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You probably haven’t heard of Joshua Zarwel (Second Life’s ‘Teufel Hauptmann’), but he was the very first person I thought of when Linden Lab banned banking last week. ‘Hauptmann’ doesn’t get a lot of press. He’s never been accused of insider trading or blackmail in the Second Life Herald, he doesn’t spend much money on his avatar, he SL Bank Logodoesn’t issue cringe-inducing press releases, and he doesn’t have his name in diamonds above his virtual door. In short, he’s the kind of guy you want managing your money.

You probably haven’t heard of SL Bank, Zarwel’s investment fund, either — its consistent, honest, 27-30% return rate pales in comparison to claims of 100% to 300% from other banks. The fund’s web site is plain, and its entire in-world presence consists of one tiny, unremarkable virtual building. The building has standard-issue white walls and a bright blue tile floor. It just fits on the 512m plot of land that is included with Zarwel’s Second Life account. It does not have a waterfront view or a private heliport; it is wedged between one store selling costumes for avatars and another selling construction supplies.

SL Bank’s whole in-world presence, from floor to ceiling, uses 102 prims (prims are the basic shapes used to build, the more you use the more you pay). That is about half as many prims as are used in the gilded fountain on the landscaped lawn in front of the sprawling headquarters of one of SL Bank’s better-known competitors. SL Bank has no plush conference rooms, no scrolling tickers for buddies’ virtual stock prices, no flat-panel TVs hanging from the ceiling, no glittering dollar signs on the walls, and no menacing avatar bodyguards.

What SL Bank does have is integrity — lots of it. When Linden Lab ended banking in Second Life last week, Zarwel did something I’ve not heard of any other banker doing: he quietly announced that every single Linden Dollar in his customers’ accounts was available for immediate withdrawal. No compulsory shifts to shady bonds, no “liquidity problems,” no complex deals with friends. ‘Hauptmann’ didn’t have to make excuses because SL Bank was not insolvent.

He made money by taking advantage of an inefficient market for Linden Dollars and, until landbots became common, an inefficient market for virtual land. He bought for less than he sold. Consistently. It is not glamorous, and it takes a lot of effort, but it works. It is easier to make large returns (like Zarwel’s 27-30%) in an emerging economy than a mature one using this method because emerging economies have less efficient markets. This is something ‘Hauptmann’ can point to with specificity. It is real and quantifiable, unlike other Second Life bankers’ vague incantations about the “speed of the economy” and the “stupendous growth rate” of the virtual world.

This story is an important coda to a point I have felt compelled to make far too often over the last year. Many banks in Second Life were ponzi schemes, many relied on phony accounting, and many are now insolvent — but not all of them. SL Bank, and, in all likelihood, a few others, quietly built legitimate, highly profitable operations that would have easily satisfied any auditor, and more importantly, at least from the standpoint of those who would like to see virtual worlds remain as free from further regulation as possible, would not have attracted unwanted attention in the first place.

It is easy for lawyers and journalists to focus on the negatives in the virtual world banking industry, but that is only part of the story. The other part is the story of SL Bank, and that story is best told by ‘Hauptmann’ himself.

“VB” is Virtually Blind, “TH” is ‘Teufel Hauptmann.’

VB: You go by ‘Teufel Hauptmann’ in-world, but you’ve been pretty open about who you are. Can you tell readers a bit about yourself?

TH: I’m 29 years old, 30 this February (oh my god!). I was born in Germany, grew up just outside of Washington, DC and now live in New York City where I work as a consultant and study at New York University where Joshua Zarwel, Photo Credit SL-Bank.comI completed a BA in Economics and am now slowly working on a graduate degree with a focus on Development Economics & Globalization Studies.

I became interested in virtual worlds after my cousin introduced me to Ultima Online in early 1998. There had been other massive multiplayer online games before it (MUDs I believe they were called) but this was the first I had seen with a graphical interface. After a few hours, I was hooked. A few months into playing I noticed a surprisingly high level of inflation in the economy. I began to investigate and found that the hyperinflationary state was due to constant injection of “gold” into the virtual economy. (After each virtual kill, you would often be rewarded with “loot” in the form of gold, which could then be traded with other players or used to buy virtual goods such as weapons or reagents from Non-Player Characters.) This was the first time I asked myself an economic question pertaining to a virtual world. When I learned about Second Life and its open and often volatile economy, I joined the next day. That was back in 2005, when Second Life was MUCH smaller and no one but us true geeks had any idea of what Second Life was.

VB: Were you surprised by Linden Lab’s decision to ban banking?

TH: Simple answer, no. I had been expecting it for years. When I saw the blog post, my immediate reaction was “Oh, it finally happened.” I wasn’t happy about it, but not upset. The fact is that it was simply too easy for anyone to set themselves up as a “bank”, “fund” “stock exchange” or whatever, and take in deposits even if they had no idea of what they were doing and/or if they were someone there to simply steal deposited funds.

Linden Lab Bank PolicyVB: How rampant do you feel fraud was in the virtual world banking industry prior to the Linden Lab policy change?

TH: That is difficult for me to gauge. I have definitely heard of at least three “banks” which had shut down operation and simply left the world, never returning a large majority of deposits. I have also heard of at least five “CEOs” of virtual companies which raised capital via a virtual stock exchange and then left Second Life with the raised IPO funds never to be heard from again. The main problem I saw was with accountability. Many people in Second Life seem to feel that it is a normal thing to not disclose who you are in real life; bank owner or not. Because of this, people may have felt it was normal to invest in a virtual bank, fund, stock or stock exchange which did not disclose any real world information. Some “scammers” may have taken advantage of this train of thought and the human being’s weakness of greed and opened such projects with the intent to steal deposited funds with little to no fear of anyone calling them out on their lack of transparency. Simply open a fancy looking bank or stock market, tell anyone who asks that you don’t wish to disclose who you are as that is your right in a virtual world, offer an eye catching rate, sit back and wait for deposits, shut down shop and go on a six month vacation.

VB: I was really impressed with SL Bank when we communicated last summer, to the degree that I intended (though I never got around to it) to deposit some Linden Dollars with you, even though I felt there was a lot of fraud in the industry as a whole. Can you explain to readers what your business model was?

SL BankTH: SL Bank is/was an arbitrage fund. In virtual worlds, due to smaller populations and higher risks (LL could turn off the L$ anytime or simply shut down SL all together), markets are less efficient than similar markets in the real world. SL Bank took advantage of this situation by arbitraging those inefficiencies. We would, for example, buy L$ on the LindeX and then sell them again at a profit on the same exchange. SL Bank would also buy and sell virtual land, but we moved away from land trading after “land bots” made the land market more efficient and less profitable. Because our deposits were used to arbitrage L$ exchange inefficiencies, they remained liquid, which is important in a virtual world where the economy is volatile and change is frequent.

We did not invest in any other financial projects in SL. This allowed us to maintain complete control over our holdings. As we now see, some banks, exchanges and funds in SL are having trouble liquidating because their funds are tied up in yet other banking and exchange projects which are having the same problem.

We kept our bank location to a minimum. Why buy entire sims to place one measly ATM? SL Bank’s in world location consists of one 512 plot on which the ATM sits. The plot is paid for by my SL account, which provides one free 512 plot with your subscription to the SL service. Thus, none of our funds were tied up in lavish banking locations.

And finally, we tried to be as transparent as possible. If you check our website and/or in world note card you will see that we provide our real world names, addresses, backgrounds, profitability, fund allocation, etc. We had nothing to hide, nor did we ever wish to be anonymous.

Our goal was to remain highly liquid, profitable, to retain complete control over all of our holdings at all times, to be transparent and to be as thrifty with in world purchases and land holdings as possible.

VB: The rate of return you paid hovered around 27-30%, that’s high by real world standards, but it is much, much lower than most virtual banks — one was offering over 350% when the new policy went into effect. How did you attract customers?

TH: Accountability and transparency. Our niche in the market was those who were looking for a lower risk investment. By providing our clients with our real world identities and a model which focused on liquidity, clients, who normally would not invest in Second Life finance, came to us. Our interest rates were lower than most if not all of the other financial projects in Second Life, but with this lower return came lower risk. And now, at the end, we see that the choice of taking a less risky investment has paid off. As many virtual financial firms are struggling to liquidate and pay off what they owe their clients, SL Bank has all funds available for withdraw with no withdraw limit and no restrictions.

VB: I know you were open about the land and currency arbitrage business model with me, but how much of that did you disclose to your depositors?

TH: Everything which has been disclosed to you has been available on our in world note card and our website which actually provides slightly more details than what I have given you thus far. In fact, our website goes into details about the risks of trading virtual currency, land and the natural risks of investing in a virtual world.

VB: How reasonable are claims that other banks made that they could pay more than 300% interest due to the “economic growth” of Second Life?

TH: I have a policy of not commenting on other specific projects in Second Life, bank or not. But I can say that a promised return of 300% is highly unlikely, I don’t care how quickly the economy may have been growing. The only way to attempt to cover such a rate would be through highly risky, unethical or even illegal means. And any loans given out to try and cover such a rate must have such an astronomically high default rate, it would seem counterproductive.

VB: Beyond the straightforward land and currency arbitrage business model, what made your bank different from other banks in Second Life?

TH: I’d say that our willingness to disclose information about ourselves and how the fund functioned is what truly separated us from the rest. No secret formulas or models “which would be disclosed later.” No hiding behind avatars. Just a simple business model that worked and a couple of guys who wanted to make people a few extra L$ while making a little extra for themselves.

VB: Have your customers been able to withdraw the funds they had on deposit with you? Describe the wind-down process.

Yes, about an hour after I read the Linden Lab policy blog post, all funds were made available for withdraw and the withdraw limit eliminated. At first the bank was full of confused clients wondering about the new policy, some were angry with the policy but all were happy their funds were available for withdraw. We have discontinued interest payments and are allowing all of our clients to withdraw their balance with no restrictions. I plan to keep the ATM up and available until the LL deadline at which point I will shut down the ATM, but keep the bank location open as a kind of memorial to a hobby I enjoyed for close to two years.

VB: How have your clients reacted to the end of SL Bank?

That’s the saddest part. I have received many IMs and emails wishing us the best and thanking us for our service. Some relied on us to help them cover tier payments. Others just enjoyed watching their balance grow as they “explored” the grid. Some were real world investors who placed a percentage of their real world portfolio into Second Life and SL Bank. They were clients of ours, so naturally they found the project appealing and so many are upset that we will no longer be providing the service.

VB: What do you see as the future of banking in virtual worlds?

TH: In virtual worlds with open economies such as Second Life, where the exchange of currency and products can be conducted between the virtual and real world, I believe banking and investing will become more and more regulated and mundane. The number of real world financial institutions moving into virtual worlds such as Second Life will probably increase, but they will more than likely focus on marketing for real world services rather than offer in world investment platforms. Those who do offer in world “investments” will probably do so with the hopes that those investing very small amounts in the virtual world, will eventually invest real world money with the firm in question at their real world location. At this point, I feel the risks, high level of opportunity cost, and the uncertainty of investing in virtual worlds will keep most real world financial firms from offering in world services beyond basic advising or investing seminars. But this could change as virtual populations and the amount of money involved increases as well as the security and reliability of in world transactions.

VB: Will you be part of it? What are your plans for your future in virtual worlds?

TH: I’ll probably take a sit back and watch approach. I have been working on a couple of papers outlining my experience and have given several presentations on virtual finance and virtual economies, focusing mainly on the histories of these economies, how they have evolved, problems with them, benefits, etc. I have done some consulting for a couple of real world firms regarding virtual economies and “metanomics” if you will, and hope to continue to do so in the future, although I may no longer be directly involved in virtual finance.

VB: Is there anything else you’d like to tell VB readers?

TH: The thing I’ll miss most about SL Bank will be the joy I received knowing that people used and appreciated the service. I just wanted to thank anyone who may have used or even checked out our service and wish everyone the best. If anyone ever has any questions, they can always reach me via email at:

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16 Responses to “Accountability and Transparency in Virtual Banking: VB’s Interview with SL Bank’s ‘Teufel Hauptmann’”

  1. on 16 Jan 2008 at 3:34 amcsven

    Enjoyed reading this. Thanks.

