Thursday, August 16, 2007

Regulating the Second Life Economy...

Second Life continues to amaze me in ways that set it light years apart from any other website on the internet. The SL economy is so robust that, as this Wired article reports, one of its banks, Ginko Financial, is going out of business and will be unable to repay the 200,000,000 Lindens (or $750,000 US dollars) to its customers who invested with them. If this were a real-world bank, the FDIC and other government institutions would protect people and their monetary assets through various insurance mechanisms and federal regulations, as they have done since the 1930s and the Great Depression. So the question is, "Should Second Life be regulated by the government in the same way?"

Here is a terrific case study about to be played out on Internet Governance. The case for regulation is the same as in real-space: help protect investors and, as a result, also the strength of the overall economy. One need only look at the success of federal regulation and the FDIC in preventing banking crises and another Great Depression over the past 70 years. However, the case against regulation is a standard mantra of cyberspace: government regulation does more harm than good to the economy by stifling innovation and creativity. Let the market run its course unimpeded by bureaucratic red tape.

Many of my loyal readers are probably wondering why this matters. It is, after all, only a bank that existed on some website that they've never even heard of before, so what's all the fuss about?

Here's why it matters. Second Life is a microcosm of cyber-economics which are increasingly relevant and part of the larger U.S. economy as a whole. Take a look at this financial data and be prepared to have your mind blown. The SL economy stakes claim to nearly 9 million residents, 2.6 billion Linden dollars in circulation (which are bought and sold for real-world U.S. dollars), land is bought, sold, and rented, businesses opened, goods and services sold, and even stocks traded on two SL-based stock exchanges, the International Stock Exchange and the SL Capital Exchange (formerly AVIX).

For all the differences between cyberspace and real-space, they are similar in that when financial institutions go out of business and people's assets are lost there are far-reaching consequences to the overall economy, both in Second Life and the U.S. In this case, individuals lost $750,000 dollars, but that number will undoubtedly increase the next time. That's less money for consumers to purchase other goods and services which increase sales, drive innovation, and generate jobs.

Obviously, some type of regulation or oversight is necessary. The question is what type. Will it be self-regulation or more federal intervention? Robert Bloomfield, accounting professor at Cornell University, says "residents are already responding by creating a variety of oversight institutions of their own, including companies that insure against fraud and homegrown regulatory institutions like the Second Life Exchange Commission, which is modeling itself on the SEC."

Government has thus far been wise to largely stay out of the various cyber-economies and let market forces run their course, which has fit well with the still prominent libertarian ideology of Internet users. It appears that all chances for self-governance will be afforded to the Second Life economy, and in that there is a tremendous opportunity to blaze the trail as a model for the entire Web. However, if they fail in their attempts to self-regulate, then you can expect the real-space authorities to stay out of the game for only so long.


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