Banking in Second Life Is Not Totally Ginko’ed
by Alphaville Herald on 05/09/07 at 11:59 pm
L$ space buck banking in the post-Ginko Financial era
by Jessica Holyoke
The recent upheaval over Ginko Financial’s failure overshadowed other reports of the SL financial sector, so after the bank run and bond conversion, I decided to investigate the other banks in SL. What I found was surprising.
serious L$ investors ponder metaverse banking options
I have used three banks in SL. JT Financial, Second Life Investor’s Bank – not to be confused with Second Life Investment Bank – and Ginko. When I went to look into other banks, I discovered that “bank” returned 55 entries that did not mention the banks of a Gorean river. And the banks need to be sub-classified by investment banks and exchange banks.
Exchange banks are banks that allow for direct currency exchange. Ibizia Bank and Easy Lindens both sell Euros for Linden Dollars. BRMB sells Reals for Linden Dollars. The cost effectiveness is hard to judge because you have to realize that for a Europa citizen to use the Lindex you either have to use your credit card, and use the card company’s currency conversions into dollars, or use PayPal’s currency conversions.
But looking at Ibizia Bank’s conversions, there is still a problem with the rates. Ibizia Bank uses a 315L to €1 conversion. $1 equals €0.730. If $1 equals 270L, then €1 should equal 369L. This means that their profit comes from an unfavorable exchange rate. PayPal exchanges $1 with €0.713. But with PayPal used on the LindeX you have to tack on a $0.30 per transaction fee. Which is 22 eurocents or 81L, so on a small transaction it makes sense to use the exchange bank. When you start to exchange over €2, you lose 54L per euro exchanged so it slowly eats away at what you could be bringing in. The time advantage may make it worthwhile to use the exchange banks over the LindeX.
Two economic problems with the exchange banks. First, different people’s lindens are worth different amounts so there is a slight economic disparity. Second, does this type of exchange mess with Supply Linden? The groups associated with the banking avatar and the owner Asturkon Jua suggest that the Linden Dollars used in the currency exchange are generated in-world and not via purchase from the LindeX. Which means the Linden Dollar value may not be worth what the LindeX reports – especially in light of the SL Exchange’s currency market listing the Linden Dollar at 272/282 per $1 USD.
the Rock Insurance Company provides one measure of banking risk – and insurance
Investment banks are what Ginko was – when it was a going concern. A resident deposited money and earned interest – at least in theory. Commonly, banks earned the Linden dollars paid as interest through land sales, rental management or providing loans, with the interest payments going back to the depositors. Currently the top three banks by traffic are Banca d’italia, Royal Bank of Whitefield and SL Capital Exchange, also known as JT Financials.
Dylan7679 DeCosta runs Banca d’italia which promises 0.23 to 0.25% daily interest via a unspecified investments. The Royal Bank of Whitfield, owned by Cristopher Whitfield, is based on a RL company found at Ciastro.com, which provides various web based services. JT Financials is owned by Arbitage Wise and experienced some difficulties around the time of the Ginko issue. That has not changed their basic investment profile as being unspecified. Although with the addition of the old AVIX exchange, plus their land and commercial holdings and their marketing space, its fairly obvious as to where the income comes from. Then again, everyone knew that Ginko invested in land – or something.
Two interesting things have happened to the banks after the Ginko situation. One is that almost everyone has a “I’m not a pyramid or Ponzi scheme” disclaimer. The second is the rise of the Rock Insurance.
The Rock Insurance offers residents an insurance policy for their investments. Typically, a percentage of your total investment invested with the Rock Insurance will insure your bank deposits for a term determined by the risk of the bank that you’re using. Comparing the Rock’s insurance scheme on the three banks listed above is instructive – and gives some indication of risk – at lewast according to the Rock.
JT financials customers can have their investments covered for 30 days from $1000L to $250,000L for 1% of the balance. Banca d’italia customers can have their investments covered for 30 days from $1000L to $50,000L for 1.60% of the balance. Royal Bank of Whitfield is not yet covered by the Rock Insurance. Banks such as BCX and SLIB are now offering the Rock Insurance to their customers automatically. One thing to consider with the Rock is that they will suspend trading in insurance certificates if the situation does not look good, such as their current suspension of the Bank and their previous suspension of ISE.
Zaldar Rhode at SL Capital Exchange
But above all, the new name of the game is transparency. Resident Ash Fitzpatrick was impressed by the transparency sought by BCX in relating to its customers what goes on behind the scenes. Second Life Investor’s Bank sends out weekly reports on how they are doing. Zaldar Rhode, the CEO of Zhenya zoning real estate, looked to AVIX, now SL Capital Exchange to go public due to their extensive screening of their listing candidates.
