February 12 2007, 23:51
Second Life is a popular “virtual world” in which people across
the real world interact with each other using “avatars.”  Avatars
are three-dimensional alter-egos that can be completely customized;
users can change their avatar’s clothing, height, weight, and even add
features like wings.  Unlike other virtual worlds, which are
basically interactive computerized versions of fantasy role-playing
games, Second Life is not a game in the traditional sense.  It does
not have goal or end; there are no monsters to fight, mysteries to
solve, or princesses to rescue.  Rather, Second Life provides its
users with a toolkit with which they can create items within the
virtual world.  Users can create pretty much anything they want:
buildings, vehicles, clothing, even games. 
Much of the activity in Second Life centers on commerce with users
“buying” and “selling” “land” and each other’s creations.  When a
user signs up he or she receives an initial allotment of “Linden
Dollars,” Second Life’s currency, and may purchase more, using real
dollars, from Linden Lab, the creators of Second Life.  Users are
encouraged to “buy” land from Linden Lab, build a home for their
avatar, and develop businesses.  Given Second Life’s commercial
orientation it is no surprise that in-game banks developed.
The best known bank in Second Life is Ginko Financial.  As
of this writing, Ginko claims to hold 114,398,068 Linden Dollars, the
equivalent of $420,581.  Ginko promises 0.10 percent daily accrued
interest, approximately a 44 percent annual return.  No real banks
pay anything close to 44 percent annual interest and even top
investment mangers do not promise such a high return. 
The Chief Executive of Ginko Financial, who goes by the name
Nicholas Portocarrero in Second Life, will not reveal his (if “he” is
in fact a man) real name or where he is located.  Nor will he
reveal anything about how he is generating such amazing returns for his
depositors.  In an interview with Reuters, Portocarrero was
evasive at best. When asked if Ginko was generating its returns
through lending, Portocarrero responded “No, the bank is essentially
loaning the money to itself right now.”  An assertion that direct
contradicts Ginko’s website which states “Ginko Financial takes part of
the total cash deposited and gives loans to various trustworthy
entities and persons, to make the money necessary to pay the daily
interest rate.” 
The combination of outsized returns and zero transparency has
led some to conclude that Ginko is a Ponzi scheme.  In a Ponzi
scheme, the promoter promises huge returns to investors on short term
investments.  The scheme works by paying older investors with
funds from newer ones.  The first few people who invest in a Ponzi
scheme usually receive the interest promised them, but Ponzi schemes
eventually collapse as they do not actually generate money and require
an ever increasing number of new investors to keep up the interest
payments owed.  When asked by Reuters whether he was running a
scam and if he had a good way to rebut such an accusation, given that
Ginko operates without any oversight or regulation, Portocarreo was
once again evasive.  He first tried avoiding the question, but
when pressed, he finally stated that he did not know of a way to rebut
the accusation and denied that Ginko was a Ponzi Scheme. 
According to Portocarreo, Ginko’s lack of disclosure is the risk
investors take on in exchange for their large returns and that people
are just going to have to trust him. 
When asked if Ginko was profitable, Portocarreo once again
avoided the question, stating “I could say yes, but it wouldn’t be
entirely accurate. It depends on how things are calculated and (what)
you count and don’t count.”  This is a remarkable response for
someone who is paying 44 percent interest to his investors.
Ginko’s promised returns, lack of transparency, and evasive
answers should make investors suspicious or at least cautious.
Nevertheless, as the numbers show, people have deposited a great deal
of money with Ginko. More curious than people’s willingness to give
their money to Ginko, is that Linden Lab does not seem to find anything
worrisome about the venture.  Linden Lab’s CEO and founder, Philip
Rosedale, believes that banks can exist within the virtual world of
Second Life without regulation.  Rosedale likens banks like Ginko
to Grameen Bank of Bangladesh which makes small unsecured loans to the
very poor to help them start businesses and work their way out of
poverty.  Grameen works closely with its borrowers to help them
become successful.  By lending to groups, and requiring that the
first few people in the group begin to pay back their loan before
Grameen lends to the others in the group, Grameen creates social
pressure on people to pay back their debts.  Ultimately, Grameen’s
loan policy comes down to trusting the people they lend to, and so far
Grameen’s trust has been warranted as they have a very low rate of
default and numerous success stories. 
Rosedale believes that Grameen’s trust based model of lending
can be applied in Second Life and that fear of being ostracized by the
Second Life Community will ensure that banks like Ginko behave
ethically.  However, Rosedale has things backwards. Grameen makes
no secret of who they are, what they are, or how the bank works.
Grameen is the one who trusts that borrowers will repay their loans.