  2. on 16 Jan 2008 at 6:06 amRobert Bloomfield

    Perhaps I am missing something, but this operation doesn’t seem like a bank at all. A typical commercial bank serves as a financial intermediary, collecting capital from large numbers depositors, and then providing that capital to other businesses in the form of loans. The bank itself earns money on the interest rate spread. It need not have other business plans…those are devised by the borrowers.

    SL Bank is more like a hedge fund. They take capital from depositors (which now should be called investors) and use it to buy low and sell high in various markets–implementing an arbitrage-based business plan, rather than making money on some type of interest rate spread.

    I don’t see why SL Bank couldn’t simply rename itself as SL Arbitrage Fund, and continue to do the same thing with one simple change: offer their investors (NOT depositors) a share of the profits gained from arbitrage, rather than a fixed interest rate.

    My understanding is that this would satisfy Linden’s new policy (though I have no idea what a “direct return” is, as mentioned in the new policy–are dividends and profit-sharing direct returns? Did they make this term up, or is is standard legal terminology?).

    This change would also make SL Bank a lot more similar to the hedge fund it really is. I know of very few that offer fixed returns, given the high volatility of most arbitrage strategies.

  3. on 16 Jan 2008 at 9:41 amBenjamin Duranske

    @2 – true, of course, but I think what you might be overlooking is that most of the banks fit that description. Some of the other banks do offer loans, but they all also invest heavily, if not chiefly, in virtual land, stocks in their buddies’ SL companies (typically in the financial sector), in “software investments” that are really just unsaleable, expensive builds, etc. Very few (actually, none that I know of) are exclusively making money by taking deposits and lending the money out. So they could all do what you describe, at least in theory.

    That’s a pretty reasonable approach, if you think about it. Don’t offer a fixed interest rate — just take deposits, do responsible money management, and pay whatever returns you can legitimately generate. Of course, then investors will then demand regular, honest accounting — a demand which, one suspects, many 300%+ plus institutions could not meet.

    As for “direct return” — I, like you, have no idea. The only way to define it seems to be by comparison — so what’s indirect return? Again, at least for me, absolutely no idea.

  4. on 16 Jan 2008 at 10:11 amDomiziano

    The proposition made from Mr Bloomfield seems to me very interesting and a opportunity for Mr “Teufel Hauptman” and his “honestly ran” bank to go ahead.
    This history clearly demonstrate to everyone that there were few good ones among the scammers & frauders in SL banking/ finance world.

    Congratulations Teufel/Joshua, hope you take advantage of Robert ‘s idea and if u do that i will surely be one of your new customers (deeply sorry to not have known SL bank before).

    SL need something more then a LL delayed regulation. Need people like you with clear ideas and no problems at all about personal data and accountability disclosure.

  5. on 16 Jan 2008 at 10:35 amTyrian Camilo

    The current stand by LL is that all returns, interest etc. is banned except from stock exchanges.

    After asking tens of times, this is the reply i constantly get. Also, if it has to do anything with finances or L$, the service will require by them an banking charter, or other applicable license. For many money related services, no licenses even exists.

    The official stance by LL is that ALL interest is banned, along with ALL direct returns on investment, later on, changed to be guaranteed return on investment.

    The bottomline is that, they are totally clueless in what the policy really is, what they can, and what they cannot do.

    It’s funny to see how they deny arrangements in full compliance of all applicable laws. For example, an hedge fund or angel investor, cannot invest anymore in a Second Life venture by the means of an loan, if any loaning and repayment part has anything to do with Second Life. That’s right, they were asking licenses/banking charter/registration statement for even personal arrangements.

    Also, initially the policy was about giving interest, it has been in further communication extended also on taking interest, that means no interest on CCs, mortgages, personal loans etc.

    Also, it isn’t anymore restricted just to ATMs and other automated methods of doing them, but also manually managed ones.