Maria Leveaux
Sep 6th, 2007
“There’s a sucker born Every Minute”
Phinias T. Barnum.
P.T. Barnums Population Estimate was Grossly Understated.
Maria LeVeaux.
Maria.
Prokofy Neva
Sep 6th, 2007
Jessica may not have heard of “limited buy orders” and “limited sell orders” on the LindEx. The big players can park their Lindens to buy or sell at favourable rates and simply wait to get their price, then use those cheap Lindens in banking.
The real investigation here should be to analyze each of the exchanges and what the cost of the round-trip ride is on each of them to see how much would be worth playing on the LindEx or any of the other exchanges — if anything.
I also marvel at this “news you can use” style of a report that neglects to tell the most important thing: the rate of interest.
And here, we see this is absolutely no different than Ginko’s.
The ad for SL Capital Exchange/JT Financials on Arbitrage Wise’s avatar says:
“Stock Exchange Capex Investment JT Financial Bank Affiliate – earn 0.15% daily – 72.8% annually”
At the time of its collapse, Ginko promised 0.14$ daily — and had been paying that for months.
So that investigation has to be done too — the interest rates and how long they last.
Ignacio
Sep 6th, 2007
SLIB not only send us a weekly report. You can also se almost 90% of the assets and revenues by joining the group under de Land&$ tab.
Andrea Liddie
Sep 6th, 2007
To start with how can any bank claim to pay .23% – .25% per day. That works out to over 87% per annum. My experience includes a financial analyst for a financial lending company in real life. We looked at starting a bank in Second Life but even with investing the proposed linden deposits in high risk collateral auto loans, (interest rate of 28% plus start up fee’s), we would not even come close to paying 87% per annum. We have shelved the bank idea in Second Life until the rest of the bank crumble, then after all the Second Life depositors have been taught a very expensive lesson, perhaps us and maybe other real life financial companies will look at expanding into Second Life with acceptable interest rates of 8% to 10% per year (not per month as what is being promoted now). Every wonder why Wells Fargo or any other real life bank never opened consumer banking operations in Second Life?
Secondly, where I am located the criminal law states that interest rates charged can not exceed 60% per annum, so Second Life pyramid banks please explain to me how you can possibly pay out interest in excess of the legal chargeable interest rate in some countries?
Third, according to the article, one bank is being run by a web services company. No corporations or financial statements posted from an accredited accounting firm, nothing… Just some postings (non of which are endorsed by an accredited accounting firm) saying what the company is doing. No physical addresses or phone numbers, nothing….
I notice that the Rock Insurance venture is selling insurance. Also have to question this venture with no physical address or telephone number. No financial statements – nothing…
Wow, are Second Life depositors really that stupid? if this is the case, perhaps we should forget our idea of running an actual banking model in Second Life and instead join the rest of the current banks in the great bank rip off… After all, the ginko boys (not from Brazil but according to reports from the United States) were able to walk away with $700,000US… the only problem with this is that we believe that when you get into lending investors money, that your customer is not the borrower but instead the investor…
Well, we will continue in our real world lending operations and patiently wait for the rest of the banks and the pyramid scheme to fall, then maybe Linden depositors will understand that paying 87% per annum in a viable banking model is not and will never be feasible in Second Life (or any other real or Second Life environment)…
DaveOner
Sep 6th, 2007
You guys know this is a game, right?
shockwave yareach
Sep 6th, 2007
I think I’ll create a bank in SL. “FIRST SUCKERS S&L” It has the same credibility and backing as any other bank or investment house in Second Life.
Enky
Sep 6th, 2007
In Reply to Ignacio, i post financial data of Rock Insurance
THE ROCK INSURANCE CO.
Assets Report 09/01/2007
Linden $
Cash On Avatars not invested $420.984
Cash in different banks $416.789
Total Cash $837.773
Stock Portfolio * $3.280.323
Land at Hayek $60.000
Web Site $350.000
Total Assets $4.528.096
_____________________________________________
Cash On Avatars not invested $420.984
Maximun single exposure $299.500
Positive/Negative balance $121.484 40,56%
————————————————————–
* Stock Portfolio is partially visible at WSE major shareholders list
with:
KJL – TMA – DSE – LLL – DDE – PNK – GAL – PFW aprox 2.6 mil. lindens
Kryss Wanweird
Sep 6th, 2007
“Dylan7679 DeCosta runs Banca d’italia which promises 0.23 to 0.25% daily interest via a unspecified investments…JT Financials is owned by Arbitage Wise and experienced some difficulties around the time of the Ginko issue. That has not changed their basic investment profile as being unspecified.”
