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.)


Robert

"The Icelandic banks were robbed from the inside by their owners."

please elaborate

"There were no external forces that collapsed the worthless garbage Icelandic banks."
bank run, fall in prices of their investemnt. the banks owned more that they owed a few months before they went into administration and were run like any other bank.

"They were doomed from the very beginning after corrupt politicians decided to sell the government run banks to their friends in 2003."

At privatization the banks were sold to the highest bidder except the national bank 'landsbankinn' and the excuse there was that the payment was in foreign currency and there was need for that.

Walk On

Gamers know that online economies exist in all large MMORPGs, it's not news. Nor is it surprising that some encounter troubles and others don't.

Eve is a new game. Try looking at older games to witness the real birth of virtual economies.

Player Hater

"... my economy... the free market rightly punishes them and rewards those who are more intelligent." - _Bobby G

"Cuz we're winners!" - Will Farrell ~"Talladega Nights"

Thanks, I needed a laugh. A game is a game; and although the real world economy is extremely complex, it is still a game full of players of different abilities, or lack there of. The rules for both are arbitrary and usually cryptic. You may be confusing intelligence with ignorance and there is no honor in exploiting the trust of others, online, or in the real world.

_Walk On - EVE is not new - I played 2003-2006. It 's a gorgeous game but abysmally like real life - more work than play.

Donnie

Credit is the bkocbane of a modern monetary system. Banks were created by the constitution as a great vehicle to have both capitalism and full employment. The private sector by itself cannot create full employment because of financial constraints and needs buffer for uncertainty and the government has to step in. Banks hold a unique position, else credit will be difficult and pricey. Banks have this unique ability to lend by expanding out its balance sheet. Preventing an easy expansion of the balance sheet will just increase the loan rates. The settlement balances at the Federal Reserve have just two roles – settlement and help satisfy the household need for currency notes. The central bank is also the lender of the last resort and can lend as much as possible. The whole system is designed wonderfully so that entrepreneurs, academicians, scientists, engineers, artists, advertisers, sales persons, managers, HR, unskilled laborers can make use of this and increase the quality of life for themselves and others. If the households permanently decide to use more cash, the central bank can help banks slowly reach that state where they keep more settlement balances, lending in unlimited quantities in the meantime. Its a misunderstanding of the system and poor economics which led to the crisis. Economic advisors to governments have no concept of “domestic private sector deficit” in their analysis. If they had noticed that the private sector was getting weak, they would not have allowed a credit boom to have happened. Instead they supported the boom and ignored reports showing scams and forgeries. It is neither low interest rates or low reserve requirerments which caused this crisis. Blaming the crisis for these two things is like blaming the invention of fire instead of blaming the fire prevention system.

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