    So far, LL has not given any other line to the limit of extent than: Stock Exchanges are OK, unguaranteed returns on investment are OK (but apparently only in stock exchanges) and charging fees etc. on loans are ok. On other perspective, they put the extent of the policy as wide as it can possibly go, telling that almost any kind of service involving money needs the RL regulation.

    I don’t want to even think about what are the next bans … Expected time for next ban is early summer or mid-summer.

  6. on 16 Jan 2008 at 10:48 amAshcroft Burhham

    This is a perfect example of why blunt instruments such as arbitrary bans on banking (without any coherent idea of what counts as “banking”) are disastrous.

  7. [...] at SL-Bank, one of the very few legitimate banking systems in all of Second Life. Virtually Blind interviewed Josh and I think the details of the interview/article express it much better than I can [...]

  8. on 16 Jan 2008 at 11:22 amSophrosyne Stenvaag

    Benjamin, thank you for the best article to come out of the banking fracas.

    Teufel is a welcome relief from the braggarts and blingtards who’ve muddied the waters and brought about LL’s over-reaction. Your discussion was clear, honest, and focused, especially in contrast to the (typically) incoherent policy from LL.

    I hadn’t known of SL Bank; if Teufel does re-enter as an arbitrage fund, I’d look very seriously at investing Extropia‘s savings.

  9. on 16 Jan 2008 at 11:24 amTaran Rampersad

    I had my blinders on here- good catch. Teufel’s business model seems as if it was sound, and perhaps even fun for him. It is unfortunate that squeaky wheels create Law while silent ones are passed over without a glance. It also is somewhat annoying sometimes that water flows downhill. It is the way it is.

    A hat tip and apology to Teufel for missing an island in the sea of discontent. Great work, Teufel, and I hope that your future endeavors go well.

  10. on 16 Jan 2008 at 12:45 pmBenjamin Duranske

    @5 – Tyrian, thanks a lot for posting that info. I hadn’t heard how this was being implemented outside of the official statement yet. If you check back in, can you let readers (and me) know where this information comes from (e.g. office hour, blog post, direct questions to Linden employees, or whatever)? I’d love to know where to look for further clarifications.

  11. on 16 Jan 2008 at 1:19 pmTyrian Camilo

    Definately, i have a blog post myself about it up also at:

    Basicly 4 sources:
    Official blog post & FAQ
    Telephone conversation with Patch Linden by Sully Okelly (
    Conversations with our lawyer
    Conversations directly with Linden Lab (Matthew Linden)

    Matthew Linden was kind of totally useless, and finally got mad for repeated requests for clarification of the policy, the discussion went in circles: He basicly told anything i want to do requires somekind of registration, bank charter or so forth. Even, laws applicable would not require such (ie. personal loans), even if it is an regular, real life contract.

    However, they opened up themselves to huge myriad of auditing: If everyone doing personal loans etc. start submitting their contract papers to LL ….

    Linden Lab, Inc. simply shot themselves in their foot, in more than one way. Most press about Second Life is about the banking crisis, right now. Thus the call for stories.
    (Aswell we saw the standard, let’s bury the bad stuff blog posting flood)

  12. on 16 Jan 2008 at 8:10 pmPatricia Johnson

    Wow, great work on this story and hats off to Zarwel and his arbitrage fund. Very interesting story. Now if I could only get Zarwel to manage my real world portfolio…

  13. on 16 Jan 2008 at 10:16 pmJessica Holyoke

    Well, all I have to say is Hey!, (because I probably wrote that Herald article) and sorry that I didn’t hear about SL Bank earlier.

  14. on 17 Jan 2008 at 10:29 amTony

    I have to say that after a bit of thinking, I’ve switched sides. I now think the required regulation on banking was a very bad decision.

    Residents don’t NEED banks. They don’t have to worry about their house burning down and all their Linden’s disappearing. If they don’t NEED them, then I don’t believe they NEED regulation, because the resident can choose.

    They don’t need the banks to finance their loan or provide as a source of savings (with or without return) because there are places outside of SL that can do that. Credit cards and are just a couple of options.

