Financial Woes in Second Life

With more than nine million registered “residents,”
Second Life leads the boom in virtual worlds–online communities with their own computer-­rendered topographies (see “Second Earth,” July/­August 2007). But the rapidly growing community is facing a virtual monetary crisis that raises questions about its approach to handling real money.

Trouble started this summer when Second Life’s parent company, ­Linden Lab, eliminated gambling activities, erasing about 5 percent of the virtual world’s economy. Later, a bank run triggered the collapse of a bank, Ginko Financial, that offered high interest rates on virtual dollars convertible to real ones (Second Life’s “Linden dollars” trade against the U.S. dollar at 270 to 1). “Most of these problems have been building for a while,” says ­Benjamin Duranske, an intellectual­-property lawyer who has been watching the Second Life banking industry.

So far, the virtual mess hasn’t been monitored by real-world authorities such as the U.S. Securities and Exchange Commission, says ­Cornell University accounting professor ­Robert Bloomfield. But Second Life residents, partly because they’d like to forestall such monitoring, are forming their own virtual exchange commission to establish standards. And Linden Lab’s chief financial officer, John Zdanowski, says the company is working to keep the currency exchange rate stable.

For now, financial instability in Second Life affects only the 45,000 people who actually make money there. But clearly, Linden Lab wants to make sure people don’t get burned so badly that they log off and start focusing on their real lives.