“But above all, the new name of the game is transparency. Resident Ash Fitzpatrick was impressed by the transparency sought by BCX in relating to its customers what goes on behind the scenes.”
Somewhat contradicting statements.
joe
Sep 6th, 2007
wow, they are nearly broke. XD
Second Lulz Vigilante
Sep 6th, 2007
@Andrea Liddie
Thanks for the analysis. I’m glad a RL financial analyst spoke up about this.
Jessica Holyoke
Sep 6th, 2007
A number of the banks were charging variable interest rates, and honestly, while the promised interest rights might show irresponsible banking, that’s not what I find interesting about the current banking situation, which is problematic due to lack of transparency, accountability and regulation.
While there is some accountanting in this article, I was shooting more for an economic viewpoint. People are still investing in banks, of which there are many. Some people are having their faith in banks reinforced because of the Rock.
And if anything in the SL financial sector is “a sucker’s game” then why do people have faith in it? Is it faith in the other residents? A matter of unearned trust? Is it the immersive experience that if I work at a job and have a house, then I should have a bank, and look here’s an ATM near me?
Kryss, you’re right, there are banks that aren’t as transparent as others. I get weekly reports from SLIB now. That started after the Ginko Collapse. When I was talking to Zaldar, he told me that his IPO was delayed as the SLCAPEX asked for additional RL information. So in those cases, more transparency is evidenced in the financial sector, even if its not extended to all of the banks.
Jessica Holyoke
Sep 6th, 2007
I looked at the Lindex and I don’t have an option for limit orders. All I can execute are market buys. Are limit orders limited to certain accounts?
Kryss Wanweird
Sep 6th, 2007
Jessica, this “transparency” you talk about is rather blurred.
If these banks and SL companies wish to meet minimum reliability criteria, 3 basic statements are required:
1. Balance Sheet
2. Profit & Loss Statement
3. Cash Flow Statement
RL life info is absolutely no evidence of business performance.
Jessica Holyoke
Sep 6th, 2007
Kryss,
Although you might want to tell the Lindens about identity relating to trust, I still think its a move in slightly the right direction. However, even if banks and companies for the stock exchanges provided the financial statements, how would we know that the numbers reported are accurate? Its still a very large leap of faith in dealing with the financial sector.
Kryss Wanweird
Sep 6th, 2007
Jessica,
Sure, the companies could come up with fantasy statements, but, from the very nature of these, it would be possible for someone medium educated in accounting to be able to identify the coherence of the information. Also, there could be some kind of auditing on this info, based on reports generated by the systems that operate these financial institutions. Of course some “faith” is required, but, once you have numbers to rely on, at least to some extent, most of this faith can be replaced by rational analysis.
Jessica Holyoke
Sep 6th, 2007
Kryss,
But how can you trust the systems? Looking at a bank that reinvests deposits into land sales, the main avatar could just be faking the numbers of the landsales.
But perhaps a somehow trusted independent accountant that worked off of Excel with the meta data viewable would be a good start?
Tyra Fierrens
Sep 6th, 2007
The issue with such “banking models” is not the high interest rates per say. It is the absence of credit products. , i.e. no workable business model. RL banks make money by having BOTH credit and debit products.
Mytwo Cents
Sep 7th, 2007
Tyra Fierrens wrote “The issue with such “banking models” is not the high interest rates per say. It is the absence of credit products. , i.e. no workable business model. RL banks make money by having BOTH credit and debit products.”
Tyra hit the prim on the head so to speak. The way I see it there are technically no banks in SL, just commercial operations that chose to finance themselves with extremely short term debt for which they have to pay high double digit interest rates to buy virtual property, develop software applications and run web portals, etc.
Andrea Liddie
Sep 7th, 2007
Reporting financial statement information should include a balance sheet, income statements, cash flow statement as well as statement of reserve – loan receivable. As I noted before, without these statement being prepared and signed off by an accredited accounting firm, (CPA, CMA, CA or CGA) they are only worth the paper they are printed on. The reason for the accredited accounting firm is that they will carry mandatory errors and omissions insurance which ensures that the statements they publish are true and accurate and in accordance with GAAP (Generally Accepted Accounting Principles). If they fail to do this, investors are able to claim against their errors and omissions insurance which can range from $1 million to $10 million in coverage.
Where are RL financial lending company is located, we are required to have our statements to be signed off in order to be able to solicit sophisticated investors, and the United States have very similar requirements.
