By JP Koning
Moneyness
Thursday, February 21, 2013
http://jpkoning.blogspot.com/2013/02/financial-deepening-and-currency.html
Much of the conversation about bitcoin adoption focuses on its use in goods and services transactions. Breaking bitcoin news, for instance, draws attention to the fact that the Internet Archive
will be giving employees the option to be paid in bitcoin. This focus
on brick & mortar transactions means that the role that bitcoin
financial instruments—stocks, bonds, and derivatives—have to play in
promoting bitcoin adoption often gets overshadowed.
I'm currently reading Barry Eichengreen's Exorbitant Privilege
which goes into the mechanics of what it takes to create a truly
international currency. Eichengreen points out that prior to World War I
the dollar played a negligible role relative to the pound sterling in
world markets, but by the mid 1920s it was the dominant unit for
invoicing payments and denominating bonds. Eichengreen's theory is that the US dollar became the world's go-to currency because of the emergence of a very specific financial instrument—the banker's acceptance.
An acceptance is much like a bill of exchange, a financial instrument I explained in my last post.
Say a merchant decides to pay for a shipment of goods with a personal
IOU, or bill. If a bank first "accepts" the bill i.e. if it agrees to
vouch for the IOU, then this gives the bill more credibility. It is now a
banker's acceptance.
According to Eichengreen, around 1908 or 1909, a concerted effort to
foster the growth of the US acceptance market began. Up till then, US
banks had been prohibited from dealing in acceptances and branching
abroad—both these limitations would be removed by new legislation. To
promote liquidity and backstop the acceptance market, the Federal
Reserve, established in 1914, was given authority to buy and sell
acceptances via open market operations. Furthermore, these acceptances
could legally "back", or collateralize, the Fed's note issue. This
feature was particularly helpful. Although the Fed was also legally
permitted to purchase government securities, government securities could
not "back" the note issue. Acceptances, therefore, became the more
flexible and preferred asset for Fed open market operations, at least
until 1932 when the limitations on government collateral were removed.
According to Eichengreen, the Fed was the largest investor in the
acceptance market and sometimes held the majority of outstanding issues
on its balance sheet.
By the mid-1920s foreign acceptances denominated in dollars exceeded
those denominated in sterling by a factor of 2:1 and more central banks
held US forex reserves than sterling. London was on the way out, and New
York on the way in. By 1929, the amount of outstanding foreign public
bonds denominated in dollars (excluding the Commonwealth) exceeded
sterling bonds. The lesson here is that a key step in the sequence of
internationalizing a currency is getting it to be used in financial
markets. This involves the development of deep, liquid, and accessible
markets in securities denominated in that currency.
What sort of financial deepening do we see in the bitcoin universe, and
how might we compare it to the dollar's emergence in the 1910s and 20s?
There are a number of healthy signs of financial deepening. I count five
competing bitcoin securities exchanges that provide a forum for trading
bitcoin-denominated stocks and bonds. These include Cryptostocks, BTCT, MPEx, Havelock, and Picostocks. A sixth, LTC-Global, provides a market in litecoin securities, a competing altchain.
Holders of bitcoin needn't cash out of the bitcoin universe in order to
get a better return. Instead, they can buy a bond or a stock listed on
any of these exchanges.
The largest publicly-traded company in the bitcoin universe is SatoshiDice, a bitcoin gambling website listed on MPEx.
With 100 million shares outstanding and a price of 0.006 BTC,
SatoshiDice's market cap is ~600,000 BTC which comes out to around $17
million. SatoshiDice IPOed
last year at 0.0032 BTC. With bitcoin only trading at $12 back then (it
is now worth $29), the entire company would have been worth $4 million.
Given today's $17 million valuation, SatoshiDice shareholders have seen
a nice return over a short amount of time—much of it provided by
bitcoin appreciation.
While SatoshiDice certainly provides some depth to bitcoin financial
markets it has the potential to shallow them out too. Because MPEx
charges large fees to trade on its exchange, a few of the competing
exchanges have created what are called SatoshiDice "passthroughs". Much
like an ETF, a passthrough holds an underlying asset—in this case
SatoshiDice shares on MPEx—and flows through all dividends earned to
passthrough owners. As a result, investors can get exposure to
SatoshiDice without having to pay MPEx's expensive fees. BTCT, for
instance, lists two different SatoshiDice passthroughs (GSDPT and S.DICE-PT) which together account for more trading volume than all other stocks and bonds listed on BTCT.
SatoshiDice's sheer size is to some extent problematic since Bitcoin
financial markets are not as deep as they might appear. Should something
ever happen to SatoshiDice, a big part of the bitcoin financial
universe's liquidity will be wiped out, and this would ripple out across
the entire field of bitcoin securities. The same might have happened to
banker's acceptances in their day, except for one difference—the Fed
was willing to back the acceptance market up. In the bitcoin universe,
there's no buyer of of last resort to provide liquidity support to
SatoshiDice shareholders.
Another impediment to deeper bitcoin markets is the hazy legality of the
bitcoin securities exchanges. The first major bitcoin securities
exchange, GLBSE, was closed in October 2012 with no prior warning. According to this
article, potential regulatory and tax liabilities convinced GLBSE's
founder to shut it down on his own behest. If any of the existing
bitcoin exchanges were to grow too noticeable, one could imagine the SEC
(or its equivalent) knocking on their door and forcing the
exchange-owner to pull the plug. This sort of regulatory uncertainty can
only dampen the liquidity and depth of bitcoin financial markets.
US authorities, on the other hand, didn't need to heed the rules when
they built the banker's acceptance market. They created the rules. If
financial deepening in the Bitcoin universe is to proceed it will happen
despite regulations and not because of them.
The last headwind to bitcoin financial deepening is bitcoin's
volatility. Eichengreen writes that the seesawing of the pound sterling
during the war period encouraged financial markets to search for a more
stable unit in which to express debts. The pound had always been
anchored to gold (or silver), but it was unpegged from its century's
long gold tether when the war broke out. Although it was repegged in
January 1916, this time to the dollar, this did not secure confidence in
the sterling's value since the peg was dependent on American support.
When this support was withdrawn at war's end, sterling fell by a third
within a year. Through all of this, the dollar continued to be defined
in terms of gold, a feature which no doubt attracted issuers.
Bitcoin, on the other hand, has more than doubled in just two months.
Back in June 2011, it fell by 50% in just two days. Like pound sterling
during the war, bitcoin's lack of stability will do little to promote
deeper financial markets.
Although I've stressed the difficulties that bitcoin markets face in
developing more depth, the sheer amount of financial innovation I'm
seeing from those involved in the various bitcoin securities exchanges
is impressive. I wish them the best. The more they build up bitcoin
securities markets, the better an alternative bitcoin presents to
competing currency units.
[Disclaimer: I am long SatoshiDice and several bitcoin mining stocks.]
Reprinted with permission.
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
Saturday, February 23, 2013
Friday, December 30, 2011
The Ten Most Anticipated Bitcoin Projects for 2012
By The Bitcoin Trader
Friday, December 30, 2011
http://www.thebitcointrader.com/2011/12/10-most-anticipated-bitcoin-projects.html
I'm not so sure that Satoshi Nakamoto could have anticipated the wave of projects that have been and continue to be inspired by his creation. At this very moment, one can only imagine the development progressing in secrecy among the hundreds, if not thousands of computer programmers, investors, financial types, marketing gurus, or otherwise, that have found their second wind thanks to the possibilities of Bitcoin.
Unfortunately, I'm not privy to the closely-guarded secrets behind most of Bitcoin's projects, however many there may be. Many developers, however, are more than happy to share their ongoing work with the community, enough to definitely get us excited about Bitcoin's prospects for next year. So, without further adieu, these are The 10 Most Anticipated Bitcoin Projects for 2012:
10) BitSynCom and the MeshNet
Though somewhat mysterious about their plans, BitSynCom recently announced a massive project to assist the growing effort to launch what can only be described as "the peoples' Internet." Called MeshNet, it would be a peer-to-peer version of the Internet, dependent on its users for owning and operating the supporting infrastructure.
