A Natural Experiment: The Failure of Ginko Financial

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A Natural Experiment The Failure of Ginko
Financial
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A Little Bit About Second Life Money

• The official currency of Second Life is the
  Linden dollar, L
• Residents can exchange real currency for L
  through the LindeX Dollar Exchange, from other
  third party websites, or ATM machines location in
  world
• Currently 1USD 266 L (or thereabouts)

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• Earning L in SL
• Those who signed up with the Premium Account
  (involves a monthly fee) are given a small weekly
  stipend of L
• Selling goods and services in-world (such as
  virtual property, scripts that animate avatars,
  entertainment venues, advertising space, and
  participation in in-world surveys).

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SL Banking Pre-August 2007

• Over 150 banks existed in SL
• Businesses in SL do not face entry barriers
  Those that thrived succeeded through positive
  reputation.
• Most of these banks acted as exchanges and
  would accept real dollars (or other currencies)
  in return for Linden dollars.
• Fly-by-night wildcat banks were not uncommon.

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Ginko Financial

• Founded in December 2004.

Accepted deposits (paying annual interest up to
44 percent), and (apparently) invested the
proceeds in both SL and real world assets.
Failed in mid-August 2007, taking 750,000 (US)
with it.
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What Went Wrong?

• Bank run precipitated by Linden Lab ban on
  in-world gambling.

Ginko in the end was insolvent because (a) The
whole enterprise was a scam. (b) Asset base was
tied to in-world gambling businesses. (c)
Asset base was tied to Brazilian telecom
investments that went bad.
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Linden Lab Responds

• As of January 22, 2008, it will be prohibited
  to offer interest or any direct return on an
  investment (whether in L or other currency) from
  any object, such as an ATM, located in Second
  Life, without proof of an applicable government
  registration statement or financial institution
  charter.

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SL Banking After 1/22/08

• None of these banks accept deposits due to LL
  banking policy
• Currently, most of the larger, more experienced
  SL bankers appear to be temporarily inactive
• Many of the CEOs are in contact with each other,
  attempting to reevaluate and improve business
  strategies