Convert or Die!

A couple of weeks ago, the SL Capital Exchange enacted a controversial decision. They chose to convert all JT Financial balances (which were the same balances SL Capex used) into shares of SLWallet.com, JT Financial's successor. Occasionally looking into the forums on the website, I could see a lot of complaining taking place.

I think that a lot of the criticism that Arbitrage Wise and company have been receiving has been rather unfair. Simply put, the ban on bank interest caught them (among others) off-guard. Perhaps even more so for SL Capex as their claim is that if the ban had started a week or two earlier, they would have had the reserves in place sooner.

While having a securities exchange coupled with an investment firm (which is what JT Financial really is) has been proven to be dangerous, it is not abnormal. While most of us who deal in securities don't interact with the exchange itself, the brokerages that serve as the media do generally offer interest on deposits. This is the case with the three that I have had RL accounts with. I suspect that if an economic panic takes place and drastic withdrawals from brokerages occur, they might be in a similar situation as what SL Capex and other firms are experiencing.

What SL Capex has done with the conversion isn't all that ridiculous. The system set up by this conversion has made it possible for liquidity to take place. Basically, account holders now have the option of accepting a virtual IOU (which might have value in of itself eventually) or cash out at a fraction of their balances. This creates an option where one did not originally exist.

The only valid criticism in my mind is that a lot of JT Financial customers did not deposit with share-dealing in mind. They were simply interested in the, well, interest offered. Now they have to interact with a securities market with people that have been there for a while and have a better idea of the dynamics. However, my response is that things happen outside of our control. The US certainly didn't ask for Pearl Harbour to be attacked, which lead to the draft. (My father went into the US Navy that way in World War II.) Sometimes there are unexpected consequences involved.

I speculate that other options for restoring liquidity were considered. I note that L&L Bank has six options in their solution to their liquidity issues. While SLW conversion was the only explicit option, there was an implicit option: become fully invested before the conversion. I was thinking that JTIC was an ideal investment as it is the closest security to a bond that the exchange offers, and they should still be looking to divestment in May as previously stated.

In the larger scheme of things, what I believe is happening is a natural human impulse to blame the face of a problem, rather than dig beneath and find the root source. Sometimes one can dig too deeply. In my mind, Wise and company are as much victims of a number of forces outside of their direct influence, and yet regardless of what action they take or do not take, they bear the brunt of the vitriol unleashed. I suppose with that in mind, it was easier to do the conversion than it otherwise might have been.

Linden Game Tokens?

I was checking on the markets when I saw a report on the WSE for Lemur Invest. The CEO, Casper Trebuchet, wrote a blog entry on his perceptions of the SL economy, along with some derisive comments that are not worth addressing. He is pondering over the nature of the Linden dollar, about what it is and what he thinks it should be.

His view and preference is that the Linden dollar should be non-convertable to RL currencies. In what he writes, residents should be able to buy Linden dollars like they are game tokens, which can then be used to "improve" the player's experience. What he apparently believes that the flow of funds should be a one-way street and cites a couple of virtual-world examples.

OK, I have no issue if he wishes to go to these virtual worlds outside of Second Life. However, let's looks at the issues involved:

1. The Linden dollar is not convertable already. This might sound paradoxical, but one does not buy Lindens from Linden Lab. The closest thing to that are stipends and some bonuses for signing up. In general, purchases are made on the LindeX or the like.
2. The economy of Second Life is not primarily with Linden Lab. Most of the "improvements" occur with purchases and sales between two residents. LL is a player only when uploading files or some land auctions.
3. Lindens would most likely be bought and sold for RL currencies anyway. I see auctions on eBay for lots of Linden dollars all the time. Indeed, my understanding is that the LindeX exists to regulate most of the player-to-player exchanges.

I suspect that a majority of Second Life residents are there without intentions of making money, using it for whatever they conceive of, so in that context Lindens are mostly game tokens anyway. It's the few of us that get into the mechanics of the SL economy (business owners, share traders, etc.) that concern ourselves with being able to retrieve value from SL enterprises.

I see Second Life as a little more than a game. To me, it's a economics simulation, which had be rather libertarian in nature but it becoming less so. Some people are rather serious about how the economy works and some are content to treat it as a game. I think that there is room enough in Second Life for both types.

