Financial Scams and Lessons from the Metaverse
Once more, the online world of the metaverse (a term to encompass online virtual communities like Second Life, Entropia, etc.) reflects “real world” economic transactions. (See this and this for background.) The latest story (via Futurismic) is how an executive of Ebank, a bank set up in the metaverse Eve Online, illegally sold the deposits and collateral of its depositors to other gamers for real currency.
The Futurismic post is based on this New York Times story, which states:
It’s not clear how much of that virtual money was embezzled and now needs to be found, somehow, by Ebank. But if the Eve chatter is accurate, it could amount to 10 percent of deposits withdrawn. That could wipe out whatever capital was used to finance Ebank’s loan book. As in the real world, that would spell insolvency.
And here’s where the Ebank story may have implications for real-world bankers, regulators and users of financial services. It’s not the first virtual bank to run into trouble — something similar happened in Second Life, which is governed by United States law.
In Eve’s virtual universe, there is no financial regulator, no Federal Deposit Insurance Corporation. And so far there is no lender of last resort, either.
For now, Ebank’s multinational directors appear to be acting just as many real-world boards would: engaging in finger-pointing and recriminations. Eventually, however, they will have to offer a solution to the depositors clamoring to get their money back in full.
As in the real economy, the customers could be tempted to appeal to a higher authority — Eve’s creators. That would probably involve appealing to the Council of Stellar Management — a body of nine members chosen by Eve players to represent them in discussions with CCP.
But the word from Reykjavik isn’t likely to comfort Ebank’s depositors. Eve’s creators at CCP — which employs its own economist and philosopher — take a laissez-faire approach, leaving most such matters to the game’s users to sort out. Unlike the Icelandic government, which allowed three local banks to nearly bankrupt Iceland with unchecked expansion, CCP is determined not to encourage entities to become too big to fail.
Whether and how Ebank can get out of its mess without a protective cocoon of support from Eve’s ultimate powers is unclear. But policy makers around the world, who bailed out greedy bankers, might want to monitor the situation.
This other-worldly simulation could provide clues on how they can avoid stepping in to save the financial system — and the moral hazard that goes with banks’ expectation that they will