Metanomics Panel on Second Life Banking Rules Change Today, 11 AM Pacific [Updated]
January 10th, 2008 by Benjamin Duranske
Metanomics, the popular in-world speaker series, will feature a panel discussion today at 11:00 AM Second Life time (Pacific) on virtual world banking and the recent Linden Lab banking policy change that effectively ends all unlicensed banking activity in Second Life.
I will be on the panel, along with Jillian Falconi, an Innovation Consultant with Saxo Bank (a real-life Danish bank focusing on foreign exchange trading with a presence in the virtual world), ‘Intlibber Brautigan,’ who runs Ancapistan Capital Exchange, a stock exchange in the virtual world, ‘Travis Ristow’ who runs BCX Bank, an in-world bank that is presumably subject to this policy, and David Talbot, who wrote the article The Fleecing of the Avatars in this month’s edition of MIT’s Technology Review, which some have speculated sparked the timing of the policy, if not the policy itself. As always, Cornell professor Robert Bloomfield will moderate the panel. SLCN will broadcast the event live in-world.
If you won’t be in-world this morning, you can also watch the video when it is added to SLCN’s Metanomics archive, shortly after the conclusion of the event.
[Updated: a video of the panel is now available at SLCN.]
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10 Responses to “Metanomics Panel on Second Life Banking Rules Change Today, 11 AM Pacific [Updated]”
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I watched most of this video, although Intibber and Travis make good arguments for banking, there are a couple of holes in their argument which I wish someone had pointed out.
Near the beginning they say that the ultra high interest rates are sustainable in SL, because of growth, which is basically the crux of their argument. The host called them out and said to effect, well why doesn’t someone take a loan out on their credit card (at a comparatively wonderful 30% APR) and just do whatever (start a business, invest in real estate).
The two optimists cited various reasons (some reasonable and some more dubious) that people would effectively want a “SL only” loan, e.g. the borrower could be from a country where loans or exchanges are prohibitive, or they could have bad credit in real life or have privacy concerns – the latter is somewhat dubious – if I charge 2000 dollars (500,000 L$s) to my credit card to start “Questionable Sex Act Land”, it won’t exactly show up on my credit card as “Business Expense – Questionable Sex Act Land”, the link between the RL CC charges and where the money goes in SL is only made through LL themselves and not the credit card companies.
In any case, I had wished someone would call them out on the next question, which would be, assuming people are willing to borrow money at 300% APR, wouldn’t someone make a killing borrowing money in the US (on their credit card even). Thus are we led to believe that these “bankers” are such wonderful people to charitably distribute the difference “back to the people” through offering such high interest rates on deposits. Of course taking out a real life loan hoping to collect on a virtual one would entail a substantial risk on their part, but they seem convicted enough that it will work don’t they, as long as it’s not “their money”.
Therefore, I suspect the truth is some middle ground, it’s true that some bankers legitimately believe that their operation will be sustainable, as long as the risk is cushioned by other people’s money…
All excellent points, Tories. One note — they’re actually charging much, much more than 300% interest. I believe the bank guy said that they’re currently charging 11-21% a week on loans (it actually says “11% to 25%” on the BCS Bank website, which I naively assumed was a yearly rate, but he clarified that it meant weekly, and said they’d lowered the maximum rate to 21%).
At the “low” end (11% a week) that would be 572% a year, but this compounds weekly, remember, which means that the effective rate they are oh-so-nobly charging foreigners, people who can’t qualify for credit cards, and cheating spouses worried about a paper trail is a staggering 22,740%.
You can run the numbers here. In the example above, you’d set it up as $100 borrowed today, no additions, 572% yearly rate (that’s 11% a week * 52 weeks), and tell it to compound 52 times a year.
At the high end (21% a week) they are charging 1092% a year, which, compounded weekly, works out to an effective rate of a little over 2 million percent a year. At this rate, if I borrowed $100 from BCX Bank, at the end of the very first month, I would owe $213.
My guess is that with these numbers, they would have, in the long run, close to a 100% default rate (after people struggle with the payments for a while) and since they make borrowers put up Second Life land as collateral they are functionally buying land for pennies on the dollar with this scheme. They can then sell the land as needed to pay off depositors who withdraw money they’ve been paying much lower, though still absurd (e.g. 350% a year) rates on.