Monopoly Money of the World!

A recent announcement made by LukeConnell Vandeverre regarding the continued closure of the World Stock Exchange certainly got my attention. He announced that the WSE would be abandoning the Linden dollar as a trading currency in favour of the World Internet Currency (WIC).

Mr. Vandeverre asserts the position that both of these currencies are "fictitious", simply meaning that they are a "limited licence product" and not real money. In contrast, IntLibber Brautigan of the Ancapistan Capital Exchange takes the interpretation that at least the Linden dollar is a valid currency. The question becomes who is right.

In my mind, and I worked this out even before coming to SL, was that money is whatever concept is accepted by two or more parties to be a means of storing value. The reason that I say concept is that most of the money in the United States today is virtual, existing in the electronic stream of financial institution servers. This is a long way from the original idea that money was some semi-rare metal or an object based on it.

By this basic definition, the idea of what money is extends beyond national currencies. For example, airline miles are a form of currency, which customers can redeem for flights. Not free flights as they are paying for them. Maybe bonus flights might be more appropriate. Similarly, the old S&H greenstamps were a currency as well, since they could be redeemed for products.

One of the major differences between a national currency and a private one is that the later usually invokes a provision stating that the value of their currencies can become zero at any time. In that sense, they are temporary stores of value. However, what if a country's economy collapses? Then it is likely their currency would collapse as well. This happened in Germany in the 1920's, when the Mark became nearly worthless and it could a wheelbarrow filled with notes to buy a loaf of bread.

With that stated, the Linden dollar is somewhere in-between airline miles and national currencies. With airline miles, they are simply created and destroyed by the airline. Linden Lab creates their money, but most transactions are trades between two users, which makes it more like a nation's currency. However, it only has value as long as LL is operating or decides to abandon their currency.

Getting back to the WSE, the basic issue is that the WIC currency is pretty much limited to the exchange itself. I suppose that one can buy and sell WICs with RL currencies, but it appears that the value within the exchange can only be changed by WSE itself. In a sense, it is fictitious as it resembles Monopoly money, of which there is a limited amount.

In contrast, the amount of Linden dollars can change over time. As premium members are afforded stipends, this is one method of increasing the amount available. LL can also decrease the amount of Lindens by selling land. In either case, Second Life is large enough for a decent simulation economy to operate. WSE simply isn't.

One last thought. As the WSE will be operating with its own play money, how will capital raised by companies within Second Life be available? Maybe the idea that Mr. Vandeverre has is that the WSE is moving beyond SL to be its own play world. I suspect that companies that work in SL will simply ask that the lights be turned off before closing the door.

Some Afterthoughts on the Revolution

It's been a little while since I was in alarmist mode. From what I experience in Second Life, things have in many ways return to normal. True, there are still a lot of institutions that are keeping low withdrawal limits, but otherwise the new policy has been absorbed into the SL economy.

Was my alarmist disposition unwarranted? Perhaps to a small extent. However, there is still the little matter of intervention in what had been a truly free market. It seems that Linden Lab has simply exercised their power in how the economy is run.

This reminds me of the situation in 1763, shortly after the Seven Years War. Even though they were victorious, Great Britain was in a financial mess. Wars that span several continents are pretty expensive to fight. They reasonably thought that some of the places that were defended in that war should contribute to the repayment of their defence.

The result was a twelve-year struggle over the issue of how much authority that the mother country had over its colonies. After all, the colonies existed only because the Crown and Parliament either established them or allowed them to be established. Given the distance and the nature of many of the American colonies, there was a lot of internal freedom, including the economic system.

All the time did Great Britain have the right to interfere with the colonial economies. Yet they kept their hands off, even when it violated the few rules laid out by the government. It was when they decided to impose this power that the whole affair leading to the Revolution occurred.

In my mind, Linden Lab has performed pretty much the same action. It is indeed their world. They allow for a large amount of internal freedom for SL residents, but at any time of their choosing, they can revoke that in favour of some new limiting policy.

After Great Britain's first attempt to impose duties within the colonies lead to disastrous results, the taxes were repealed. However, the mother country did leave with a parting shot, an official proclamation that they could impose this again at any time.