BitSynCom hopes to integrate Bitcoin with MeshNet to act as a payment system to reward those who maintain the infrastructure and provide bandwidth, and to charge those who use it. The development time for such an ambitious project will likely extend well past 2012, but we may see it get legs next year, especially if SOPA comes to pass in its current form. For more information, you can watch an interview with Yifu Guo of BitSynCom, here.
9) The Bitcoin Bond
"JackH" first mentioned the concept of a Bitcoin Bond back on October 25th of this year. The idea is that a publicly traded entity could be used as a vehicle through which investors could buy a piece of the Bitcoin pie while not directly purchasing any Bitcoins. The Bitcoin buying would be the responsibility of an agent associated with the "company." It's an arrangement that would sound familiar to anyone who dabbles in gold and silver ETFs.
The main driver of the project is to mitigate the fragility of the current relationship between banks and Bitcoin exchanges, as there were several instances of banks suspending their accounts with Mt.Gox, Tradehill, and Intersango over the last few months (though it's been quiet as of late).
The latest hurdle facing "JackH" is the cost of developing the legal framework for the company, which was quoted at over 200,000 British Pounds. Yikes! Apparently Mr. H. does have interested investors, though their pockets aren't quite deep enough to come up with that chunk of change. He continues to look for cheaper lawyers...
8) Bitcoin Browser Extensions
Though several attempts have been made at a browser extension, none have really proven effective nor have caught on with Bitcoin users, and most of the development in this field came to a grinding halt when the bubble burst in June. At the moment, it does not appear that anyone in the community is working on an extension, but with the pending implementation of the URI scheme and release of a thin version of the Satoshi client, a browser extension would be the next logical step and would make Bitcoin incredibly user-friendly. Hopefully we'll see one develop in 2012.
7) Bitcoin Options and Futures Trading on the Major Exchanges
2011 will no doubt be remembered as the year that Bitcoinica took Bitcoin by storm. With leveraged trading, playing the Bitcoin markets went from tee-ball to the big leagues, seemingly overnight. 2012, however, will take things to a whole new level. Mt.Gox and Tradehill have both hinted at the fact that they will be unveiling futures and options markets as part of their development plan, with Mt.Gox possibly bringing the features online as early as next month when they are set to unveil... well, something.
6) ICBIT Stock Exchange
Giving Mt.Gox, Tradehill, and Bitcoinica a run for their money will be the ICBIT Stock Exchange. Currently in alpha testing, the exchange promises options and futures trading, as well as the ability to buy traditional stocks using Bitcoins, all of the above on margin, of course.
Having access to derivatives will help to smooth out the volatility that we currently see in Bitcoin trading, and will also give merchants and miners the ability to hedge their holdings (or future holdings). These are key components to establishing a respectable currency market, and will surely generate a lot of interest outside of the Bitcoin community.
5) Electrum Overlay Network
Still looking for an official name to distinguish itself from the Electrum client (I like Overbit, myself), the Electrum Overlay Network is looking to integrate many of the services that are currently found elsewhere, as well as some that do not already exist, and bring them under the umbrella of a single platform. Features will include:
4) Bitcoin Client Upgrades
Though not scheduled for the 0.6 version of Bitcoin, Gavin Andresen has hinted several times at his increasingly urgent desire to release a thin version of the standard client. Motivated primarily by the poor first-time user experience that comes with the full blockchain download, Gavin's dev team will likely deliver a thin version of the client in 2012. The blockchain is already topping out at 1.2 GB, and we'd hate to see what it will look like by the end of next year. In fact, most of us would rather never see it again as long as we know the friendly miner community is keeping tabs on it. Please Gavin, make the blockchain go away!
Also sorely needed is the implementation of the Bitcoin URI scheme. Currently, most Bitcoin transactions happen through the copying and pasting of ugly-looking strings of numbers and letters (i.e. public keys) that have to be manually checked and re-checked before a transaction can take place. With the URI Scheme, the click of a link in a browser will automatically launch the client and incorporate the address into a transaction. It's much needed, and we hope to see it next year.
3) New Bitcoin Transaction Types
I touched on this topic with my post about Bitcoin 0.6, but it's important enough that it needs to be repeated. The upcoming version of Bitcoin, and there will no doubt be more than one iteration in 2012, will support new transaction types. Essentially, the new version will allow for transactions with multiple signatures, thus allowing for escrow-type contracts with third-parties involved.
Having the option for multiple signatures will also add a new layer of security to Bitcoin, where you will be able to require that your transactions be signed by two different private keys, stored in physically separated devices. This added level of security will stop potential hackers and wallet thieves in their tracks, and make credit cards look downright irresponsible. It's the reason why new transactions types are number three on our list.
2) Open-Transactions (OT)
Already in private alpha-testing on a live server, OT, the brain-child of Fellow Traveler, is going to be extremely important in 2012. Really, its relationship with Bitcoin only tells part of the story, but it's an important relationship nonetheless. Bitcoin is the oil lubricating an OT machine that will enable such a vast array of financial instruments and contracts that lawyers everywhere will beg for retirement packages before they are inevitably smacked in the face with pink-slips as their jobs are made redundant.
OT will allow for truly anonymous, off-the-blockchain, instantaneous transactions, thus silencing some of Bitcoin's harshest critics. This will be a capability so powerful that integration with TOR will almost be a necessity. Multi-asset trading and smart contracts will be OT's killer apps, though the power of OT will only be limited by the imagination.
1) Max Keiser and the LoveBitcoins.org Campaign
Announced at the European Bitcoin Conference, Max Keiser is teaming up with lovebitcoins.org with the goal of bringing 1,000,000 new users to Bitcoin in 2012.
In addition to his radio and web presence, Max (I'm assuming we're on a first-name basis) has his own segment on Russia Today called the Keiser Report, with a huge audience that is sympathetic to the Bitcoin cause.
Equally important here is the structured marketing organization starting to develop within the Bitcoin community that will be extremely important to promoting the technology in 2012.
---
2011 was a year of growing pains for Bitcoin. It was both loved and hated by the media and subject to a huge bubble that topped out with a market cap of over $200 million. Hackers and miscreants took shots at exchanges and Bitcoin users alike, yet the currency and the community proved their resilience.
Bitcoin is positioned better than ever to prove to the world its significance and utility. These incredible projects only hint at some of what's to come in 2012, which will no doubt be the year that Bitcoin comes of age.
Reprinted with permission.
Friday, December 30, 2011
http://www.thebitcointrader.com/2011/12/10-most-anticipated-bitcoin-projects.html
I'm not so sure that Satoshi Nakamoto could have anticipated the wave of projects that have been and continue to be inspired by his creation. At this very moment, one can only imagine the development progressing in secrecy among the hundreds, if not thousands of computer programmers, investors, financial types, marketing gurus, or otherwise, that have found their second wind thanks to the possibilities of Bitcoin.
Unfortunately, I'm not privy to the closely-guarded secrets behind most of Bitcoin's projects, however many there may be. Many developers, however, are more than happy to share their ongoing work with the community, enough to definitely get us excited about Bitcoin's prospects for next year. So, without further adieu, these are The 10 Most Anticipated Bitcoin Projects for 2012:
10) BitSynCom and the MeshNet
Though somewhat mysterious about their plans, BitSynCom recently announced a massive project to assist the growing effort to launch what can only be described as "the peoples' Internet." Called MeshNet, it would be a peer-to-peer version of the Internet, dependent on its users for owning and operating the supporting infrastructure.
BitSynCom hopes to integrate Bitcoin with MeshNet to act as a payment system to reward those who maintain the infrastructure and provide bandwidth, and to charge those who use it. The development time for such an ambitious project will likely extend well past 2012, but we may see it get legs next year, especially if SOPA comes to pass in its current form. For more information, you can watch an interview with Yifu Guo of BitSynCom, here.
9) The Bitcoin Bond
"JackH" first mentioned the concept of a Bitcoin Bond back on October 25th of this year. The idea is that a publicly traded entity could be used as a vehicle through which investors could buy a piece of the Bitcoin pie while not directly purchasing any Bitcoins. The Bitcoin buying would be the responsibility of an agent associated with the "company." It's an arrangement that would sound familiar to anyone who dabbles in gold and silver ETFs.
