Second Life is a popular “virtual world” in which people across the real world interact with each other using “avatars.” [1]  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. [2]  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. [3]  It does not have goal or end; there are no monsters to fight, mysteries to solve, or princesses to rescue. [4]  Rather, Second Life provides its users with a toolkit with which they can create items within the virtual world. [5]  Users can create pretty much anything they want: buildings, vehicles, clothing, even games. [6]

    Much of the activity in Second Life centers on commerce with users “buying” and “selling” “land” and each other’s creations. [7]  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. [8]  Users are encouraged to “buy” land from Linden Lab, build a home for their avatar, and develop businesses. [9]  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. [10]  As of this writing, Ginko claims to hold 114,398,068 Linden Dollars, the equivalent of $420,581. [11]  Ginko promises 0.10 percent daily accrued interest, approximately a 44 percent annual return. [12]  No real banks pay anything close to 44 percent annual interest and even top investment mangers do not promise such a high return. [13]

      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. [14]  Nor will he reveal anything about how he is generating such amazing returns for his depositors. [15]  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.” [16]  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.” [17]

      The combination of outsized returns and zero transparency has led some to conclude that Ginko is a Ponzi scheme. [18]  In a Ponzi scheme, the promoter promises huge returns to investors on short term investments. [19]  The scheme works by paying older investors with funds from newer ones. [20]  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. [21]  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. [22]  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. [23]  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. [24]

      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.” [25]  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. [26]  Linden Lab’s CEO and founder, Philip Rosedale, believes that banks can exist within the virtual world of Second Life without regulation. [27]  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. [28]  Grameen works closely with its borrowers to help them become successful. [29]  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. [30]  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. [31]

      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. [32]  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. [33]  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. [34]  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 . . .” [35]  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. [36]  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.

[1] 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).

[2] Second Life, Create an Avatar, http://secondlife.com/whatis/avatar.php (last visited Feb. 12, 2007).

[3] Second Life, What is Second Life?, http://secondlife.com/whatis/ (last visited Feb. 12, 2007).

[4] See Id.

[5] Second Life, Create Anything, http://secondlife.com/whatis/create.php (last visited Feb. 12, 2007).

[6] See Second Life, The Creations, http://secondlife.com/whatis/creations.php (last visited Feb. 12, 2007).

[7] See Second Life, Economy, http://secondlife.com/whatis/economy.php (last visited Feb. 12, 2007).

[8] Second Life, Membership Plans, http://secondlife.com/whatis/plans.php (last visited Feb. 12, 2007).

[9] Second Life, Own Virtual Land, http://secondlife.com/whatis/land.php (last visited Feb. 12, 2007).

[10] 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.

[11] 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).

[12] Reuters, supra note 10; (Ginko recently lowered its daily interest rate from 0.10 to 0.09).

[13] Id.

[14] Id.

[15] 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/.

[16] Id.

[17] Ginko Financial, About Us, http://ginkofinancial.com/aboutus.php (last visited Feb. 12, 2007).

[18] Reuters, supra note 10.

[19] Id.

[20] Id.

[21] Id.

[22] Reuters, supra note 15.

[23] Id.

[24] Id.

[25] Id.

[26] See Reuters, supra note 10.

[27] Reuters, supra note 10.

[28] 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).

[29] Grameen Bank, Breaking the Vicious Cycle of Poverty Through Microcredit, http://www.grameen-info.org/bank/bcycle.html (last visited Feb. 12, 2007).

[30] Id.

[31] Id.

[32] Reuters, supra note 10.

[33] Grameen, supra note 29.

[34] Reuters, supra note 10.

[35] Reuters, supra note 15.

[36] Second Life, Terms of Service, http://secondlife.com/corporate/tos.php (last visited Feb. 12, 2007).