The risk is borne entirely by Grameen and the relationship between
Grameen and its borrowers is a close and active one.  Ginko is the
exact opposite. Rather than Ginko trusting borrowers, depositors trust
Ginko. They are the ones bearing all of the risk as their deposits are
not insured, Ginko is completely unregulated, and none of the
depositors know who is behind Ginko or how the bank makes money. 
Unlike the people who Grameen lends to who cannot simply leave with
Grameen’s money, there is nothing stopping someone like Portocarreo
from simply taking people’s money and shutting off his Second Life
account. In his Reuters interview, Portocarreo stated “ [w]e keep a
[Linden Dollar] reserve of about 5%, sometimes less . . .”  This
means that at least 95 percent of the Linden Dollar deposits
Portocarreo has received have been converted to real currency. As
depositors have no idea what Ginko does with their money, it is
possible that Portocarrero has spent the money or transferred it to a
location unreachable by U.S. creditors.
Given Ginko’s complete lack of transparency, if it turned out
to be a swindle, it would be very hard for depositors to track down the
person or persons behind it. Even if they were found, there is no
guarantee that depositors would be able to obtain redress. If this
were to occur, it is likely that the depositors would sue Linden Lab
for not protecting them from fraud. By not taking efforts to ensure
that commercial activity in Second Life is conducted in a transparent
manner, Linden Lab is in essence putting their stamp of approval on
ventures like Ginko. Linden Lab of course absolves itself of any
liability for the actions of Second Life users in its Terms of Service
Agreement, but there is no guarantee that the Terms of Service
Agreement will hold up in court.  If a court determines that
Linden Lab is liable for fraudulent activities that take place within
Second Life, they may be overwhelmed with suits. To avoid liability,
and governmental regulation of the commercial activities within Second
Life, Linden Lab should develop rules and policies that ensure
commercial transactions between users are transparent and legitimate.
 Second Life, What is Second Life?, http://secondlife.com/whatis/ (last visited Feb. 12, 2007); Second Life, Create an Avatar, http://secondlife.com/whatis/avatar.php (last visited Feb. 12, 2007).
 Second Life, Create an Avatar, http://secondlife.com/whatis/avatar.php (last visited Feb. 12, 2007).
 Second Life, What is Second Life?, http://secondlife.com/whatis/ (last visited Feb. 12, 2007).
 See Id.
 Second Life, Create Anything, http://secondlife.com/whatis/create.php (last visited Feb. 12, 2007).
 See Second Life, The Creations, http://secondlife.com/whatis/creations.php (last visited Feb. 12, 2007).
 See Second Life, Economy, http://secondlife.com/whatis/economy.php (last visited Feb. 12, 2007).
 Second Life, Membership Plans, http://secondlife.com/whatis/plans.php (last visited Feb. 12, 2007).
 Second Life, Own Virtual Land, http://secondlife.com/whatis/land.php (last visited Feb. 12, 2007).
 Adam Reuters, Ginko Financial – Pioneer or Pyramid?, Reuters Second Life News Center, Oct. 15, 2006, http://www.secondlife.reuters.com/stories/2006/10/15/ginko-financial-pioneer-or-pyramid.
 Ginko Financial, http://ginkofinancial.com (last visited Feb. 12, 2007); Second Life, LindeX Market Data, http://secondlife.com/whatis/economy-market.php (last visited Feb. 11, 2007).
 Reuters, supra note 10; (Ginko recently lowered its daily interest rate from 0.10 to 0.09).
 Adam Reuters, INTERVIEW: Ginko CEO Nicholas Portocarrero, Reuters Second Life News Center, Oct. 12, 2006, http://www.secondlife.reuters.com/stories/2006/10/12/nicholas-portocarrero/.
 Ginko Financial, About Us, http://ginkofinancial.com/aboutus.php (last visited Feb. 12, 2007).
 Reuters, supra note 10.
 Reuters, supra note 15.
 See Reuters, supra note 10.
 Reuters, supra note 10.
 Reuters, supra note 10; Grameen Bank, Breaking the Vicious Cycle of Poverty Through Microcredit, http://www.grameen-info.org/bank/bcycle.html (last visited Feb. 12, 2007).
 Grameen Bank, Breaking the Vicious Cycle of Poverty Through Microcredit, http://www.grameen-info.org/bank/bcycle.html (last visited Feb. 12, 2007).
 Reuters, supra note 10.
 Grameen, supra note 29.
 Reuters, supra note 10.
 Reuters, supra note 15.
 Second Life, Terms of Service, http://secondlife.com/corporate/tos.php (last visited Feb. 12, 2007).