The main driver of the project is to mitigate the fragility of the current relationship between banks and Bitcoin exchanges, as there were several instances of banks suspending their accounts with Mt.Gox, Tradehill, and Intersango over the last few months (though it's been quiet as of late).
The latest hurdle facing "JackH" is the cost of developing the legal framework for the company, which was quoted at over 200,000 British Pounds. Yikes! Apparently Mr. H. does have interested investors, though their pockets aren't quite deep enough to come up with that chunk of change. He continues to look for cheaper lawyers...
8) Bitcoin Browser Extensions
Though several attempts have been made at a browser extension, none have really proven effective nor have caught on with Bitcoin users, and most of the development in this field came to a grinding halt when the bubble burst in June. At the moment, it does not appear that anyone in the community is working on an extension, but with the pending implementation of the URI scheme and release of a thin version of the Satoshi client, a browser extension would be the next logical step and would make Bitcoin incredibly user-friendly. Hopefully we'll see one develop in 2012.
7) Bitcoin Options and Futures Trading on the Major Exchanges
2011 will no doubt be remembered as the year that Bitcoinica took Bitcoin by storm. With leveraged trading, playing the Bitcoin markets went from tee-ball to the big leagues, seemingly overnight. 2012, however, will take things to a whole new level. Mt.Gox and Tradehill have both hinted at the fact that they will be unveiling futures and options markets as part of their development plan, with Mt.Gox possibly bringing the features online as early as next month when they are set to unveil... well, something.
6) ICBIT Stock Exchange
Giving Mt.Gox, Tradehill, and Bitcoinica a run for their money will be the ICBIT Stock Exchange. Currently in alpha testing, the exchange promises options and futures trading, as well as the ability to buy traditional stocks using Bitcoins, all of the above on margin, of course.
Having access to derivatives will help to smooth out the volatility that we currently see in Bitcoin trading, and will also give merchants and miners the ability to hedge their holdings (or future holdings). These are key components to establishing a respectable currency market, and will surely generate a lot of interest outside of the Bitcoin community.
5) Electrum Overlay Network
Still looking for an official name to distinguish itself from the Electrum client (I like Overbit, myself), the Electrum Overlay Network is looking to integrate many of the services that are currently found elsewhere, as well as some that do not already exist, and bring them under the umbrella of a single platform. Features will include:
- Client integration of BTC/fiat exchanges;
- Wallet storage for diskless or extremely low-resource clients;
- Server-side escrows (sending bitcoins to an email address);
- Integration of bitcoin laundry;
- Exchange calculators (to display the “fiat” equivalent value of BTC in clients);
- Firstbits support;
- Mining support for clients; and
- Various transport protocols (especially HTTP Push, which allows PHP websites to integrate easily with Bitcoin).
4) Bitcoin Client Upgrades
Though not scheduled for the 0.6 version of Bitcoin, Gavin Andresen has hinted several times at his increasingly urgent desire to release a thin version of the standard client. Motivated primarily by the poor first-time user experience that comes with the full blockchain download, Gavin's dev team will likely deliver a thin version of the client in 2012. The blockchain is already topping out at 1.2 GB, and we'd hate to see what it will look like by the end of next year. In fact, most of us would rather never see it again as long as we know the friendly miner community is keeping tabs on it. Please Gavin, make the blockchain go away!
Also sorely needed is the implementation of the Bitcoin URI scheme. Currently, most Bitcoin transactions happen through the copying and pasting of ugly-looking strings of numbers and letters (i.e. public keys) that have to be manually checked and re-checked before a transaction can take place. With the URI Scheme, the click of a link in a browser will automatically launch the client and incorporate the address into a transaction. It's much needed, and we hope to see it next year.
3) New Bitcoin Transaction Types
I touched on this topic with my post about Bitcoin 0.6, but it's important enough that it needs to be repeated. The upcoming version of Bitcoin, and there will no doubt be more than one iteration in 2012, will support new transaction types. Essentially, the new version will allow for transactions with multiple signatures, thus allowing for escrow-type contracts with third-parties involved.
Having the option for multiple signatures will also add a new layer of security to Bitcoin, where you will be able to require that your transactions be signed by two different private keys, stored in physically separated devices. This added level of security will stop potential hackers and wallet thieves in their tracks, and make credit cards look downright irresponsible. It's the reason why new transactions types are number three on our list.
2) Open-Transactions (OT)
Already in private alpha-testing on a live server, OT, the brain-child of Fellow Traveler, is going to be extremely important in 2012. Really, its relationship with Bitcoin only tells part of the story, but it's an important relationship nonetheless. Bitcoin is the oil lubricating an OT machine that will enable such a vast array of financial instruments and contracts that lawyers everywhere will beg for retirement packages before they are inevitably smacked in the face with pink-slips as their jobs are made redundant.
OT will allow for truly anonymous, off-the-blockchain, instantaneous transactions, thus silencing some of Bitcoin's harshest critics. This will be a capability so powerful that integration with TOR will almost be a necessity. Multi-asset trading and smart contracts will be OT's killer apps, though the power of OT will only be limited by the imagination.
1) Max Keiser and the LoveBitcoins.org Campaign
Announced at the European Bitcoin Conference, Max Keiser is teaming up with lovebitcoins.org with the goal of bringing 1,000,000 new users to Bitcoin in 2012.
In addition to his radio and web presence, Max (I'm assuming we're on a first-name basis) has his own segment on Russia Today called the Keiser Report, with a huge audience that is sympathetic to the Bitcoin cause.
Equally important here is the structured marketing organization starting to develop within the Bitcoin community that will be extremely important to promoting the technology in 2012.
---
2011 was a year of growing pains for Bitcoin. It was both loved and hated by the media and subject to a huge bubble that topped out with a market cap of over $200 million. Hackers and miscreants took shots at exchanges and Bitcoin users alike, yet the currency and the community proved their resilience.
Bitcoin is positioned better than ever to prove to the world its significance and utility. These incredible projects only hint at some of what's to come in 2012, which will no doubt be the year that Bitcoin comes of age.
Reprinted with permission.
Sunday, June 5, 2011
Global Bitcoin Stock Exchange on AgoristRadio
This AgoristRadio.com episode special guest is Nefario. Buckle your seat-belt Dorothy, cause Kansas is about to go bye-bye. This episode is not for the faint of heart.Discussion includes the Global Bitcoin Stock Exchange, Ricardian contracts, PGP key signing of contracts, encryption transports, encrypted messages over OTR, issues of criminal organizations attacking this system and the need to take it deep in the darknets, onion routing and geocache, massively distributed p2p hawala systems, and anonymous exchange networks.
Listen to the April 28th, 2011 interview here.
Nefario is also interviewed by Bitcoin Weekly here.
Monday, February 22, 2010
Virtual Currency and Money Laundering
By Max Burns
The Profit Potential of Virtual Crime
In fact, money laundering on the Lindex was a hot topic in early 2008, causing the company to take a strong stand in defense of its platform. However, these concerns require further investigation, as the ease with which a player can convert currencies - which requires only a computer and a Second Life account - raises serious anti-terrorism concerns.
As virtual worlds grow in scale and in the number of financial transactions conducted daily, cybercriminals are growing in tandem. With no standardization between worlds, there is no way of knowing whether one source is making and cashing out Linden Dollars, Warcraft Gold, or any other in-game currency. This makes tracking accusations of money laundering extremely difficult.
As virtual worlds grow larger and become a part of tens of millions of lives, the security of one's virtual identity will come to the fore. Trading game currency and betting real currency on in-game markets has birthed an emerging, if impromptu, stock market.
Speculators discontent with the ravaged real-world market will no doubt turn to virtual worlds as they become viable. Without any virtual Securities and Exchange Commission to test the legitimacy of "virtual stock" promotions, this leaves well-meaning players open to fraud.
Despite how common e-mail phishing scams may seem (and who doesn't have a fake PayPal or eBay "account verification" e-mail in their inbox from the past month?), it is vital to remember that these are crimes.
