Yet another financial casualty: Citigroup just became the latest institution to come crawling to the feds for a bailout. Where will it all end? As industry experts become desperate for any kind of divining rod, some observers pointed out that the failure of unregulated banking has already played out — in Second Life. The rise and fall of one of the virtual world’s unregulated banks has some financial researchers taking a closer look at the predictive benefit of virtual environments.The economy in Second Life exists without external regulation, which enabled the creation of Ginko Financial, a bank set up inside the vitual world. The bank accepted Second Life’s virtual Linden dollars at a 40 percent interest rate, then charged extremely high interest rates for its loans. Thousands of investors poured their money into Ginko, but when people started pulling their accounts en masse, the bank was unable to pay its promised interest rate, and it folded. Because of the relationship between the ongoing US financial crisis and banking deregulation, some researchers have drawn an analogy between Ginko and the US banks.
"I don't view 'Second Life' as a game," said Robert Bloomfield, an accounting researcher at Cornell University in Ithaca, New York. "I view it as a market space."
"The 'Second Life' financial markets have pretty much been unregulated…There are accusations that people are doing everything from questionable behavior to outright fraud."
Because Ginko’s virtual collapse had real world implications for Second Life users who paid US dollars for their Linden bucks, Second Life creator Linden Labs no longer allows banks to pay interest on deposits. But financial researchers still have plenty of reasons to examine Second Life and other virtual environments to look at the ways that entrepreneurs and consumers operate in their virtual test tubes. [MSNBC]