January 26, 2008

When the SLippery SLope beckons

Second Life takes another step onto the slippery slope. They have previously banned gambling, and now they are banning finance.

Please read this if you operate, or have transferred L$ to, an in-world “bank” or financial company.

As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter. ...

This is the slippery slope. By putting a blanket ban on the operation of financial services (or, passing the buck to the old-world regulators, which amounts to the same thing), they have exited from a large sector of commerce. Expect others to follow.

The reason? In short, it is not economic for them. Linden Labs have no economic / libertarian background to understand the theory, so they cannot see a forward path. Nor do they have the necessary regulatory background or friends, so they have inherited a big and powerful enemy (or more precisely, a horde of enemies who all look the same on first glance) with no way to deal with a war.

Also, it has been recently shown by one similar venture (eBay/Paypal) that taking the slippery slope has a quid pro quo: no financial downside, indeed success and profits. Other than a lot of noisy press ("traitors to the cause"), what's the problem? The process looks on track according to modern marketing theories (ditch the early adoptors as you move to the mainstream).

Under this cloud of exit stories, sad to some, there is at least a silver lining. We extract one data point from the experiment that confirms the theories developed in the 1990s for unregulated finance providers:

You probably haven’t heard of Joshua Zarwel (Second Life’s ‘Teufel Hauptmann’), but he was the very first person I thought of when Linden Lab banned banking last week. ‘Hauptmann’ doesn’t get a lot of press. He’s never been accused of insider trading or blackmail in the Second Life Herald, he doesn’t spend much money on his avatar, he SL Bank Logodoesn’t issue cringe-inducing press releases, and he doesn’t have his name in diamonds above his virtual door. In short, he’s the kind of guy you want managing your money.

Sounds like a scam already, right? Call the Feds? The USSS should be hovering as we speak? Read on...

The fund’s web site is plain, and its entire in-world presence consists of one tiny, unremarkable virtual building. ... When Linden Lab ended banking in Second Life last week, Zarwel did something I’ve not heard of any other banker doing: he quietly announced that every single Linden Dollar in his customers’ accounts was available for immediate withdrawal. ...

For those who have memories of the unregulated gold and dollars economy:

... we tried to be as transparent as possible. If you check our website and/or in world note card you will see that we provide our real world names, addresses, backgrounds, profitability, fund allocation, etc. We had nothing to hide, nor did we ever wish to be anonymous.

This is rhyme. Indeed, it's as close to repeat as you can get, to challenge Mark Twain. We can see everything, as indeed it should be in open governance:

  • provide transparent access to account balances
  • show the governance arrangements (a.k.a. 5PM)
  • describe the business model fully
  • describe who the controllers really are (Ivan the Honourable)
  • allow the public to regulate (the fifth party)

The long and the short is that if Linden Labs had implemented the lessons of open governance, they would have likely knocked out (over time) the scams and been left with the gems (again, over time). This does not change the question of whether it would have been economic of them to pursue Austrian approaches to commerce (Hayek's open money, etc), but it does show that there was a forward path, and the place at the end of that path will stand up to scrutiny.

While we are on the finance business, let's check in to see where the regulated world are at in governing their activities:

The UK's HSBC is to use Identrust's Internet authentication network to enable its corporate customers to digitally sign electronic payments files. Identrus provides a secure digital certificate-based infrastructure for business-to-business e-commerce transactions and corporate-to-bank communications....

A select number of HSBC corporate banking clients will be issued with Identrus digital certificates so that their staff can electronically sign payment files.

Identrust-backed digital signatures are used to guarantee non-repudiable and legally binding electronic communications between banks and their corporate clients. Only one Identrus digital identity per user is needed to interact with all of a corporate client's banks, which simplifies the transaction authentication process.

(Imagine here comments about Ricardian contracts, x.509 failings, x9.59 designs, transaction economics, and a whole host of lessons that simply can't be learnt at any price.)

Posted by iang at January 26, 2008 05:18 PM | TrackBack
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