One of the major problems facing law enforcement agencies is the issue of where an attack originates. This decides the thorny issue of jurisdiction.
Internet security firms like McAfee decry the current scam-ridden landscape of virtual worlds, but substantive recommendations for improving the situation are few and far between. As Tech Target reports, the ever-expanding virtual landscape and the cleverness of cybercriminals is confounding traditional law-enforcement services.Given the cost of cybercrime and its potential to destabilize small virtual worlds that may lack superior protections, being confounded is no longer good enough. Law enforcement agencies need to give serious consideration to the major role virtual worlds are playing in the lives of users - both as hubs for financial transactions with sensitive credit card information, and as a center for semi-anonymous gathering.
Should law enforcement agencies monitor virtual worlds for cybercrime and identity theft? Is it time for the FBI to open a virtual office in Second Life to deal with claims of large-scale cybercrime events? Let us know your thoughts.
Max Burns is the editor of Pixels and Policy. Reprinted with permission.
For further reading/viewing:
"The Failure of Anti-Money Laundering Laws" (video), Center for Freedom and Prosperity, February 22, 2010
"Runescape creator pursues 'phishing thieves'", Mark Ward, BBC News, November 30, 2009
"Virtual World Money Laundering", Mark Methenitis, June 3, 2009
"Cyber-Laundering: The Union Between New Electronic Payment Systems and Criminal Organizations", Giulio Piller and Elvis Zaccariotto, Transition Studies Review, May 2009
"E currencies and money laundering are they intertwined?", Michael Hearns, November 21, 2008
"Group Laundered $38M in Virtual Currencies in 18 Months", Virtual World News, October 27, 2008
"Virtual worlds becoming money laundries", Shaun Nichols, vnunet.com, August 29, 2008
"Cyber Laundering: An Analysis of Typology and Techniques", Wojciech Filipkowski, International Journal of Criminal Justice Sciences, Volume 3 Issue 1, January - June 2008
"Virtual Money Laundering and Fraud", Kevin Sullivan, April 3, 2008
"Exchanging Real Money in Virtual Worlds", Andrea Kaminski, E-Commerce Times, March 3, 2008
ATM cards tied to virtual worlds a 'money launderer's dream'", Brian Monroe, Moneylaundering.com, November 20, 2007
"UK panel urges real-life treatment for virtual cash", Adam Reuters, May 14, 2007
Virtual Worlds 'Clear and Present Danger' for Money Laundering", Brian Monroe, Moneylaundering.com, April 26, 2007
"Virtual money laundering now available on the world wide web", Kenneth Rijock, World-Check, January 2, 2007
Pixels and Policy
Tuesday, November 3, 2009
http://www.pixelsandpolicy.com/pixels_and_policy/2009/11/cybercrime-booms-in-the-virtual-world.html
After looking at the necessity of proper policing in virtual worlds yesterday, let's take a look at just how prevalent cybercrime really is.
As the Hindu Business Line reports, cybercrime - both small-scale phishing and large-scale acts like cyberterrorism and mass account information theft - is on the rise.Tuesday, November 3, 2009
http://www.pixelsandpolicy.com/pixels_and_policy/2009/11/cybercrime-booms-in-the-virtual-world.html
After looking at the necessity of proper policing in virtual worlds yesterday, let's take a look at just how prevalent cybercrime really is. The Profit Potential of Virtual Crime
Cybercrime’s prevalence in the virtual world is debatable, with different organizations expressing varying levels of concern. The Fraud Advisory Panel, a consumer protection group, called for the extension of federal laws into the virtual world as early as 2007. There’s definitely a need, reports the the Hindu Business Line, a business policy newspaper that recently dipped into the virtual world to take a sampling of cybercrime. From the article:
"Phishing attempts to acquire sensitive consumer information such as usernames, passwords, and credit card details fraudulently. Once an account is compromised in this way, a cyber criminal can empty it or use its associated credit card information for other purchases."
"While not a threat in the usual sense, users can inadvertantly become party to money laundering. Because avatars can trade currencies and goods inside the virtual world and then sell them into secondary markets for real money, the crime is difficult to trace."We've come a long way from trying to trade useless loot for gold in Runescape. Money laundering through Second Life's Lindex Exchange, which allows users to spend real currency for Linden Dollars and then convert them back into a real world currency, is also a potential financial fraud hub.
In fact, money laundering on the Lindex was a hot topic in early 2008, causing the company to take a strong stand in defense of its platform. However, these concerns require further investigation, as the ease with which a player can convert currencies - which requires only a computer and a Second Life account - raises serious anti-terrorism concerns.
As virtual worlds grow in scale and in the number of financial transactions conducted daily, cybercriminals are growing in tandem. With no standardization between worlds, there is no way of knowing whether one source is making and cashing out Linden Dollars, Warcraft Gold, or any other in-game currency. This makes tracking accusations of money laundering extremely difficult.
As virtual worlds grow larger and become a part of tens of millions of lives, the security of one's virtual identity will come to the fore. Trading game currency and betting real currency on in-game markets has birthed an emerging, if impromptu, stock market.
Speculators discontent with the ravaged real-world market will no doubt turn to virtual worlds as they become viable. Without any virtual Securities and Exchange Commission to test the legitimacy of "virtual stock" promotions, this leaves well-meaning players open to fraud.
Despite how common e-mail phishing scams may seem (and who doesn't have a fake PayPal or eBay "account verification" e-mail in their inbox from the past month?), it is vital to remember that these are crimes.
One of the major problems facing law enforcement agencies is the issue of where an attack originates. This decides the thorny issue of jurisdiction.
Internet security firms like McAfee decry the current scam-ridden landscape of virtual worlds, but substantive recommendations for improving the situation are few and far between. As Tech Target reports, the ever-expanding virtual landscape and the cleverness of cybercriminals is confounding traditional law-enforcement services.Given the cost of cybercrime and its potential to destabilize small virtual worlds that may lack superior protections, being confounded is no longer good enough. Law enforcement agencies need to give serious consideration to the major role virtual worlds are playing in the lives of users - both as hubs for financial transactions with sensitive credit card information, and as a center for semi-anonymous gathering.
Should law enforcement agencies monitor virtual worlds for cybercrime and identity theft? Is it time for the FBI to open a virtual office in Second Life to deal with claims of large-scale cybercrime events? Let us know your thoughts.
Max Burns is the editor of Pixels and Policy. Reprinted with permission.
For further reading/viewing:
"The Failure of Anti-Money Laundering Laws" (video), Center for Freedom and Prosperity, February 22, 2010
"Runescape creator pursues 'phishing thieves'", Mark Ward, BBC News, November 30, 2009
"Virtual World Money Laundering", Mark Methenitis, June 3, 2009
"Cyber-Laundering: The Union Between New Electronic Payment Systems and Criminal Organizations", Giulio Piller and Elvis Zaccariotto, Transition Studies Review, May 2009
"E currencies and money laundering are they intertwined?", Michael Hearns, November 21, 2008
"Group Laundered $38M in Virtual Currencies in 18 Months", Virtual World News, October 27, 2008
"Virtual worlds becoming money laundries", Shaun Nichols, vnunet.com, August 29, 2008
"Cyber Laundering: An Analysis of Typology and Techniques", Wojciech Filipkowski, International Journal of Criminal Justice Sciences, Volume 3 Issue 1, January - June 2008
"Virtual Money Laundering and Fraud", Kevin Sullivan, April 3, 2008
"Exchanging Real Money in Virtual Worlds", Andrea Kaminski, E-Commerce Times, March 3, 2008
ATM cards tied to virtual worlds a 'money launderer's dream'", Brian Monroe, Moneylaundering.com, November 20, 2007
"UK panel urges real-life treatment for virtual cash", Adam Reuters, May 14, 2007
Virtual Worlds 'Clear and Present Danger' for Money Laundering", Brian Monroe, Moneylaundering.com, April 26, 2007
"Virtual money laundering now available on the world wide web", Kenneth Rijock, World-Check, January 2, 2007
Thursday, June 11, 2009
My Virtual Life
By Robert D. Hof
BusinessWeek
Monday, May 1, 2006
https://www.bloomberg.com/news/articles/2006-04-30/my-virtual-life
A journey into a place in cyberspace where thousands of people have imaginary lives. Some even make a good living. Big advertisers are taking notice
As I step onto the polished wood floor of the peaceful Chinese country house, a fountain gurgles softly and a light breeze stirs the scarlet curtain in a doorway. Clad in a stylish blue-and-purple dress, Anshe Chung waves me to a low seat at a table set with bowls of white rice and cups of green tea. I'm here to ask her about her booming land development business, which she has built from nothing two years ago to an operation of 17 people around the world today. As we chat, her story sounds like a classic tale of entrepreneurship.
