Have you ever used Second Life or played World of Warcraft? These are online games in which real-world people take on virtual personas, sometimes called avatars, and live out imaginary lives quite independently of their real-world ones. In these imaginary worlds, people can own things, make things, and exchange them, all for units of virtual world currency.
All very interesting from an academic perspective, but the thing is, there are now currency exchanges that let people move money from the real world into the virtual one and visa-versa. In fact, there are exchanges which not only allow you to move real world dollars into the virtual world, but between virtual worlds. Isn’t that interesting? There is an evolving market for virtual financial services, and the central players are not banks.
For an overview of the kinds of things that are going on, this article in the Economist is excellent. Apparently, most of the money being made in Second Life is a result of virtual land speculation, and there are tales of people being able to make a real-world living on the back of their virtual activities. And major corporate brands – including bank Wells Fargo – have recognised a trend and are starting to lease space in the online realm (here’s a summary of this activity).
Interestingly, Reuters has an online presence in Second Life and provides financial information, including a ticker that tracks the value of the Linden Dollar (the online game currency in Second Life) against the USD. According to Reuters, as of 1PM PST on October 31, $583,496 US dollars were spent in Second Life that day, and $1 USD is worth 277.9 Lindens.
Quite a lot of value, for a single day of trading in imaginary things by imaginary people.
The economics of virtual worlds are covered in a fascinating, if somewhat out-of-date, treatment by Edward Catronova (here), who explored the implication of Everquest, released by Sony some years back. Like World of Warcraft, this is a game that was is as much about slash and gore as anything else, but Second Life is quite different. It is Web 2.0 in that a key focus is user generated content, and players are given virtual atoms with which to construct things, supported by strong enforcement of intellectual property rights over their creations. They are then able to buy and sell this content using the aforementioned Lindens.
The fact that there is an active market for both user generated content, and virtual currencies should be no surprise to anyone. It is nothing to see ads on blogs and other web 2.0 media, and frankly, the dollars one puts into a Paypal account are pretty much as virtual as the Lindens one uses in Second Life.
So what is is the implication of all this cyber-financial stuff for an institution, especially if significant economic activity migrates into cyberspace?
In the virtual world, many of the traditional roles of banks are largely irrelevant. There is little value, for example, in any capital access function when, ipso facto, the cost of manufacture of anything is essentially zero. Whilst demand for any product might still be variable and associated with price, supply is essentially infinite. Payment systems? The transfer of value is an inherent part of the game world, which is, in effect, a largely closed loop value store.
On first inspection, cyberspace worlds don’t need banks, especially given the fact that the owners virtual world environments are dictator, central banker, and arbitrators of all with no recourse to anyone.
But despite all this, could there be something a financial institution could bring to Second Life which might make it a valuable addition to the virtual economy? I think the answer to that is yes, and that the value comes from being able to sit at the interface of the real and virtual worlds.
Avatars, since they are virtual constructs, are inherently ephemeral things that might vanish at a moments notice. One effect of this is that there can be no reliability on any form of contract between parties in the virtual world, making whole classes of economic activity unviable. Second Life and the rest are therefore limited to simple markets one step up from barter.
A bank with a virtual branch, however, might be able to address this. They could link avatars with real world customers (whilst preserving the anonymity of the avatar, of course) and be in a position, therefore, to guarantee registered contractual relationships between parties. If the Avatar is deleted or otherwise fails to attend to its commitments, the contract would be enforceable by access to customer’s assets in the real world, maybe through some special payment product established by the bank for just this purpose.
My view is that having trust and enforceability would have the effect of taking the markets in the virtual world to the next level. It would make it possible, for example, to write a contract for service from an Avatar and have some recourse for non-delivery. Or to guarantee the transfer of some asset between Avatars: there is, for example, an active market for virtual possessions in World of Warcaft on Ebay (amazing, I know), but such transactions rely on there being a trust relationship between parties. Not much you can do if Magic-Sword-Against-Goblins isn’t transferred to you in the game world after you’ve sent your money in the real one.
All this is very academic, I realise, and frankly, when I started to hear about currency exchanges in virtual worlds, I thought it was just an in-game artifact and not to be confused with serious financial services. But considering the fact that yesterday there were transactions totaling half a million US dollars in just one virtual world, this may be something that it would be unwise to ignore.
And this early in the evolution of cyber worlds, banks might just have a chance to change the way the game is played, and to become as integral a part of the cyber world as they are in the real one.