bankofjoe is DOA — Back to the drawing board

One of the many ongoing deep black projects out back in the bookofjoe skunk works — up to an hour ago, at least — has been the bankofjoe.

The plan was to create a one-stop destination for all your banking needs — in Second Life.

Alas, game over — before it even started.

Chris Nuttall's story in today's Financial Times (FT) reports that "Second Life is banning unregulated banks from its virtual world."

Rats.

Here's the FT article.

Second Life bans unregulated banks

Second Life is banning unregulated banks from its virtual world after a run of defaults by financial institutions offering interest rates unobtainable in the real world and unsustainable in a virtual one.

San Francisco-based Linden Lab, which runs Second Life, is prohibiting from January 22 any object, such as a bank or ATM, which offers interest or any direct return on an investment, unless it has proof of a real-world government registration or financial institution charter.

"Linden Lab has received complaints about several in-world 'banks' defaulting on their promises," it said. "These banks often promise unusually high rates of return, reaching 20, 40 or even 60 per cent annualised."

The virtual world uses its own currency — the Linden dollar — which can be exchanged at the rate of about 270 to 1 US dollar at Linden's own currency exchange.

The complaints follow the collapse of Ginko Financial, one of the virtual banks, last August after months of speculation among Second Life members over whether it was no more than a pyramid scheme that paid interest to older members from investments by new ones.

There was a run on the bank that depleted its reserves as panicked investors queued up at virtual ATMs to withdraw their money. Ginko, which had been offering interest rates of more than 40 per cent a year, ran out of funds, owing customers more than 750,000 real US dollars.

There were similar scenes yesterday at other institutions, including JT Financial, as depositors digested the impact of the ban.

In an analysis of the Ginko collapse last year, the Journal of the Business Law Society warned that Linden Lab could face real-world litigation from victims.

"By not taking efforts to ensure that commercial activity in Second Life is conducted in a transparent manner, Linden Lab is in essence putting their stamp of approval on ventures like Ginko," it said.

Financial institutions in Second Life have been targeted by scams and hackers. The 'World Stock Exchange' was robbed of $3.2m Linden dollars in July by a former employee, while hackers extracted a similar sum from in-world banks in November.

Linden Lab's decision yesterday was welcomed and condemned in equal measure by members, with critics saying it was becoming more like the real world. Second Life has nearly 12m registered residents but a high churn rate — only 780,000 have logged on over the past 30 days.

About 340,000 users spent money inside Second Life in December.

Linden Lab banned in-world gambling in July to come into line with real-world laws.

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Oh, well — there's always Facebook.