Except I've left out one small detail: Chung's land, her beautifully appointed home, the steam rising from the teacups -- they don't exist. Or rather, they exist only as pixels dancing on the computer screens of people who inhabit the online virtual world called Second Life. Anshe Chung is an avatar, or onscreen graphic character, created by a Chinese-born language teacher living near Frankfurt, Germany. And the sitting room in which Chung and my avatar exchange text messages is just one scene in a vast online diorama operated by Second Life's creator, Linden Lab of San Francisco. Participants launch Second Life's software on their personal computers, log in, and then use their mice and keyboards to roam endless landscapes and cityscapes, chat with friends, create virtual homes on plots of imaginary land, and conduct real business.
REAL BUCKS
The avatar named Anshe Chung may be a computerized chimera, but the company she represents is far from imaginary. Second Life participants pay "Linden dollars," the game's currency, to rent or buy virtual homesteads from Chung so they have a place to build and show off their creations. But players can convert that play money into U.S. dollars, at about 300 to the real dollar, by using their credit card at online currency exchanges. Chung's firm now has virtual land and currency holdings worth about $250,000 in real U.S. greenbacks. To handle rampant growth, she just opened a 10-person studio and office in Wuhan, China. Says Chung's owner, who prefers to keep her real name private to deter real-life intrusions: "This virtual role-playing economy is so strong that it now has to import skill and services from the real-world economy."
Oh yes, this is seriously weird. Even Chung sometimes thinks she tumbled down the rabbit hole. But by the time I visited her simulated abode in late February, I already knew that something a lot stranger than fiction was unfolding, some unholy offspring of the movie The Matrix, the social networking site MySpace.com (NWS ), and the online marketplace eBay (EBAY ). And it was growing like crazy, from 20,000 people a year ago to 170,000 today. I knew I had to dive in myself to understand what was going on here.
As it turns out, Second Life is one of the many so-called massively multiplayer online games that are booming in popularity these days. Because thousands of people can play at once, they're fundamentally different from traditional computer games in which one or two people play on one PC. In these games, typified by the current No. 1 seller, World of Warcraft, from Vivendi Universal's (V ) Blizzard Entertainment unit, players are actors such as warriors, miners, or hunters in an endless medieval-style quest for virtual gold and power.
All told, at least 10 million people pay $15 and up a month to play these games, and maybe 20 million more log in once in a while. Some players call World of Warcraft "the new golf," as young colleagues and business partners gather online to slay orcs instead of gathering on the green to hack away at little white balls. Says eBay Inc. founder and Chairman Pierre M. Omidyar, whose investing group, Omidyar Network, is a Linden Lab backer: "This generation that grew up on video games is blurring the lines between games and real life."
Second Life hurls all this to the extreme end of the playing field. In fact, it's a stretch to call it a game because the residents, as players prefer to be called, create everything. Unlike in other virtual worlds, Second Life's technology lets people create objects like clothes or storefronts from scratch, LEGO-style, rather than simply pluck avatar outfits or ready-made buildings from a menu. That means residents can build anything they can imagine, from notary services to candles that burn down to pools of wax.
PROPERTY RIGHTS
You might wonder, as I did at first, what's the point? Well, for one, it's no less real a form of entertainment or personal fulfillment than, say, playing a video game, collecting matchbook covers, or building a life list of birds you've seen. The growing appeal also reflects a new model for media entertainment that the Web first kicked off: Don't just watch -- do something. "They all feel like they're creating a new world, which they are," says Linden Lab Chief Executive Philip Rosedale.
Besides, in one important way, this virtual stuff isn't imaginary at all. In November, 2003, Linden Lab made a policy change unprecedented in online games: It allowed Second Life residents to retain full ownership of their virtual creations. The inception of property rights in the virtual world made for a thriving market economy. Programmer Nathan Keir in Australia, for example, created a game played by avatars inside Second Life that's so popular he licensed it to a publisher, who'll soon release it on video game players and cell phones. All that has caught real-world investors' attention, too. On Mar. 28, Linden Lab raised a second, $11 million round of private financing, including new investor Jeff Bezos, CEO of Amazon.com Inc (AMZN ).
Virtual worlds may end up playing an even more sweeping role -- as far more intuitive portals into the vast resources of the entire Internet than today's World Wide Web. Some tech thinkers suggest Second Life could even challenge Microsoft Corp.'s (MSFT ) Windows operating system as a way to more easily create entertainment and business software and services. "This is why I think Microsoft needs to pay deep attention to it," Robert Scoble, Microsoft's best-known blogger, recently wrote.
WEAK SPOT
A lot of other real-world businesses are paying attention. That's because virtual worlds could transform the way they operate by providing a new template for getting work done, from training and collaboration to product design and marketing. The British branding firm Rivers Run Red is working with real-world fashion firms and media companies inside Second Life, where they're creating designs that can be viewed in all their 3D glory by colleagues anywhere in the world. A consortium of corporate training folks from Wal-Mart Stores (WMT ), American Express (AXP ), Intel (INTC ), and more than 200 other companies, organized by learning and technology think tank The MASIE Center in Saratoga Springs, N.Y., is experimenting inside Second Life with ways for companies to foster more collaborative learning methods. Says Intel Corp. learning consultant Brent T. Schlenker: "We're trying to get in on the front end of this new workforce that will be coming."
The more I kept hearing about all this, the more I knew this was wa-a-a-ay more than fun and games. So early this year I signed up at www.secondlife.com, downloaded the software, logged on, and created my persona. As reporter "Rob Cranes," I embarked on my journey.
And promptly got lost in the vast, uncharted terrain.
Click: I land at the Angry Ant, a nightclub holding a "Naked Hour" where avatars are in various stages of undress, dancing lasciviously. Is it getting warm in here?
Click: I stumble upon someone teaching a class on how to buy and sell virtual land to a motley crew of avatars sitting attentively on chairs watching PowerPoint slides. Do we get a toaster when we're done?
Click: Suddenly, I'm underwater at Cave Rua, watching a school of fish swim by. Cool, but what do I do here?
Click: Here's a virtual doctor's office, where a researcher runs a simulation of what it's like to be a hallucinatory schizophrenic. A menacing British voice from a TV urges: "Shoot yourself. Shoot them all. Get the gun out of the holster and shoot yourself, you !@#&!" Yikes, where's that teleport button?
My disorientation points up one of the big challenges of these virtual worlds, especially one so open-ended as Second Life: With nothing to shoot and no quest to fulfill, it's hard for newbies to know what to do. Virtual worlds require personal computers with fairly advanced graphics and broadband connections and users with some skill at software. "The tools are the weak spot," says Will Wright, legendary creator of The Sims video game, who nonetheless admires Second Life. For now, he says, "That limits its appeal to a fairly hard-core group."
Still, there's no denying the explosion of media, products, and services produced by users of these virtual worlds. IGE Ltd., an independent online gaming services firm, estimates that players spent about $1 billion in real money last year on virtual goods and services at all these games combined, and predicts that could rise to $1.5 billion this year. One brave (or crazy) player in the online game Project Entropia last fall paid $100,000 in real money for a virtual space station, from which he hopes to earn money charging other players rent and taxes. In January inside Second Life alone, people spent nearly $5 million in some 4.2 million transactions buying or selling clothes, buildings, and the like.
