Virtual Exchanges Get Real

A virtual heist in Second Life spurs some community members to call for oversight and regulation—maybe even the real world kind—of virtual stock markets

by Francesca Di Meglio

In late July, a perpetrator with privileged information hacked into a stock exchange's computers, made false deposits, then ran off with what appears to be the equivalent of $10,000, disappearing into thin air. Despite the seemingly small haul, this heist left investors feeling outraged and vulnerable.

Oh, yes…none of this transpired in the real world. The robbery took place in Second Life, an online virtual world created by Linden Lab. Residents of this realm can take on any name and persona they choose, then wander about in the form of cartoon-like avatars. There are virtual companies courting their business, and some of them are listed on virtual stock exchanges where their shares are bought and sold by avatars with "Linden Dollars" and other virtual currencies.

Not Just Funny Money

It's here where the virtual begins to blur with the real: Linden Dollars can be swapped on virtual currency exchanges for real U.S. dollars. Though the stolen amount, 2.8 million Linden Dollars, only translates to roughly $10,000 in real money, the heist has spurred many Second Lifers to debate whether these exchanges are just a game or serious business.

At present, only Linden, with its power to remove avatars that violate its terms of use, wields any real authority in Second Life. Yet as societal overlord, Linden is declining all public comment on what it calls a third-party affair, suggesting it sees no obligation to serve as an exchange watchdog (though it reportedly helped to recover some of the stolen money). With that, some participants wonder whether other regulators, possibly even a real-world version of the Securities & Exchange Commission, may be needed to police these markets. The SEC has not discussed this issue at all, a spokesman says.

The World Stock Exchange, the market victimized in the Second Life robbery, closed temporarily after the theft for an investigation and system upgrades. The operator of the exchange, which sports an automated trading platform and integrated banking system, suspects the crime was committed by an anonymous software developer WSE hired as a consultant. The programmer, who goes by the Second Life name Thurston Hallard, also worked as a chairman of a virtual company, Mystik Designs, that was listed on the WSE until the robbery.

Competing Virtual Exchanges

Before the incident, the WSE was the dominant exchange in the virtual world with 5,800 trading accounts and 65 listed companies; trading volume on a recent day totaled 1.1 million shares worth 1.3 million Linden Dollars and 4,603 units of another currency called World Internet Currency. ("Historical" trading data can be viewed at the WSE's Web site.)

Since the security breach, some companies have left the WSE, though many were recent initial public offerings that sold poorly or firms that were in danger of being delisted because they violated WSE rules, says WSE Chief Executive Luke Connell, better known in Second Life as LukeConnell Vandeverre.

Residents say another market, the International Stock Exchange, has gotten more positive attention in light of the WSE's troubles. And a Second Life resident named Arbitrage Wise recently purchased another market, the AVIX, with a pledge to bring new transparency to virtual trading. Soon to be renamed SL Capital Exchange, the market plans to offer extensive disclosure of trading data and to adopt listing requirements recommended by Robert Bloomfield, a professor at Cornell University's Johnson Graduate School of Management who has spent the summer studying virtual markets. His recommended policies include weekly and monthly financial updates by listed companies and a requirement they carry virtual insurance.

But despite such efforts at law and order, some suggest that a Wild West atmosphere, a break from the real-life chains of rules and societal norms, may be somewhat appropriate to a realm such as Second Life. "In other virtual worlds, you can play a thief," says Bloomfield (aka Beyers Sellers). "Maybe in Second Life, if you can convince a fool to give you his money, you win."