The Next Financial Crisis: Virtual Banks

By now, the financial woes of Lehman, Bear Stearns, Washington Mutual, and the many other troubled banks is old news.

But we may need to start preparing for another round of bank failures … in the virtual world.

If indeed it happens, a character named Ricdic will likely be to blame. Ricdic is part of Eve Online, which I have never heard of, but according to this BBC news report “has about 300,000 players all of whom inhabit the same online universe. The game revolves around trade, mining asteroids, and the efforts of different player-controlled corporations to take control of swathes of virtual space.”

Ricdic, according to the article, runs a large ebank at the site, and pilfered some virtual funds, traded them to other players for real money, and made a down payment on a house and paid off medical bills.

In response to the news of the scandal, there has been a run on Ricdic’s bank. As consumers lose confidence in Ricdic’s banks, it won’t be long before people get the idea that they should take their money out of any bank in Eve Online. And why should this banking panic not spill over to other virtual
worlds? The entire virtual banking system may be brought down by Ricdic.

There is some irony in Eve Online’s banking crisis: Eve online is run by an Icelandic company. The real Icelandic banks were some of the worst casualties in the financial crisis, and as far as I can tell, not through any fault of their own. Unlike the American banks which crashed because of sub-prime debt
exposure, the Icelandic banks fell prey to an old-fashioned bank run. Because the Icelandic banks were so big relative to the size of the Icelandic G.D.P., there was no way for the government to guarantee the banks, and therefore nothing to slow the bank run once it got started.

Again according to the BBC, this isn’t the first time there has been trouble in Eve Online. Apparently earlier this year one of the game’s biggest corporations was “brought down by industrial espionage.”

(Hat tip: Clayton A.)

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  1. Red says:

    Though I’m not very familiar with Eve Online, I’ve read that it constitutes an interesting experiment in pure free marketism, with virtually no top-down, “administrator”-run governments or interventions.

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  2. X says:

    Also see at least one of the responses to the article.

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  3. Randy Betancourt says:


    The Icelandic bank’s collapse has all of the classic signs of collective mania whereby many citizens in the commercial fishing industry imagined themselves adept at being investment bankers. According to Michael Lewis article in a April 2009 Vanity Fair article, at the peak, household debt was 850% of their GDP. The conclusion is this bubble was the result of the unsustainable growth in banking assets from $1 billion to over $140 billion in just three years. The bank-run is only the symptom of the much larger problem.

    Randy Betancourt

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  4. c says:

    This is actually well within the spirit of the game. In-game player-run banks are deliberately not policed by the developers. Eve gets most of its popularity _because_ of the intrigue and wild-west metagame it allows.

    At least when I was still playing, every single player bank ended up as a scam or Ponzi scheme, and everyone knows that the rest are going to be too. It’s really more like gambling – remember, the first folks who get in on a Ponzi scam actually do get really good returns. You just invest the money you don’t mind losing. I mean, it’s a game after all, losing your virtual currency doesn’t really matter much.

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  5. Brett says:

    I think the economics of virtual worlds is an interesting topic. It’s got some fundamental and critical differences from real-world economics that make things interesting.

    Some thoughts:
    1. Most systems seem to suffer from inflation as they’re definitely not at all a ‘closed system.’ Performing in-game tasks (Usually some variation on killing monsters and taking their stuff) often creates money from nothing (but time and maybe some additional in-game resources, but these are generally trivial). Ina new game, new characters might be exacted at a few hundred or few thousand of the local currency, while older games may see experienced characters with billions, which excludes new players from competing in any way in which money can be leveraged.

    2. Building off the previous point, inflation can lead to ‘second currencies’ in many games. For example, expensive ‘content’ might be discussed in terms of value in another uncommon item. Building off this, many free games foster a system like this by selling a currency for real money that is used for special benefits for paying members.

    I play a lot of the game Kingdom of Loathing and one thing I like is that the developers do spend a lot of time trying to tweak the economy by making incentives instead of just devaluing things. They’ve talked about the economic side quite a bit on their podcasts and have been quite successful for a business based on donations.

    Kingdom of Loathing does have a player-run bank that I’ve heard is successful, but the requirements to use it are somewhat strict… The guy running it likes using it to cover economics, but doesn’t want the book-keeping of hundreds or thousands of accounts, so essentially takes large investments from the player base and offers up the returns.

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  6. Tariq says:

    It’s interesting that comment #1 points out that it’s an experiment in pure free-marketism, and comment #4 points out that all the player banks are scams or Ponzo schemes.

    Having worked in finance/investment banking, I’m a believer in the power of the market as much as any other, but outside of prudent and active regulation it is bound to fail. This lesson seems obvious in light of recent events, but there will always be those who want to ignore it over time. (Case in point, Alan Greenspan presided over the collapse of Long-Term Capital Management in 1998 yet still foolishly maintained his blind belief in the power of the free-market to regulate itself).

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  7. Rian Litchard says:

    In the terms of the EVE Online economy, banks are investments rather than warehouses of money. As such, this is your normal scam of “trust the wrong person and watch what happens to you”.

    In addition, in a game as known for scams as this one is (with considered reason – it is a deliberate design choice to only disallow the selling of in-game currency for real currency except through approved channels), this is not an unusual occurrence and is certainly not expected to kill the banking industry.

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  8. Mike B says:

    Mark my words, but as virtual currencies become increasingly exchangeable and virtual worlds become increasingly sovereign one day there WILL be a global economic crisis brought about by lax banking standards in the virtual world.

    Just like the Global Pool of Money incited the increasingly lax lending standards in the sub-prime markets, that same money will begin to hunt for high returns and loose regulations in virtual worlds. There will be a bubble and then a huge collapse that will hopefully have real world consequences. Why do I say hopefully? Because I want to turn on the TV and see the US Treasury Secretary giving a press conference about how they are working to stabilize the World of Warcraft currency through emergency IMF loans 😀

    The reason this is inevitable is because there is a strong incentive for virtual worlds to monetize themselves in way that go beyond the monthly subscription model. When what the parent company can earn with a virtual income tax exceeds what they can bring in for subscriptions and when virtual currencies become as liquid as any other the bubble will soon form and nobody will sound the alarm because after all…these worlds are only a game.

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