While I think it is important for LL to step in and address issues of fraud in the financial markets in Second Life, I believe their current effort is fundamentally flawed. I've written up some of my thoughts on this in. If you want to accept deposits of real value from real people there's no reason you shouldn't be required to get a real banking license/financial institution charter. I have been following these recent financial related events in Second Life for a while now and it puzzles me why people are surprised that problems with virtual banks cropped up AFTER Second Life banned virtual gambling. From what I have been able to glean these virtual banks were dependent to a large degree on the viability of the virtual gambling companies and their profitability.

These banks were universally frauds and people were losing large amounts of very real money. I'm sure Linden will be blamed when these banks can't pay back their depositors, but it's just a matter of whether people lose their money now or lose more of their money six months from now when Mr. Ponzi skips town. Did anyone ever borrow money from any of these? It seems like most of the costs in creating a business are real world ones: tools like photoshop or a 3d modeller, tier fees, private island for your business.

There are many points of contention over the course of the hour, and I won't try to address them all here. But I would like to respond to Numtini on one point: Travis Ristow of BCX Bank argued that there is a legitimate need for capital within Second Life. People need Lindens to pay for land (which ultimately costs hard cash); they may also need capital to hire people to help them with building, scripting and other services; and if they want to keep their real-world finances out of Second Life (not using a credit card), they will want to access the Second Life captial markets.

My guess is that with these numbers, they have close to a 100% default rate (even sadder, probably after people struggle with the payments for a while) and since they make borrowers put up Second Life land as collateral they are functionally buying land for pennies on the dollar with this scheme. They can then sell the land as needed to pay off depositors who withdraw money they've been paying much lower, though still absurd (e.g. 350% a year) rates on. It's more complex than a ponzi scheme at least, and as long as you have depositors who do not understand the implications of these "loans" willing to put up SL land without realizing they will never be able to repay, it's self-sustaining, but it's just awful.

The other thing I wish we'd gotten to was the idea that the bankers kept coming back to that this was all possible due to a "1000% economic growth rate." That's nonsense -- the economy isn't growing at 1000% in any traditional sense, there is just more money being added by new users. Growth rate refers to the increase in the value of the goods and services produced by an economy, not how much money is being brought to the economy by foreigners immigrating from elsewhere (the closest analogy here). Besides, as amply demonstrated above, this scheme isn't relying on the "growth rate" -- it's just an underhanded way to get dirt cheap land by offering people loans that they have absolutely no long-term ability to repay.

I agree that goings on in the SL "economy" are not simple ponzis. They're much more similar to HYIPs. In fact, if you view the economic dimension of the game as a whole (rinse, lather, repeat)... While I have no doubt that the scam artists claim to have legions of customer lining up to borrow money at 21% a week, I have yet to hear a single borrower complaining about the Linden changes. Is this legal? No wonder why the subprime mortgage crisis is hitting us so hard..., heck, why dont we give driver licenses to illegal immigrants who cross the border. Then, give them access to computers so they can join in and "fake how much they make" to get a home loan so they can join the subprime meltdown too! Great idea! OH GEEZ!

A majority of the SL community has been begging Linden to work at curbing the fraud and illegal practices witnessed. It protects the future of Linden Labs against fraud litigation, and protects the idiot users whom believe in those that parade "Financial Sector Analysis" out of their parent’s basements. When it comes to a loss like Ginko, and the real USD that was defrauded, it's time to step up to the plate. I believe this was the best move I've seen by Linden in a long time and only wish they had taken action years ago. A couple of updates: First, the complete transcript of last Thursday's Metanomics panel discussion of Second Life Banking is available here.

Incidentally, I'd not even be talking about BCX but for the fact that the guy who runs it is trying to make a big deal out of how he's got a clean operation, and yesterday, accused me of slander (he meant libel) for running some math in the comment above that crunched his absurd interest rates as if it was compounded weekly. I did that because said that one of his loans serviced fourteen depositor accounts in the previous panel, but he now said that he doesn't compound those weekly, making 14:1 a total fiction. He was either misstating things yesterday or a week ago. Pick your poison. Since there are no stated policies anywhere on this stuff, they can just make it up as they go depending on the side they're taking hits from.

Take a look at the balance sheet on the BCX site. "Deposits (Customer)" are listed as a "Corporate Asset" and there are no liabilities listed at all. It's just a big joke. I mean, this is Accounting 101 stuff -- even dumb lawyers like me understand it. Deposits represent liabilities, not assets. They represent other people's money. Is there anybody out there who will say with a straight face that this is a reasonable balance sheet? I know there is some natural sympathy for these guys -- who got surprised by this announcement -- but I have heard nothing so far that makes me think that the grid is not better off without this operation, and dozens of others like it. They aren't intentionally crafted as ponzi schemes -- not the more advanced ones.

It's just a big, absurd, house of cards, and they're scrambling around saying whatever sounds good last week, today, whatever. I don't buy it. This is most definitely not legal analysis, it's just a guy who has been following these fairly closely talking about it, but it bugs me. Regular users were getting fleeced by these guys, who then cast it as some kind of community service. It makes me kind of sick. On the other hand, I've got a story about a bank that it really is sad to see disappear slotted for tomorrow at VB. Bad news of a happier sort, I guess. There were a few good ones, and it is sad to see them go. Nice catch, Ben. I talked to Travis Ristow, CEO of BCX. First, they have gotten their accounting in order, and have shown a new set of statements here. There are still a couple of items worth mentioning.