That can add up to serious change. Some 3,100 residents each earn a net profit on an average of $20,000 in annual revenues, and that's in real U.S. dollars. Consider the story of Chris Mead, aka "Craig Altman," on Second Life. We exchange text messages via our keyboards at his shop inside Second Life, where he hawks ready-made animation programs for avatars. It's a bit awkward, all the more so because as we chat, his avatar exchanges tender caresses with another avatar named "The Redoubtable Yoshimi Muromachi." Turns out she's merely an alter ego he uses to test his creations. Still, I can't help but make Rob Cranes look away.
SHOPPING SPREE
Mead is a 35-year-old former factory worker in Norwich, England, who chose to stay home when he and his working wife had their third child. He got on Second Life for fun and soon began creating animations for couples: When two avatars click on a little ball in which he embeds the automated animation program, they dance or cuddle together. They take up to a month to create. But they're so popular, especially with women, that every day he sells more than 300 copies of them at $1 or less apiece. He hopes the $1,900 a week that he clears will help pay off his mortgage. "It's a dream come true, really," he says. "I still find it so hard to believe."
His story makes me want to venture further into this economy. Besides, my photo editor is nagging me to get a shot of my avatar, which needs an extreme makeover. Time to go shopping! First I pick out a Hawaiian shirt from a shop, clicking on the image to buy it for about 300 Lindens, or about a dollar. Nice design but too tight for my taste, so I prowl another men's shop for a jacket. I find something I like, along with a dark gray blazer and pants. As a fitting finishing touch for a reporter, I add a snazzy black fedora, though I'm bummed that it can't be modified to add a press card.
I'm also feeling neglectful leaving my avatar homeless every time I log out. It's time to buy some land, which will give me a place to put my purchases, like a cool spinning globe that one merchant offered cheap. And maybe I'll build a house there to show off to friends. I briefly consider buying a whole island, but I have a feeling our T&E folks would frown on a $1,250 bill for imaginary land. Instead, I purchase a 512-square-meter plot with ocean view, a steal for less than two bucks. Plopping my globe onto my plot, I take a seat on it and slowly circle, surveying my domain. My Second Life is good.
I soon discover that Second Life's economy has also begun to attract second-order businesses like financial types. One enterprising character, whose avatar is "Shaun Altman," has set up the Metaverse Stock Exchange inside Second Life. He (at least I think it's a he) hopes it will serve as a place where residents can invest in developers of big projects like virtual golf courses. In a text chat session in his slick Second Life office, Altman concedes that the market is "a bit ahead of its time. I'm sure it will take quite some time to build up a solid reputation as an institution." No doubt, I'm thinking, especially when the CEO is a furry avatar whose creator refuses to reveal his real name.
Premature or not, such efforts are raising tough questions. Virtual worlds may be games at their core, but what happens when they get linked with real money? (For one, people such as Chung's owner start to take changes to their world very seriously. She recently threatened to create her own currency inside Second Life after the Linden dollar's value fell.) Ultimately, who regulates their financial activities? And doesn't this all look like a great way for crooks or terrorists to launder money?
Beyond business, virtual worlds raise sticky social issues. Linden Lab has rules against offensive behavior in public, such as racial slurs or overtly sexual antics. But for better or worse, consenting adults in private areas can engage in sexual role-playing that, if performed in real life, would land them in jail. Will that draw fire from law enforcement or, at least, publicity-seeking politicians? Ultimately, what are the societal implications of spending so many hours playing, or even working, inside imaginary worlds? Nobody really has good answers yet.
My head hurts. I just want to have some fun now. It's time to try Second Life's most popular game. Tringo is a combination of bingo and the puzzle-like PC game Tetris, where you quickly try to fit various shapes that appear on a screen into squares, leaving as few empty squares as you can. I settle in on a floating seat, joining a dozen other competing avatars at an event called Tringo Money Madness @Icedragon's Playpen -- and proceed to lose every game. Badly. I start to get the hang of it and briefly consider waiting for the next Tringo event until I see the bonus feature: a movie screen showing the band Black Sabbath's 1998 reunion tour.
Instead, I seek out Tringo's creator, Nathan Keir, a 31-year-old programmer in Australia whose avatar is a green-and-purple gecko, "Kermitt Quirk." It turns out Keir's game is so popular, with 226 selling so far at 15,000 Lindens a pop, or about $50, that a real-world company called Donnerwood Media ponied up a licensing fee in the low five figures, plus royalties. Tringo soon will grace Nintendo Co.'s (NTDOY ) Game Boy Advance and cell phones. "I never expected it at all," Keir tells me, his awe evident even in a text chat clear across the world. He's working on new games now, wondering if he can carve out a living. That would be even cooler than the main benefit so far: making his mum proud.
TALENT BANK
After all my travels around Second Life, it's becoming apparent that virtual worlds, most of all this one, tap into something very powerful: the talent and hard work of everyone inside. Residents spend a quarter of the time they're logged in, a total of nearly 23,000 hours a day, creating things that become part of the world, available to everyone else. It would take a paid 4,100-person software team to do all that, says Linden Lab. Assuming those programmers make about $100,000 a year, that would be $410 million worth of free work over a year. Think of it: The company charges customers anywhere from $6 to thousands of dollars a month for the privilege of doing most of the work. And make no mistake, this would be real work were it not so fun. In Star Wars Galaxies, some players take on the role of running a pharmaceutical business in which they manage factory schedules, devise ad campaigns, and hire other players to find raw materials -- all imaginary, of course.
All this has some companies mulling a wild idea: Why not use gaming's psychology, incentive systems, and social appeal to get real jobs done better and faster? "People are willing to do tedious, complex tasks within games," notes Nick Yee, a Stanford University graduate student in communications who has extensively studied online games. "What if we could tap into that brainpower?"
In other words, your next cubicle could well be inside a virtual world. That's the mission of a secretive Palo Alto (Calif.) startup, Seriosity, backed by venture firm Alloy Ventures Inc. Seriosity is exploring whether routine real-world responsibilities might be assigned to a custom online game. Workers having fun, after all, likely will be more productive. "We want to use the power of these games to transform information work," says Seriosity CEO Byron B. Reeves, a Stanford professor of communications.
BUILDING BOOM
Whether or not their more fantastic possibilities pan out, it seems abundantly clear that virtual worlds offer a way of testing new ideas like this more freely than ever. "We can and should view synthetic worlds as essentially unregulated playgrounds for economic organization," notes Edward Castronova, an associate professor in telecommunications at Indiana University at Bloomington and author of the 2005 book Synthetic Worlds: The Business and Culture of Online Games.
I get a taste of the lack of regulation just as we're about to go to press. Logging in to Second Life after a few days off, I see that someone has erected a bunch of buildings on my avatar Rob Cranes's land, which is located in a region called Saeneul. The area was nearly empty when I arrived, but now I'm surrounded by Greek temples under construction. So much for my ocean view. Online notes left by one "Amy Stork" explain that the "Saeneul Residents Association" is building an amphitheater complex, and "your plot is smack bang in the middle." She's "confident that we can find a *much* better plot for you than this one....Love, Amy xx."
Oh, really? For some reason, this causes Rob Cranes to blow a gasket. He resists my editor's advice to "head to the virtual gun store," but he fires off angry e-mail complaints to Ms. Stork and Linden Lab and deletes the trespassing buildings, planting some trees in their place. Then he reconsiders: Maybe a ramshackle cabin with a stained sofa and a sun-bleached Chevy up on blocks would be a great addition to his plot.
At first, I wonder why I (or my avatar) has such a visceral reaction to this perceived intrusion. Then a flush of parental pride washes over me: My avatar, which so far has acted much like me, hanging back from crowds and minding his punctuation in text chats, suddenly is taking on a life of his own. Who will my alter ego turn out to be? I don't know yet. And maybe that's the best thing about virtual worlds. Unlike in the corporeal world, we can make of our second lives whatever we choose.