It’s more complex than a ponzi scheme at least, and as long as you have depositors who do not understand the implications of these “loans” willing to put up SL land without realizing they will never be able to repay, it’s self-sustaining, but it’s just awful.
Usery laws are notoriously complex (California’s limits person-to-person loans to 10% interest, but exempts real estate and banks, so it’s hard to say if that applies). What it would come down to is whether a prosecutor was willing to take it on. It certainly wasn’t the kind of operation called out in Linden Lab’s statement (which was directed at the much more common ponzi schemes, which are insolvent from inception) but it sure doesn’t sound to me like the grid will be worse off without it.
The other thing I wish we’d gotten to was the idea that the bankers kept coming back to that this was all possible due to a “1000% economic growth rate.” That’s nonsense — the economy isn’t growing at 1000% in any traditional sense, there is just more money being added by new users. Growth rate refers to the increase in the value of the goods and services produced by an economy, not how much money is being brought to the economy by foreigners immigrating from elsewhere (the closest analogy here). Besides, as amply demonstrated above, this scheme isn’t relying on the “growth rate” — it’s just an underhanded way to get dirt cheap land by offering people loans that they have absolutely no long-term ability to repay.
I have to say, I very, very much doubt that more than a tiny handful of very gullible people are borrowing money from SL banks. See my commentary on Gwyn’s ‘blog here for details.
Ben: That’s a good point, I had forgotten that he mentioned that those loans were secured on SL land. Talk about “irresponsible lending” at it’s finest.
In any case, if there are enough desperate people on SL willing to borrow money at such exploitative rates, and back it up with collateral, someone ought to just form a legitimate lending company: borrow money from RL institutions and lend money at say, RL credit card or slightly higher rates. Of course the loans would need to be secured by SL property, but at least it would not bank on loan defaults (pardon the pun).
If it were established correctly it should not violate SL’s policy on banks (as they are currently written anyway), which as it is worded only covers the paying out of interest, and furthermore if someone were to establish such an institution, it would instantly drive the SL sharks out of business, while providing a legitimate service for those that need short term credit – for example to cover the difference between profits and land tiers for a sim during a slow month.
Following up here, since we had another panel yesterday (video) and I learned a bit more about BCX. It was a great panel — we got audience questions directly this time, which was fantastic, and had no significant technical issues (well, except for the fact that I semi-crashed partway through and became invisible, though could still be heard). I hope Robert sticks with the format.
Incidentally, I’d not even be talking about BCX but for the fact that the guy who runs it is trying to make a big deal out of how he’s got a clean operation, and yesterday, accused me of slander (he meant libel) for running some math in the comment above that crunched his absurd interest rates as if it was compounded weekly. I did that because he said that one of his loans serviced fourteen depositor accounts in the previous panel, but he now said that he doesn’t compound those weekly, making 14:1 a total fiction. He was either misstating things yesterday or a week ago. Pick your poison.
Since there’s no stated policies anywhere on this stuff, they can just make it up as they go depending on the side they’re taking hits from. If it’s lack of profits, then the answer is, “look at our massive interest rates on loans, we make 14:1 over deposits” but when you do crunch those numbers, then it’s “well… they’re really not that big.”
If loans really aren’t compounded weekly, then he is “only” charging between 572% and 1092% a year for loans. This, of course, is presented as a reasonable rate, because the world is a virtual world. Virtual or not, the new statement about the interest rate directly conflicts with what he said last week, which was that you could service 14 depositors with a single loan.
Run the math — that’s the only way to figure out what’s really going on.
$100 loaned generates $572 to $1092 a year.
$100 deposited pays $147 to $361 a year.
At the extreme ends (the lowest interest rate on deposits and the highest interest rate on loans) that’s only about 7:1. At the lower, probably more typical end, it’s about 3:1.
Where on earth does he get 14:1 without compounding weekly? Wait, as I was typing that I had an idea. It may come from the defaults tied to virtual land — he admitted that in one month he had a 20-30% default rate.
The point here is that the story is constantly changing, and my best guess is that this guy (and others like him) have very little real understanding of these numbers, his profitability, or his overall financial picture, though I’m sure he thinks he has a solid grasp on it.