    If people have these other options, but are STILL choosing to do business with these “banks”, then they must have a reason. None that I could come up with seemed like a good enough reason to take the choice out of the hands of all residents. I’ve put what I came up with at the end.

    I understand that many (if not most) are just like that a guy selling Rolexs and Oakleys on the sidewalk for cheap which are probably fake or possibly stolen

    But if there are a few banks that have some kind of plan (even if it doesn’t make sense) and they are transparent about who they are and what their plan is, then it should be up to the person to decide. That’s the crux of the matter, it should be the resident’s freedom to choose.

    To try to turn this back to a legal question. How much policing can LL do before they become legally responsible for policing ALL other activities? A.K.A, when would classifieds fall under discriminatory scrutiny, what about Taxable income reporting on virtual gains, not to mention Stock Exchanges.

    Should anyone purporting to be a business at all, first prove to LL that they hold a business license in their area? Should lawyers have to prove their qualifications?

    At what point does LL actually become required to become the governing body they so strongly seem to want to avoid.

    Reasons I came up with why people would use inworld banks:

    1. They think the bank is actually the “official bank of SL”, and therefore secured and safe.
    2. They are naive or greedy to think that the deal they found isn’t “too good to be true”, but is instead a “once in a lifetime opportunity”.
    3. They want to promote the idea (to others or themselves) that the SL economy is completely independent and self sustainable.
    4. They want to participate in some form of P2P based community lending, or believe or trust that person with their money.

    LL should take measures to make sure no one thinks #1 is true (which should be part of their stance on using “SL” in website names and other things purporting to be “the official SL” anything).

    You can’t protect everyone in #2 because there will always be a way to separate a fool and his money. If they haven’t learned this lesson yet, then its better for them to learn it over a $50 US investment in SL, rather then several hundreds or thousands in RL. Giving your money to someone anonymous is stupid, no matter how good the “deal”

    #3 and #4 aren’t really harmful, and could actually be good for the SL economy.

  15. on 17 Jan 2008 at 11:51 amMego Ryba

    Ben, thank you for this WONDERFUL interview. What would we know about the world if not for journalism?

    It truly is a very good thing for the Lindens to ban unregulated banking. Banking is not intrinsically bad, it is just that history shows clearly that it requires some degree of oversight to reduce deliberate fraud and maintain transparency– provide adequate information to all parties. A problem in this regard is that providing this amount of oversight is a very expensive proposition, requiring a legal system, monitoring organizations like the US SEC, economic and financial experts to draft appropriate regulation and manage macro effects such as money supply, and so on. SL today simply does not have anywhere near the resources to provide this level of

    On the other hand, if SL is to fulfill its potential, “in world” financing and investment is certainly appropriate and necessary. So, how can LL provide some degree of protection without mirroring the entire regulatory structure that a RL entity would need? One mechanism is to rely on outside institutions. Tie the currency to another currency, force investors to invest through established RL financial markets. To a large extent that is what the unregulated banking ban has done, and the approach the Lindens have taken in maintaining the $L at a more or less fixed USD rate.

    But Teufel’s institution brings to life a new requirement, the need to establish some amount of banking and investment opportunity, a mechanism to allow the gradual evolution of a full fledged financial system as the SL economy grows (perhaps!) into a real economy. One possible mechanism for this would be to create analogy with the US SEC’s “accredited investor” ( The SEC tries regulate investment markets in a way that is protective of most investors, but still allows room for circumstances which they cannot forsee or in which the normal regulation must be relaxed. The status of “accredited investor” might be based on resources that the investor has available, or on declarations that the investor makes as to their ability to understand risk and sustain loss.

    Here is perhaps an opportunity for the SL legal and financial communities to meet and propose a system that allows honest institutions like Teufel’s to work to help develop an independent and healthy financial system that is primarily “in-world”.

  16. on 22 Jan 2008 at 9:16 amSecond Life Guess « Rheta’s World

    [...] and that LL should reconsider are more or less the last ones to battle it out. Prokofy Neva and Benjamin Duranske on the other hand have added most welcome shades of grey to the often black and white discussion by [...]

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