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.)


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.


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

Randy Betancourt


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


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.


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.



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).

Rian Litchard

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.

Mike B

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 :-D

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.


Janet Brown

Thank you for finally explaining that so well. This is just one more reminder that the only real way to keep our economy strong is not by raising taxes, but by keeping taxes low, fair and simple. I've been looking for a way to take action and contact our legislators and sign petitions and found some good policy the U.S. Chamber of Commerce backs (here). I don't have a lot of money or time, but I figure this will help other people do good.

Rolfbags McLaffo

I didn't really follow this when it happened but the BBC article seems mostly right. But "industrial espionage"? That's not what happened. A Band of Brothers director realized his alliance is full of terrible people and he disbanded it just to have a lol. There was no espionage until Mittens came in at the end and kind of took credit for it. While this does cause the alliance to temporarily lose the in-game advantages of the solar system sovereignty system they still could have reformed and fought off the invading alliances without their defensive advantage. The deciding factor in most alliance level warfare is moral. The killing blow on the collection of corporations formerly know as Band of Brothers came from the increase in moral this story imparts in GoonSwarm's, Pandemic Legion's, Razor Alliance's, and others' common members to drop everything and move to Delve to stomp on their enemy's face 23/7 for a month straight. "Brought down by industrial espionage" is misunderstanding Mittens's role and overlooking a long history of war and corporate culture.


Chris S

For more reading, try this article on Star Wars Galaxies economy,...

... and the Terra Nova blog, which tracks this more often than most.

Sounds like most games use a "faucet-drain" economy, which would have most funds passing from "in-game faucets" (ways to earn) through one player to "in-game drains" (ways to spend money).

Eve Online, by contrast, actually has banks created by players, suggesting that its developers are much closer to structuring (not "running") an economic system in which the player participate.

The best description I've heard of the difference is that in most games, the game provides the stories, and players provide the activities. In Eve Online, the players provide both the activities AND the stories.

Although most of these are not realistic economies, perhaps they are a better environment to allow some form of experimentation with economics and economic theory - something that is hard to do in the real world.


David Chowes, New York City

If the radical right crazies take control of this country, all former citizens will become...

Virtual humanoids.


Suggesting the Icelandic banks were the victims of forces beyond their control is a real whopper. The banks banks were the authors of their own misfortune. They took hot money. The collateral was worthless. Thier drank their own kool-aid. They played crony capitalism. The collapse was swift and inevitable.


"Apparently earlier this year one of the game's biggest corporations was "brought down by industrial espionage."

This statement is slightly incorrect.

And this is the truth:

The games largest _ALLIANCE_ (formed by plenty corporations) was brought down by _ESPIONAGE_
(there was no industry involved)

One hostile player gained trust and sneaked up to alliance leadership power until he obtained
aministrative Access to the "dissolve alliance" button that would technically
disolve it, and all their common assets lose their defence

summary: "corporation" and "industry" was false, the rest was okish.

best regards, zool


EVE Online has industrial espionage all the time. In a game where a wild-west aesthetic is deliberately cultivated and there is a hard limit on resources, eventually large organisations like the player-run ones in the game have to start duking it out. Espionage is seen as a risky, but effective, means to do this.

I'd be surprised if it causes a bank run because players know more about the banks they put their money in than most consumers in real-world economies do. Players know who runs the bank, they can socialise with them and maybe even get out-of-game contact details - they can certainly contact them in-game if they know the name. It's rare that bank customers have the phone numbers of the CEOs.

EVE Online is fascinating, although not to my personal tastes. I'm told they employ an economist to keep an eye on the game's economy, and I can easily imagine the economist chipping in on the game design aspects as well - there's more similarities between the two fields than one would think.



"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."

You obviously know very little about the Icelandic bank collapse.

The Icelandic banks were robbed from the inside by their owners. There were no external forces that collapsed the worthless garbage Icelandic banks. They were doomed from the very beginning after corrupt politicians decided to sell the government run banks to their friends in 2003. Their "friends" turned out to be bunch of criminals.

Although it may not be obvious, Iceland is more corrupt than Nigeria!

The reason I know this. Well I have to live on this sorry island.


The Chinese government has already installed regulations over the issuance and use of virtual money, as it is already disturbing the monetary system in China. Some real world transactions are now settled with virtual money online.


"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 :-D"

When "World of Warcraft" is too real to fail, we'll have other problems to deal with.

Of course most of those will involve orc infestations or super villains of various persuasions...

Bobby G

Not sure we can entirely make the connection that if a virtual free-market economy fails, so too will a real-life free-market economy.

First of all, and this happens often in online games, people cannot simply exit the scene and continue on with their real life shrouded in complete anonymity like they can with an online game. People invest a lot of time and effort to become "powerful" in a game, but inevitably some of these people will quit the game. When they quit, all of the sudden things that had value such as reputation, partnerships, sustainable long-term growth are no longer important to the player.

The player has then several options. 1) a clean break from the game... essentially "disappearing" forever without notice. 2) a disruptive break: abuse and exploit any and all power a character has amassed just for fun and/or infamy immediately before quitting. 3) a liquidation break: this is often like #2, except the end goal is to liquidate everything the character has stock in into any sort of real life value, typically through a "black market" such as eBay or under-the-table in-game connections. Currency in a game often has a real-dollar value. For example in World of Warcraft 1000 "gold" goes for anywhere between $12 and $20. Other options include ebaying the account itself... some of the top accounts may sell for anywhere between $500-$1000, if you don't get caught that is.

Another important thing to note is that, given these black market schemes, the free-market is in fact not actually a free market. I have some experience with World of Warcraft, and I know that the developers do not recognize account switches... the person who made the account is forever the owner of that account in the eyes of the developers, regardless even of whose name is on the credit card paying the subscription. As a result, people who gamble on the black market of either currency trading or account trading are on their own completely... nothing stops someone who "sells" their account from taking the money and then telling the developers that they "lost their password" and/or thinks they were hacked, getting their account back, and continuing to play with cash in pocket.

Unregulated free markets that include *optional* black markets (because they are all optional in these games) do not harm the rational and/or intelligent player/consumer. The only players who are harmed are those who cannot assess risk appropriately... this is an economic disadvantage and the free market rightly strips their money and economic power away from them. It's not like every player is not adequately aware of how much connection and accountability people have between the game and real life (none, essentially)... each player lives the same connection and accountability.

Some of these comments remind me of typical remarks and articles among proponents of socialist capitalism... these people put a dress on a "negative" scenario that occurs within the free market and then claim that this is evidence of a (fatal) fault within the free market. Uh, no. It's true that people do get hurt in a free market... less intelligent people. Frankly I don't want less-intelligent people having a lot of economic power in my economy... the free market rightly punishes them and rewards those who are more intelligent.

I strongly disagree with comment #6 which aligns "pure free-marketism" with scams. Sure, scams exist. If you fell for a scam, that's your fault though... don't put your money places you don't trust. Transparency is important in a free market, and all investors should be wary of investment opportunities that provide little transparency.



Wait a minute. What is really the difference between the so-called "real currency" and virtual currency ?

They both are highly commercialized and poorly regulated.
Also the are not backed by any real guaranties, at least not for the common people...