I think that is the danger that has emerged. We residents have had it fairly free economically to create risky yet high yield investments. With that slapped down (at least in the form of interest), we now have a better picture of what Linden Lab could do in the future. That is the lesson we should take note of.

Backdoor into Heaven

Recently, IntLibber Brautigan posted a system announcement on his Ancapistan Capital Exchange website proclaiming a backdoor loophole by which investment activity from his BNT Financial Bank can continue. He evoked the Middle Ages principle of Contractum Trinius, which in short allows for a three-stage method of bypassing the banking ban.

Looking at it from a purely technical sense, it would likely work. After all, Linden Lab did actually state what they were banning from a pure technical stance. They are simply not allowing monetary transactions to take place that pass through scripted objects (i.e. and ATM) that guarantee a return of investment.

When we look that this terminology, then it is rather easy to bypass. A bank doesn't have to have an ATM where depositors have to travel to. Indeed, LSL makes it possible for withdrawals initiated by a website to send funds to an avatar. Ginko Financial allowed that all the time, so I didn't need to leave my seat at the blackjack table to gather extra funds. Still though, I suspect that an object did perform the actual transaction.

Based on my knowledge of ATMs, they are needed so that website and database information on who is actually making the deposit be recorded. Otherwise we could simply send the funds to the proper avatar. This would protract the process of assigning monies to a given account, but otherwise it skirts around the use of ATMs in-world.

However, the question remains: What is the stated purpose behind the banking ban? Certainly it's not about ATMs. Fortunately, Linden Lab has provided that reasoning, which is to protect residents from those that would take advantage of us. Bypassing ATMs might slow that down in one way, but speed it up in others.

It's the spirit of the ban that is of issue. While the Contractum Trinius worked mainly because the loophole was based on sanctioned activities, Linden Lab has not in place any such guarantees. It's not papel decree that we have to worry about, but rather the law of the gods themselves.

At least BNTF has a more legitimate avenue for survival in that they are already an RL bank, which they proudly display at ACE headquarters. I do wish them luck in their SL endeavors, but if they push for the sneaky route, I fear that it may backfire. Unfortunately for us, such a backfire may very well take place in a room full of petrol.

Looking from the Outside In

One of the things that occasionally run in my mind is the question of who actually profited from the Great Depression of the 1930's? After all, it's not like wealth somehow just disappeared. Money, yes, but wealth is a different issue.

Part of the issue for the Stock Market crash of 1929 was excessive speculation. Stock prices just soared to record highs based on some assumption that the market could do no wrong. Then there was the economic equivalent of a sneeze that knocked down the house of cards that was built on Wall Street, and suddenly the economy went to pot.

Obviously the ones that managed to make well out of the stock market were the ones that sold at the high speculative levels then didn't return their gains until afterwards. In my mind, that fair. From a certainly point of view, trading shares on the market is much like a grand game of poker, where one tries to guess who is bluffing on value. The ones that convince others that a security is worth more or less than what it is worth do better.

But what if there are some that have an unfair advantage? In the parlance of the 1980's, it's called insider trading. As a society that attempts to inject a sense of morality into capitalism (which is neither moral nor immoral, but rather amoral), we tend to throw the proverbial book at them, and since gains almost always come at someone else's loss, this is not a bad thing for society to adopt.

Now when we look at Second Life, it is interesting to ask the same question: who is profiting off of the bank ban? If we try to look at it from the stance of naiveness, then it will be the banks themselves that are profiting. After all, they no longer have to pay interest and can blame Linden Lab for their stinginess!

Alas, customers are not stupid. (Well, most of them aren't.) They know that if a bank is no longer paying interest, it is not in their best interest for their deposits to remain in the hands of another avatar. Hence we see the phenomenon of the "bank run". This was of course what was happening in the early days of the Great Depression as banks were indeed collapsing, and some were collapsing due to the loss of operating capital. In other words, those that got out early were the ones that prospered.

But what can a financial institution do to prevent a bank run? For the stock exchanges that have not been paying interest, it should be a non-issue as they proclaim they have the funds on hand. I certainly hope this is the case, and I believe that it is. Of course some stock exchanges are connected to banks that do generate interest (which is not unusual even in RL), and some are going through the crunch of liquidating holdings in order to match deposits on record.

