I laughed at him. That is almost an 800% return on your money in a year! He insisted it was legitimate. I asked how anyone could pay out that kind of return. He said the money came from mysterious "investments" in land and casinos. (This was back when you could still play poker in Second Life, or should I say, you could sit a table and be fleeced by rings of messaging, card-counting cheats!)
The stock market might return 8% a year, bonds and so on under 5%. But 800% a year in guaranteed interest income? Ludicrous. Only pyramid schemes can pay such high rates of interest, because they take the payments directly out of your deposit! That is not banking, that is fraud.
Given these absurd returns, how can a bank in Second Life be anything but a fake? How did they make any money? To answer this question, we have to understand how a real bank makes money.
A real bank profits on the interest it makes on loans. The more loans it makes, the more interest it collecdts. The only limitation to how much they can loan out is based on a multiple of the deposits it holds. This is fractional reserve lending, a unique power of banks. The money a bank loans out is created at the moment the loan is made, and retired when the debt is paid.
A bank in Second Life can not do this! It cannot conjure debt money out of thin air! It is therefore not a real bank. It can only lend out the money it has. It has no way to leverage interest income on deposits. So is it no surprise these so-called "banks" never did any significant lending at all.
Linden's public comments about the banks are so naïve, it's shocking. How many tiny little businesses did Ginko help get off the ground with "micro-loans" to brand new avatars? Ha! An unregulated virtual world where real money changes hands is a scammer's paradise. I wouldn't be surprised if the "hackers" that hit some of these banks were insiders. It is a common excuse insiders use to cash out and close up shop when running an online high yield investment scams. It certainly looks like these types of scammers set up shop in Second Life.
A law student made a convincing case that Ginko was just such a Ponzi scheme, and Ginko was perhaps the oldest, largest "bank" in the game. Tens, maybe hundreds of thousands of dollars have disappeared in these "bank failures." Disrupting Gorean sims with flying penises are the immature antics of drunken frat boys in comparison. Wired missed the real story, which is this:
Money-scamming con artists in Second Life are the most dangerous criminals in our virtual world because of the real life damage they do. If some financially unsophisticated person develops a relationship with another avatar and is persuaded to invest thousands of real-world dollars in a pyramid scheme and is swindled, it is no longer just a game and it's not just the Internet and the shame and loss are quite real.Yeah, but aren't the fake banks gone? Even though Linden belatedly banned the "banks," I believe these Ponzi schemes continue under the guise of "virtual stock markets", with the daily interest rates being replaced by similar, if more irregular, "stock dividend" payouts. And they are intimately connected to the banks. The failed bank Ginko, instead of holding a portfolio of loans like a real bank, claimed to much of its money in virtual stocks. And many of the surviving banks "reincorporated" as other kinds of "companies" which are traded on "stock exchanges."
I'm not saying that every exchange is crooked or every company issuing "stock" is the front for an illegitimate scam, but overall this whole thing reeks of conflict of interest, lack of transparency, and worse. It is very much buyer beware out there.
But I'll continue these thoughts another day.