For further reading:
"Virtual Land, Real Money", BusinessWeek, May 1, 2006
"Virtual Worlds, Virtual Economies", BusinessWeek, May 1, 2006
"The Virtual Rockefeller", Paul Sloan, Business 2.0, December 1, 2005
BusinessWeek
Monday, May 1, 2006
https://www.bloomberg.com/news/articles/2006-04-30/my-virtual-life
A journey into a place in cyberspace where thousands of people have imaginary lives. Some even make a good living. Big advertisers are taking notice
As I step onto the polished wood floor of the peaceful Chinese country house, a fountain gurgles softly and a light breeze stirs the scarlet curtain in a doorway. Clad in a stylish blue-and-purple dress, Anshe Chung waves me to a low seat at a table set with bowls of white rice and cups of green tea. I'm here to ask her about her booming land development business, which she has built from nothing two years ago to an operation of 17 people around the world today. As we chat, her story sounds like a classic tale of entrepreneurship.
Except I've left out one small detail: Chung's land, her beautifully appointed home, the steam rising from the teacups -- they don't exist. Or rather, they exist only as pixels dancing on the computer screens of people who inhabit the online virtual world called Second Life. Anshe Chung is an avatar, or onscreen graphic character, created by a Chinese-born language teacher living near Frankfurt, Germany. And the sitting room in which Chung and my avatar exchange text messages is just one scene in a vast online diorama operated by Second Life's creator, Linden Lab of San Francisco. Participants launch Second Life's software on their personal computers, log in, and then use their mice and keyboards to roam endless landscapes and cityscapes, chat with friends, create virtual homes on plots of imaginary land, and conduct real business.
REAL BUCKS
The avatar named Anshe Chung may be a computerized chimera, but the company she represents is far from imaginary. Second Life participants pay "Linden dollars," the game's currency, to rent or buy virtual homesteads from Chung so they have a place to build and show off their creations. But players can convert that play money into U.S. dollars, at about 300 to the real dollar, by using their credit card at online currency exchanges. Chung's firm now has virtual land and currency holdings worth about $250,000 in real U.S. greenbacks. To handle rampant growth, she just opened a 10-person studio and office in Wuhan, China. Says Chung's owner, who prefers to keep her real name private to deter real-life intrusions: "This virtual role-playing economy is so strong that it now has to import skill and services from the real-world economy."
Oh yes, this is seriously weird. Even Chung sometimes thinks she tumbled down the rabbit hole. But by the time I visited her simulated abode in late February, I already knew that something a lot stranger than fiction was unfolding, some unholy offspring of the movie The Matrix, the social networking site MySpace.com (NWS ), and the online marketplace eBay (EBAY ). And it was growing like crazy, from 20,000 people a year ago to 170,000 today. I knew I had to dive in myself to understand what was going on here.
As it turns out, Second Life is one of the many so-called massively multiplayer online games that are booming in popularity these days. Because thousands of people can play at once, they're fundamentally different from traditional computer games in which one or two people play on one PC. In these games, typified by the current No. 1 seller, World of Warcraft, from Vivendi Universal's (V ) Blizzard Entertainment unit, players are actors such as warriors, miners, or hunters in an endless medieval-style quest for virtual gold and power.
All told, at least 10 million people pay $15 and up a month to play these games, and maybe 20 million more log in once in a while. Some players call World of Warcraft "the new golf," as young colleagues and business partners gather online to slay orcs instead of gathering on the green to hack away at little white balls. Says eBay Inc. founder and Chairman Pierre M. Omidyar, whose investing group, Omidyar Network, is a Linden Lab backer: "This generation that grew up on video games is blurring the lines between games and real life."
Second Life hurls all this to the extreme end of the playing field. In fact, it's a stretch to call it a game because the residents, as players prefer to be called, create everything. Unlike in other virtual worlds, Second Life's technology lets people create objects like clothes or storefronts from scratch, LEGO-style, rather than simply pluck avatar outfits or ready-made buildings from a menu. That means residents can build anything they can imagine, from notary services to candles that burn down to pools of wax.
PROPERTY RIGHTS
You might wonder, as I did at first, what's the point? Well, for one, it's no less real a form of entertainment or personal fulfillment than, say, playing a video game, collecting matchbook covers, or building a life list of birds you've seen. The growing appeal also reflects a new model for media entertainment that the Web first kicked off: Don't just watch -- do something. "They all feel like they're creating a new world, which they are," says Linden Lab Chief Executive Philip Rosedale.
Besides, in one important way, this virtual stuff isn't imaginary at all. In November, 2003, Linden Lab made a policy change unprecedented in online games: It allowed Second Life residents to retain full ownership of their virtual creations. The inception of property rights in the virtual world made for a thriving market economy. Programmer Nathan Keir in Australia, for example, created a game played by avatars inside Second Life that's so popular he licensed it to a publisher, who'll soon release it on video game players and cell phones. All that has caught real-world investors' attention, too. On Mar. 28, Linden Lab raised a second, $11 million round of private financing, including new investor Jeff Bezos, CEO of Amazon.com Inc (AMZN ).
Virtual worlds may end up playing an even more sweeping role -- as far more intuitive portals into the vast resources of the entire Internet than today's World Wide Web. Some tech thinkers suggest Second Life could even challenge Microsoft Corp.'s (MSFT ) Windows operating system as a way to more easily create entertainment and business software and services. "This is why I think Microsoft needs to pay deep attention to it," Robert Scoble, Microsoft's best-known blogger, recently wrote.
WEAK SPOT
A lot of other real-world businesses are paying attention. That's because virtual worlds could transform the way they operate by providing a new template for getting work done, from training and collaboration to product design and marketing. The British branding firm Rivers Run Red is working with real-world fashion firms and media companies inside Second Life, where they're creating designs that can be viewed in all their 3D glory by colleagues anywhere in the world. A consortium of corporate training folks from Wal-Mart Stores (WMT ), American Express (AXP ), Intel (INTC ), and more than 200 other companies, organized by learning and technology think tank The MASIE Center in Saratoga Springs, N.Y., is experimenting inside Second Life with ways for companies to foster more collaborative learning methods. Says Intel Corp. learning consultant Brent T. Schlenker: "We're trying to get in on the front end of this new workforce that will be coming."
The more I kept hearing about all this, the more I knew this was wa-a-a-ay more than fun and games. So early this year I signed up at www.secondlife.com, downloaded the software, logged on, and created my persona. As reporter "Rob Cranes," I embarked on my journey.
And promptly got lost in the vast, uncharted terrain.
Click: I land at the Angry Ant, a nightclub holding a "Naked Hour" where avatars are in various stages of undress, dancing lasciviously. Is it getting warm in here?
Click: I stumble upon someone teaching a class on how to buy and sell virtual land to a motley crew of avatars sitting attentively on chairs watching PowerPoint slides. Do we get a toaster when we're done?
Click: Suddenly, I'm underwater at Cave Rua, watching a school of fish swim by. Cool, but what do I do here?
Click: Here's a virtual doctor's office, where a researcher runs a simulation of what it's like to be a hallucinatory schizophrenic. A menacing British voice from a TV urges: "Shoot yourself. Shoot them all. Get the gun out of the holster and shoot yourself, you !@#&!" Yikes, where's that teleport button?
My disorientation points up one of the big challenges of these virtual worlds, especially one so open-ended as Second Life: With nothing to shoot and no quest to fulfill, it's hard for newbies to know what to do. Virtual worlds require personal computers with fairly advanced graphics and broadband connections and users with some skill at software. "The tools are the weak spot," says Will Wright, legendary creator of The Sims video game, who nonetheless admires Second Life. For now, he says, "That limits its appeal to a fairly hard-core group."
Still, there's no denying the explosion of media, products, and services produced by users of these virtual worlds. IGE Ltd., an independent online gaming services firm, estimates that players spent about $1 billion in real money last year on virtual goods and services at all these games combined, and predicts that could rise to $1.5 billion this year. One brave (or crazy) player in the online game Project Entropia last fall paid $100,000 in real money for a virtual space station, from which he hopes to earn money charging other players rent and taxes. In January inside Second Life alone, people spent nearly $5 million in some 4.2 million transactions buying or selling clothes, buildings, and the like.