Ah, but there is one that is not seeing this problem. The World Stock Exchange, which is connected to an institution call One Bank, is simply closed, with their ATMs non-functional. In a general sense this isn't a surprise; other banks have at least discarded their ATM withdrawals or put low limits on them. However, what make WSE's case interesting is that they closed before the bank ban was announced!

It could be pure coincidence, but others have noted the timing of WSE's closing with Linden Lab's announcement and are highly suspicious. I personally do not like to make judgements without solid and incontrovertible evidence, but I too have to be a bit on the suspicious side.

If it is simply a coincidence, then it would be useful to have suspicions allayed. After all, rumours are the hallmark of panics in the economic realm. However, if there is something afoul, then I hope that it is exposed for what it is. Only then can we in the SL community be doing what Linden Lab is looking to impose. Voting by feet is the way economic democracy works, and it would be worthwhile to discern who does not deserve our votes.

The Land of the Free?

I've been making comments on SL Reports and a few blogs that deal with the Second Life economy, stating my opinions on what I see as the end of the free market. That is something of a hyperbole to be sure as there will seem to be no restriction on buying megaprims from someone even though they are freely available.

To explain what I mean about the end of a free SL market, it might be useful to compare it with the rise of the middle class in the late Middle Ages. During much of the time after the collapse of the Roman Empire, feudal manors tended to be self-sustaining entities. There was no need for trade or the like as the serfs did all the work needed for continued prosperity of the fief lord. Simply put, those who controlled the land didn't need to advance society.

When guilds were being created in the towns of Northern Europe, there came into being the beginnings of what we call the middle class. Not at the same economic prosperity as a feudal land-owner, but certainly more freedom than most serfs. In order to advance themselves against the reactionary aristocratic system, they had to develop means of managing wealth. For them, wealth was the result of labour put into their respective crafts instead of land holding.

So far, so good. Obviously in Second Life there will continue the presence of designers, animators, scripters, and builders. There is no reasonable objection to what most of them do, so in that sense the free market will exist. However, to what I am referencing is the innovation for the management of wealth by this pool of talent.

A way to look at it is that most businesses that have high survival rates are those that do more than simply operate their craft. Many of them have to have the resources to conduct their skills and be successful at it. Communities of individuals working together toward a common objective are far more likely to prosper than those working alone. This gestalt is the kernel of what a corporation is, or at least a partnership.

In a lot of cases, such communities require an investment into what activity they are performing. It could be as simple as a sponsor, but that is just an alternate form of the feudal model. For communities to have the independence to operate their skills, investment needs to have a broader base of support.

Of course no one is stopping people from giving out loans to another individual, but the basic human tendency is to have some expectation of a return. I might give or loan money to a family member or a close friend, but I'd be daft to entrust it to someone else without some incentive, meaning dividend. And yet when stretched to a logical extreme, this is precisely what LL's policy does.

When I make a deposit in a bank, I'm not simply letting them hold onto my funds while I go off somewhere else. In Second Life, I can simply hold onto it where it is safer. (Talk about a reversal of what is the safest location.) Instead, I am loaning my money to a financial entity which then invests elsewhere. That is why funds get depleted when there is a high volume of withdrawals in a short time-frame. As a gesture of the trust that I am engendering, I am compensated for my loan with a return on it in the form of interest.

Yes, some of these places will simply take that money and run, but that's also a risk that they take when they invest themselves. A borrower might simply not log in again, leaving a bank out of luck. With the high risk comes the high rate of interest, otherwise it would be insufficient in a cost-benefit analysis.

Banking is a two-way street. A depositor becomes the lender, and the reverse hold true when loans are made or some other service offered. The middle class of centuries ago understood this, and despite usury prohibitions, they worked around it to spawn a new level of how a market works. A free market would allow people to make that decision on their own, even if there is some level of regulation. An outright prohibition stomps that out.

No longer will an ambitious businessperson be able to ask other people for the chance to expand beyond what they can do alone. Only those with the wealth to begin with will be able to operate in that capacity, while potential investors will no longer be able to share in that journey. It's not just an aristocracy and peasantry type of system. Free markets are not the domain of peasants.