Depositors, don’t be stupid. While Second Life can be viewed as a game or some form of entertainment, remember that the ginko $700,000 US was real hard cold deposited cash. Only the depositors can stop the existing banks from the pyramid scheme by asking yourself if you are comfortable with loosing your money before you make that next deposit. If you are still going to make that next deposit, well don’t come crying when the bank fails…
In taking a look at the Rock Insurance posted information, have to wonder how an insurance company can sell insurance with reserves that can not support wide spread claims… Would suggest that the owners of the Rock Insurance Company consult a insurance analyst or insurance actuary firm to find out what an insurance reserve really is… Insurance in the banking industry is based in reinsurance and have to wonder how this is possible with one Second Life insurance company?
Fabio Medby
Sep 8th, 2007
I agree with many of the above comments, and especially with the one by Ignacio. SL Banks just can’t have a real business model, not paying a 60% or even only a 40% annual interest, and any report they can provide now is only a collection of inverifiable numbers on a sheet of paper (or in Excel).
Morigi himself, the founder and owner of Rock Insurance, in an interview he gave me some time ago for SLNN.com stated very clearly that at this stage banks and companies are giving him just some numbers, without any real possibility to check them. Ask him…
Here, I wanted to add another thing, though. I think that the journalists (or bloggers, or whatever they want to call themselves) that are now trying to explain us that at least some banks are good, that not everything is totally Ginkoed and (many of them are saying so lately…) that Rock Insurance is great, well, they should also state, first of all, exactly how many lindens they have deposited or invested, in which banks, in which stocks and with which insurance. Then, maybe, they can try to convince us.
Nobody Fugazi has about the same ideas that are expressed in this article here, and to him too I asked to state where exactly he keeps his lindens. He just did not answer. I think that this is at least very unfair and very unacceptable from an ethical and professional point of view. Will SL Herald be better?
Fabio Medby.
Jessica Holyoke
Sep 8th, 2007
Fabio,
I think that there are some real problems with giving a total financial balance sheet based on being a journalist. At the same time, biases should be disclosed. At the time of this article being written, I had banking accounts at SLIB and JT Financial that I opened. I invested on the AVIX, so when AVIX became SL Cap Ex, my dividend balance became a bank deposit at Allenvest Financial. The amount is very low and I didn’t chose to invest at Allenvest Financial, so I didn’t report that bank account. In none of these banks am I a major investor.
Kryss Wanweird
Sep 8th, 2007
Jessica,
For all that was exposed in the comments, I suggest you delete the NOT from the title of you article.
Il0n Papp
Sep 9th, 2007
Great article! Well done!!
Mateo Infinity
Sep 14th, 2007
Personally I have to say I think the financial sector in SL, it finally starting to get their heads on. Several of the I’ll use the term more stable banks in SL are finally looking at things from more than just a “deposits” perspective. Some of the banks are now releasing decent financial data, and exposing their RL info to provide some transparency. I think things are heading in the right direction.
But in the end just like in all the wonderful disclaimers about investing money in the real world. Don’ invest it if you can’t afford to lose it. I have some money in a few places in SL and if it one day went poof, well I would be a bit upset, but it was my money to spend and I’m having fun in the process.
Now let’s also put something into perspective here folks especially those of us in the good ole’ US of A. Let me quote from author Fred Cederholm from Financial Sense Magazine.
“Real money backed by assets has morphed into unreal money backed by only liabilities. Look at any printed US currency in circulation and you see the words “Federal Reserve Note” printed across the top. This means that there is no intrinsic difference between $1, a $5, a $10, a $20, a $50, or a $100 bill. Each would generate the same amount of heat if ignited. The difference in value exists because our government says it does. The backing for the Dollar is heralded as the “full faith and credit of the United States of America.” While the phrase always gives me a surge of patriotic gooseflesh, I know as a CPA and forensic accountant it reduces to the fact that Dollars have perceived value only because the Federal Government has the ongoing power to tax! In the final analysis, it is only the future cash flow from US/ us which can pay down the debt or truly pay the interest on it – not just capitalizing it via still more debt.”
So folks if our “real money” in the “real world” isn’t backed by anything like precious metals anymore, and just laugh at some folks who think all the SL banks should just pack their bags and go home. It is a game, and as I and many others have before. If you invest it you should be prepared to lose it. I for one will continue to enjoy the financial sector of SL. I have meet some of the big players in the arena and while some I wouldn’t trust a goldfish with, others are making some sincere efforts to provide some honesty, and real data that investors can work with.
The article I quote from above can be seen here:
http://www.financialsense.com/editorials/cederholm/2006/1205.html