First Draft

Done. Sacrificed a lot of sleep, but I think it will be enough to work on with the editor tomorrow.

Flash:
Online world fed up with virtual “banks”

If Ben Bernanke thought economics in real life was tough, he should spare a thought for the monetary authorities of one of the US’s trading partners, the virtual online economy of Second Life, which has dramatically banned all banks after a succession of crises.

Considered view:
A perfect storm, perfected

Ben Bernanke would have been forgiven a few months ago for envying the central bank of one peculiar small open economy, that of the online game Second Life. Its economic growth surpasses real world economies and the only scarce resources are the time and effort players are willing to invest.

The fiscal and monetary branches of domestic government are both controlled by Second Life’s creators, California based Linden Labs. Real life visitors to Second Life are served by a virtual currency, the Linden dollar, whose exchange rate is managed at around L$270 to US$1.

However, the game’s omnipotent creators will soon outlaw virtual banks. Counterparty risk tends to be high in virtual economies and fraudulent banks have destroyed the banking industry’s reputation in Second Life by taking money and running. Interest offered by banks on deposits have increased to thousands of percent, prompting complaints from users that banks were fundamentally insolvent and simply Ponzi schemes enriching those at the top of the pyramid.

Predictably, the ban’s announcement prompted a bank run and turns the financial sector from a laissez-faire playground to state control in a flash, which may not be so much fun – Second Life usage declined over 5% in November, and this crackdown on banks follows a ban on gambling. Differences in valuation and perception allowed users to speculate in markets, some to make money but some just for the fun of it. Many stock exchanges are also tied to interest-bearing banks, and fear that they too will soon be in Linden’s crosshairs.

Second Life may also be a victim of its own success. Its fiscal authorities have to run a budget deficit since presumably not all of its revenues from exchanging L$ for players’ real world currency is passed through in L$ injections into the virtual economy. Linden has to pay electricity and wage bills in real life after all. Since the monetary branch is required to finance the deficit by increasing the L$ supply by an equivalent amount, we may soon see speculative attacks on the exchange rate peg.

Real world central bankers have to balance economic growth and inflation, and perhaps maintain the odd fixed exchange rate. For all their powers, central banks of parallel worlds have to satisfy customers who also want security, innovation and fun.

(Word count: 381)

Context news:

From January 22, the online virtual world of Second Life will prohibit the offering interest or any direct return on an investment (whether in L$ or other currencies) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter.