Sunday, January 13, 2008

What Choice Do We Have?

The recent ban on unregulated banking is indicative of a general problem in Second Life: the lack of choices in services providers. LL has full control over Second Life and they do not have to give us choices but choices is what we want.

Second Life has a single currency and a single method of payment in-world, the Linden dollar. And Linden Lab acts in fact as a bank. A bank with limited services and, more importantly, now the only bank. Yes, a bank. We all have an account where we deposit money that we can withdraw later and Linden dollars are issued only as more RL money comes in than goes out. Therefore, all the Linden money that sits in our accounts represents real US dollars in the (RL) coffers of the LL company and LL can invest that money in any way they want. And that is what banks do.

The services of a regular, RL, bank are more extensive. They offer loans, credit, and also pay interest on deposits. LL doesn't offer such services. LL has also been doing very poorly (no pun intended) in handling financial transactions with customers from across the world. Local banks do a much better job at that. In other words, LL is not a very good bank and we shouldn't expect them to be. We should just get those services from other providers.

I am not arguing with the present ban on unregulated in-world banks, I am all for having only regulated banks. But right now we are left with no other choices but the "LL Bank". The way I see it, there should be different providers for the service of an in-world Linden dollar account. I should have the choice of using an institution from my own country. I should have the choice of paying on credit or otherwise to receive interest on the balance in my account. And LL should just be the Cirrus of Second Life.

Similarly, the lack of choices in server locations is at the root of many of the networking problems. The lack of choices has been also at the root of much of the discontent with the implementation of ID verification. There may not be many global choices for that type of service but, whatever they are, LL should have opened the door for different providers instead of choosing one themselves and closing the door behind them.

Yes, the vision of open source servers and especially an open source architecture and open, standardized, protocols holds the promise of enabling all those choices. However, that vision is distant and is not well presented and we cannot see what Second Life will be like in that rosy future. In the meantime, we get more and more restrictions instead of more choices. We can just keep our fingers crossed for the future.


Lem Skall said...

I saw only now (thanks to Cory Ondrejka) that Raph Koster also makes the suggestion that LL in fact acts as a virtual bank.

Gwyneth Llewelyn said...

Yes, he makes that point, Lem, but unfortunately (or not), it's not correct.

Remember that your major argument for having Linden Lab as a bank is "[...]all the Linden money that sits in our accounts represents real US dollars in the (RL) coffers of the LL company and LL can invest that money in any way they want." That's not true. All the L$ in our accounts represent potential US$ if Linden Lab exchanges them on the many currency exchanges (including their own) for US$. If you think about it a bit, this is impossible. They could certainly try to sell a few million L$ every day and invest that money somewhere (Jessica Holyoke sort of hints that they might get a revenue from that), but never the whole L$ 4 billion in circulation — it's not like a bank where this money is "available" for LL to invest with.

So I'm afraid that the L$ sitting in our account do not represent "real US dollars" in LL's real coffers. The analogy would be assuming that all rubles in Russia held in the Russians' individual accounts are in fact convertible to US$ and thus Russia can use that money to buy things abroad. Well, they can't — they can only convert a small fraction of the rubles in circulation into US$.

This doesn't mean that SL's economy isn't an asset and has no value. In fact, Bill Gates used to be the world's richest person, but he didn't have those US$42 billion in cash, but most of it was on Microsoft shares, which had the potential of generating US$42 billion if sold on the stock market. However, that value of US$42 billion is far below the total amount of US$ in circulation, and the NASDAQ or the NYSE are not "banks" just because they allow shares to be exchanged for US$ there.

So, what is Linden Lab? They're definitely a micropayment provider. Since they also provide transfer of micropayments between accounts, and accounts and objects (ie. content for sale), they're a payment gateway. They operate a currency exchange (in fact, the largest currency exchange for the L$). And they "mint money" just as you describe, and also remove some excess money at the money sinks. So they're much closer to a central bank that regulates how transactions are handled, and inject (or remove) money from the economy to make enough money in circulation (but remove the excess money if needed) — but they cannot invest any (or just a tiny fraction) of the money they have in circulation in SL.

A few people have toyed with the idea of creating additional currencies for use in Second Life, mostly through a HUD or a similar system. There is a "gold" currency for the old RPG in SL that I keep forgetting the name; its currency was used for a while. Anshe Chung used the Anshe Dollar for payments inside Dreamland for a while, when the L$ was dramatically falling: people had the option either to pay with A$ or leave her land, so this enjoyed some success for a while. The WSE also toyed with its own currency for a while (they wanted to have a currency that worked across virtual worlds, if they decided to expand beyond SL). These ultimately failed because the L$ is tied-in to everything — to the client, to objects, to scripts. It's very hard to make all vendors accept additional currencies in-world. The L$ is so convenient!

Lem Skall said...

Gwyn, The LindeX only converts "Linden Dollars into US Dollars and vice-versa". All the Lindens in circulation must have once been created by LL with a payment made in US$. So the Linden dollars that are in circulation are all matched by US$ that have been paid to LL. I believe now though that LL does not keep that money in reserves to cover the float of Linden dollars (so they are probably fully invested or even spent).

Our debate on this is kind of a glass-half-full/glass-half-empty thing. There are similarities and differences at the same time between LL and what a bank is. You point out that LL is not a bank because of the differences, I point out that it has much in common with a bank and therefore should have at least some of its responsibilities. It's definitely not a black and white conclusion.

You also compare LL to a central bank and that takes us closer to what is actually the main point I am trying to make. I agree that it has many of the traits of a central bank, but it is now also a central bank that has closed the private banking market and they have a monopoly on it.