Take a look at the balance sheet on the BCX site. “Deposits (Customer)” are listed as a “Corporate Asset” and there are no liabilities listed at all. It’s just a big joke. I mean, this is Accounting 101 stuff — even dumb lawyers like me understand it. Deposits represent liabilities, not assets. They represent other people’s money. Is there anybody out there who will say with a straight face that this is a reasonable balance sheet?
I know there is some natural sympathy for these guys — who got surprised by this announcement — but I have heard nothing so far that makes me think that the grid is not better off without this operation, and dozens of others like it. They aren’t intentionally crafted as ponzi schemes — not the more advanced ones. But they’re also not legitimate banking operations, and I see nothing that gives me any confidence that they know what they’re doing or will ever be able to pay everyone back, though they say so. No timeframe, a lot of mumbling about asset purchases and liquidity, talk of sales and exchanges for bonds. It sounds remarkably like what Ginko was feeding depositors about a week after it collapsed, frankly.
It’s just a big, absurd, house of cards, and they’re scrambling around saying whatever sounds good last week, today, whatever. I don’t buy it. This is most definitely not legal analysis, it’s just a guy who has been following these fairly closely talking about it, but it bugs me. Regular users were getting fleeced by these guys, who then cast it as some kind of community service. It’s sick.
On the other hand, I’ve got a story about a bank that it really is sad to see disappear slotted for tomorrow. Bad news of a happier sort, I guess. There were a few good ones, and it is sad to see them go.
I saw bits of the transcript, and I was most heavily amused by Intlibber’s claims. I mean – *really* amused. Your question on the interest/week was off a bit, but the hammer was swinging in the right direction.
Personally, I have no idea what he was doing on that panel.
And did you know panel and penal look the same to a dyslexic sometimes?
I had a chat with Travis Ristow of BCX and have some clarifications on their finances. The comment is at http://terranova.blogs.com/, but I will repeat here to keep people from tiring their mouse-clicking hand:
—————————–
Nice catch, Ben. I talked to Travis Ristow, CEO of BCX. First, they have gotten their accounting in order, and have shown a new set of statements here: http://www.BCXbank.com/BCXJAN.xls.
There are still a couple of items worth mentioning. First, they have as assets about L$4,000,000 in software development costs–this was the cost of developing their platform. Probably not an asset that is easily liquidated, though the accounting is reasonable.
Second, they have L$5,720,255 in loans outstanding. Given the default rate of about 20%, I would shave a good L$1M off this to set up an allowance for doubtful accounts.
So assuming we trust the numbers (although they weren’t audited) and ignore the problems created by the ban itself–and keep in mind that these are as of Jan 7th, before the ban was announced, they actually look reasonably solvent. They owe about L$11M to depositors, of which about half are demand deposits, and the remainder term/CD deposits that mature in 30 days or more.
They can pay the short term deposits off with about $L5M in cash deposits and equivalents and other securities. In the long term, things are a little rougher, because the software platform is not something they can sell (as long as they remain a going concern), and they have not taken an allowance for credit risks. But overall, this doesn’t seem terribly shaky to me.
Of course, keep in mind that these are not audited financial statements, so we only have BCXs word that they have these assets.
“Of course, keep in mind that these are not audited financial statements, so we only have BCXs word that they have these assets.”
approximates
“I haz a zillion dollars in rezerve. U have my werd. I can haz cheezeberger?”
which could lead to Wimpy (Popeye; movie w/Robin Williams) saying,
“I’ll gladly pay you Tuesday for a hamburger today”
The latter, though, is stated by a fictional character where he is bartering with fictional currency. The irony is that it is humorous because we instinctively know he won’t pay on Tuesday, but since it is only fictional money – not our own – we are amused.
When people’s money is at stake – even a privately issued currency, such as frequent flier miles or subway tokens or Linden dollars – people get a bit more involved.
“d00d, I haz a zillion dollars in rezerve. U have my werd. I can haz cheezeberger?”
Sure, Wimpy. Have a cheeseburger. *That* costs people nothing but a rental fee and maybe a late charge on the movie.
Are there transcripts available for these interviews?
There’s a transcript of the first one linked from here:
http://metanomics.net/10-jan-2008/special-metanomics-session-video-link
I haven’t seen a transcript for the second one.