Financial Scams and Lessons from the Metaverse

by Chris Borgen

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 But if the Eve chatter is accurate, it could amount to 10 percent of deposits withdrawn.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

http://opiniojuris.org/2009/06/17/financial-scams-and-lessons-from-the-metaverse/

6 Responses

  1. Count me skeptical as to the value of any ‘lessons’ of the type referred to. In Eve, unelected administrators overseeing purely voluntary ‘citizens’ with deposits on a far smaller scale can easily apply pure libertarian caveat emptor.

    The interesting lessons may come some years down the track if they do indeed apply a rigid caveat emptor and leave the ‘citizenry’ to monitor its own banking.

  2. What language is this post written in? It has a syntax remarkably similar to English, and appears to share some vocabulary. But the semantics differ at some deep level, rendering it incomprehensible to an English-speaking reader.

  3. The original post, or Patrick’s reply, Flummoxed?  They both seem readable (If not precisely simple.)

    I think Patrick’s too quick to discount it, MMORPGs tend to have very high levels of customer attachment, especially Eve Online.  That makes people far more hesitant to walk away from the game and makes it somewhat applicable to real life financial institutions.

    The fact that the administrators are (roughly) unaccountable allows us to see the effects of policies we might never observe in the real world, as it were.  If such drastic measures are indeed successful, even if only in a simulation, don’t we owe it to ourselves as a democratic populace to consider them?

  4. I was commenting on the original post, but if the shoe fits, …

    I have not a scintilla of a clue what the original post is about. For all I know, it’s in literary Klingon. I don’t even know how to go about trying to find a clue; the linked articles are in a language linguistically similar to the original post.

    I am sure there is a 40,000 word Wikipedia article, with copious links to other 40,000 word Wikipedia articles. However, they are probably also written in literary Klingon, for which I do not have a Rosetta Stone.

    [I’m also the “Irritated”, whose comment provoked Mr Hollis’s bleg on acronyms. So tossing out MMORPGPs — mobile marine-operated rocket propelled grenade projectors? — is more likely to irritate than enlighten.]

  5. I am relieved you said my post was written in literary Klingon. If you said it was just conversational Klingon, I would have been annoyed… ;)

  6. Perhaps he has a point,  the exact applicability would be kind of lost on someone not familiar with Eve Online (Or similar games.)  Chris has commented on the game in prior entries, if memory serves, so perhaps he was assuming most people were familiar with it from his previous work.

    While a familiarity with international law might be reasonably considered a prerequisite for understanding a post on this blog, perhaps familiarity with the sociological aspects of online gaming is not.

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