money: Big Fake Bucks?

August 10, 2007

Most online games make some effort to distance themselves from real currency; selling virtual items for real cash in games like World of Warcraft is against the end-user license agreement and can get your account banned. But the real forward-looking online worlds embrace their economy as a true economy -- Second Life, a game that just can't stay out of the news, actually has a working exchange rate (you can trade about 270 Linden Dollars for one real-life U.S. dollar). It's not just permitted -- it's a major part of the game!

For some time now Second Life has been big enough that people can actually make a real income from it. I've got an artist friend for example who supplements her income by selling virtual tee-shirts online -- it turns out that actually making your art look good wrapped around a 3D model is a bit tricky, a skill that people value (and pay for!) online.

But with a "real" economy comes all the trappings, including banking and finance.


The Second Life economy is reeling right now, according to this article in the MIT Technology Review. Earlier this year the game was forced to ban gambling thanks to "conflicting gambling regulations around the world," which devalued the currency in some people's eyes and subsequently triggered a run on the many virtual banks online. One of the largest was forced to cease operations as people rushed to withdraw their money. Is that such a big deal? It is when you realize that the bank, Ginko Financial, had over $700,000 worth of virtual money in over 18,000 accounts. Yeah, that's $700,000 U.S. Dollars.

Of course there's no regulation in the online space. There was no regulatory body ensuring that Ginko actually had the funds to back itself up. As Cornell University economist Robert Bloomfield explained in the Technology Review article, "The average person who goes to a [real-world] bank isn't aware that there's a large regulatory body keeping track of the reserves the bank has." That's not the case online, which is why virtual banks like Ginko could promise ludicrous interest rates of over 44% a year.

It's up to the online community at large to figure out how to regulate this new frontier, which makes it one hell of a fun social experiment. Of course, that's easy for me to say -- I didn't have anything invested in the banks. For some more detailed analysis, read some in-depth economic commentary in the Second Thoughts blog.

      -Fargo

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