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The Linden Lab controlled SecondLife Economy has been an important subject of late, and in what may be a new record in responsiveness - Zee Linden wrote The Second Life Economy¹. In the post, he discusses things which are pretty common knowledge - such as the sinks of the economy. I don't recall where that information is made available, but it has been available. Because I could not readily find it, it is nice that Zee did revisit the basics of the SecondLife economy. More people should read that post simply for that information.

What was not addressed were particularly interesting - rather than take Matthew Beller's article and respond to specifics. That would be refreshing and informative. It will be interesting to see what responses there are to Zee's post in this regard.

The part which probably will get the most attention is related to banking:

Why haven’t you put in place any regulations for “virtual” banking institutions in-world? Are there plans to regulate?

It is important here to distinguish between real-world banks and the “virtual banking” services that some people are trying to develop in Second Life. From a simple perspective, banks exist in the real world so you have a place more convenient than your mattress in which to store your cash. Banks in the real world attract capital by offering to pay an interest rate. They then turn around and try to lend that capital to worthy borrowers earning money on the spread between the interest they pay and the interest they earn. Because Linden Lab holds everyone’s L$ as a database entry in each account, virtual banks don’t offer a superior “storage” alternative.

Probably the most important point is that real-world banks are regulated by real-world laws. Linden Lab does not intend to recreate or subvert real-world laws in any way.We are not aware of any institutions in Second Life that are insured by the Federal Deposit Insurance Corporation or similar governmental agencies in other countries. We caution our residents to be wary of anyone offering extremely high interest rates at no risk, either in the real world or in Second Life — if it sounds too good to be true, it probably is.

This is what I would call a disclaimer. I could easily argue that 'banks' in Second Life are also a place more convenient than my mattress to store cash; I can offer that banks in Second Life also attract real world capital through Linden dollars by offering to pay an interest rate. The technology of the Linden Lab databases for storing accounts is a neutral playing ground for Second Life banks, but what Zee alluded to with the comment on loans is that banks provide services and dress themselves up as investments.

The second paragraph is where the meat is, and also where there is some misting. Real world banks are regulated by real world laws - but Second Life resident accounts are regulated by real world laws as well. While laws related to banking are not directly related to user accounts, fraud and other laws most certainly are. In fact, there are laws in the real world which keep people from posing as banks when they are not, legally speaking, banks. I'm not familiar with those laws, I'm not a lawyer, but I do know that people have been successfully prosecuted for acting as banks when they were not banks. So what is next, a ban on 'banks'? After all, the gambling ban was put in place because of Law - it stands to reason that Linden Lab may be similarly affected by Laws related to fraud.

Most certainly, if it sounds too good to be true, it probably is. If we apply that to Second Life itself, where do we end up? There has to be some protection for residents from fraud - and while Zee writes of banks, you'll notice he has stayed away from stock exchanges. In the misappropriation of funds related to WSE, as an example, Linden Lab saw fit to assist a 3rd party website dealing in stocks - indeed, Linden Lab saw fit to assist a 3rd party website and has so aided an individual or group of individuals which created its own barter currency partnership to the detriment of unsuspecting people while not even alluding to any plans for protection from possible fraud and even theft of residents Linden dollars.

In fact, the policy structure of Second Life allowed for what drtomaso writes of with respect to Ginko/WSE:

He went from a ponzi scheme to a debt transfer fraud.

Sure, the banking aspect is being sold as 'buyer beware' by Linden Lab - but they have aided the WSE in investigating a misappropriation of funds - and WSE is where the debt was transferred to as Ginko Perpetual Bonds. That's ok? Benjamin Duranske's comment is worth reading.

In all, it seems that Linden Lab either cannot support or is not interested in supporting community growth in these directions. That is no surprise; they have done little in the past to assist the community where people have lost thousands of dollars. In doing this, it is quite possible that they are decreasing the value of the Linden dollar... by not protecting the value of the Linden dollar. Breakers on the exchange may make the value of the Linden dollar look the same, but as Aemilia Ballinger² wrote:

...The decline in demand is when a game or virtual world ceases growing and begins to shrink. There is a VERY good curve to explain that trend. I can't find it now, but Raph Koster had it on his website. If you watch the curve, then you can predict when supply of a currency should outpace demand. Then the currency becomes less valuable because fewer new users and old users need it to outfit their avatars/toons/whatever....

A pair of leather shoes last longer when maintained, something which Linden Lab has not demonstrated with present policy on land, and which the Linden dollar seems to be suffering as well.

So one of two things will happen. Either Linden Lab will have to create policy to contend with these sorts of issues in the future, or the trust in the Linden dollar, as well as the trust in Linden Lab, decreases. And where trust decreases, so does value - a fact which most people know intuitively.

¹Oddly enough, the post isn't in tagged economy on the official blog - perhaps an oversight.
² Yeah, I did it again.