That can add up to serious change. Some 3,100 residents each earn a net profit on an average of $20,000 in annual revenues, and that's in real U.S. dollars. Consider the story of Chris Mead, aka "Craig Altman," on Second Life. We exchange text messages via our keyboards at his shop inside Second Life, where he hawks ready-made animation programs for avatars. It's a bit awkward, all the more so because as we chat, his avatar exchanges tender caresses with another avatar named "The Redoubtable Yoshimi Muromachi." Turns out she's merely an alter ego he uses to test his creations. Still, I can't help but make Rob Cranes look away.
SHOPPING SPREE
Mead is a 35-year-old former factory worker in Norwich, England, who chose to stay home when he and his working wife had their third child. He got on Second Life for fun and soon began creating animations for couples: When two avatars click on a little ball in which he embeds the automated animation program, they dance or cuddle together. They take up to a month to create. But they're so popular, especially with women, that every day he sells more than 300 copies of them at $1 or less apiece. He hopes the $1,900 a week that he clears will help pay off his mortgage. "It's a dream come true, really," he says. "I still find it so hard to believe."
His story makes me want to venture further into this economy. Besides, my photo editor is nagging me to get a shot of my avatar, which needs an extreme makeover. Time to go shopping! First I pick out a Hawaiian shirt from a shop, clicking on the image to buy it for about 300 Lindens, or about a dollar. Nice design but too tight for my taste, so I prowl another men's shop for a jacket. I find something I like, along with a dark gray blazer and pants. As a fitting finishing touch for a reporter, I add a snazzy black fedora, though I'm bummed that it can't be modified to add a press card.
I'm also feeling neglectful leaving my avatar homeless every time I log out. It's time to buy some land, which will give me a place to put my purchases, like a cool spinning globe that one merchant offered cheap. And maybe I'll build a house there to show off to friends. I briefly consider buying a whole island, but I have a feeling our T&E folks would frown on a $1,250 bill for imaginary land. Instead, I purchase a 512-square-meter plot with ocean view, a steal for less than two bucks. Plopping my globe onto my plot, I take a seat on it and slowly circle, surveying my domain. My Second Life is good.
I soon discover that Second Life's economy has also begun to attract second-order businesses like financial types. One enterprising character, whose avatar is "Shaun Altman," has set up the Metaverse Stock Exchange inside Second Life. He (at least I think it's a he) hopes it will serve as a place where residents can invest in developers of big projects like virtual golf courses. In a text chat session in his slick Second Life office, Altman concedes that the market is "a bit ahead of its time. I'm sure it will take quite some time to build up a solid reputation as an institution." No doubt, I'm thinking, especially when the CEO is a furry avatar whose creator refuses to reveal his real name.
Premature or not, such efforts are raising tough questions. Virtual worlds may be games at their core, but what happens when they get linked with real money? (For one, people such as Chung's owner start to take changes to their world very seriously. She recently threatened to create her own currency inside Second Life after the Linden dollar's value fell.) Ultimately, who regulates their financial activities? And doesn't this all look like a great way for crooks or terrorists to launder money?
Beyond business, virtual worlds raise sticky social issues. Linden Lab has rules against offensive behavior in public, such as racial slurs or overtly sexual antics. But for better or worse, consenting adults in private areas can engage in sexual role-playing that, if performed in real life, would land them in jail. Will that draw fire from law enforcement or, at least, publicity-seeking politicians? Ultimately, what are the societal implications of spending so many hours playing, or even working, inside imaginary worlds? Nobody really has good answers yet.
My head hurts. I just want to have some fun now. It's time to try Second Life's most popular game. Tringo is a combination of bingo and the puzzle-like PC game Tetris, where you quickly try to fit various shapes that appear on a screen into squares, leaving as few empty squares as you can. I settle in on a floating seat, joining a dozen other competing avatars at an event called Tringo Money Madness @Icedragon's Playpen -- and proceed to lose every game. Badly. I start to get the hang of it and briefly consider waiting for the next Tringo event until I see the bonus feature: a movie screen showing the band Black Sabbath's 1998 reunion tour.
Instead, I seek out Tringo's creator, Nathan Keir, a 31-year-old programmer in Australia whose avatar is a green-and-purple gecko, "Kermitt Quirk." It turns out Keir's game is so popular, with 226 selling so far at 15,000 Lindens a pop, or about $50, that a real-world company called Donnerwood Media ponied up a licensing fee in the low five figures, plus royalties. Tringo soon will grace Nintendo Co.'s (NTDOY ) Game Boy Advance and cell phones. "I never expected it at all," Keir tells me, his awe evident even in a text chat clear across the world. He's working on new games now, wondering if he can carve out a living. That would be even cooler than the main benefit so far: making his mum proud.
TALENT BANK
After all my travels around Second Life, it's becoming apparent that virtual worlds, most of all this one, tap into something very powerful: the talent and hard work of everyone inside. Residents spend a quarter of the time they're logged in, a total of nearly 23,000 hours a day, creating things that become part of the world, available to everyone else. It would take a paid 4,100-person software team to do all that, says Linden Lab. Assuming those programmers make about $100,000 a year, that would be $410 million worth of free work over a year. Think of it: The company charges customers anywhere from $6 to thousands of dollars a month for the privilege of doing most of the work. And make no mistake, this would be real work were it not so fun. In Star Wars Galaxies, some players take on the role of running a pharmaceutical business in which they manage factory schedules, devise ad campaigns, and hire other players to find raw materials -- all imaginary, of course.
All this has some companies mulling a wild idea: Why not use gaming's psychology, incentive systems, and social appeal to get real jobs done better and faster? "People are willing to do tedious, complex tasks within games," notes Nick Yee, a Stanford University graduate student in communications who has extensively studied online games. "What if we could tap into that brainpower?"
In other words, your next cubicle could well be inside a virtual world. That's the mission of a secretive Palo Alto (Calif.) startup, Seriosity, backed by venture firm Alloy Ventures Inc. Seriosity is exploring whether routine real-world responsibilities might be assigned to a custom online game. Workers having fun, after all, likely will be more productive. "We want to use the power of these games to transform information work," says Seriosity CEO Byron B. Reeves, a Stanford professor of communications.
BUILDING BOOM
Whether or not their more fantastic possibilities pan out, it seems abundantly clear that virtual worlds offer a way of testing new ideas like this more freely than ever. "We can and should view synthetic worlds as essentially unregulated playgrounds for economic organization," notes Edward Castronova, an associate professor in telecommunications at Indiana University at Bloomington and author of the 2005 book Synthetic Worlds: The Business and Culture of Online Games.
I get a taste of the lack of regulation just as we're about to go to press. Logging in to Second Life after a few days off, I see that someone has erected a bunch of buildings on my avatar Rob Cranes's land, which is located in a region called Saeneul. The area was nearly empty when I arrived, but now I'm surrounded by Greek temples under construction. So much for my ocean view. Online notes left by one "Amy Stork" explain that the "Saeneul Residents Association" is building an amphitheater complex, and "your plot is smack bang in the middle." She's "confident that we can find a *much* better plot for you than this one....Love, Amy xx."
Oh, really? For some reason, this causes Rob Cranes to blow a gasket. He resists my editor's advice to "head to the virtual gun store," but he fires off angry e-mail complaints to Ms. Stork and Linden Lab and deletes the trespassing buildings, planting some trees in their place. Then he reconsiders: Maybe a ramshackle cabin with a stained sofa and a sun-bleached Chevy up on blocks would be a great addition to his plot.
At first, I wonder why I (or my avatar) has such a visceral reaction to this perceived intrusion. Then a flush of parental pride washes over me: My avatar, which so far has acted much like me, hanging back from crowds and minding his punctuation in text chats, suddenly is taking on a life of his own. Who will my alter ego turn out to be? I don't know yet. And maybe that's the best thing about virtual worlds. Unlike in the corporeal world, we can make of our second lives whatever we choose.
For further reading:
"Virtual Land, Real Money", BusinessWeek, May 1, 2006
"Virtual Worlds, Virtual Economies", BusinessWeek, May 1, 2006
"The Virtual Rockefeller", Paul Sloan, Business 2.0, December 1, 2005
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