The Second Life Exchange Commission met last night, and came out with this official statement
The Second Life Exchange Commission (SLEC) has been closely investigating the recent issues that surround the recent theft at the World Stock Exchange. It is our policy that we will not make public statements based on speculation, we will only deal in facts.
At this point, we have confirmed that the theft has occurred and we believe that this issue clearly shows that independent regulation is a necessity in order to protect the investing public.
At this time, there are several questions that have not yet been answered to our satisfaction. We are confident that the issue will be resolved. The SLEC will only support the exchanges & companies that are willing to work with us toward our mission of full disclosure.
We caution investors not to panic since this is an issue that faces Hope Capital Limited and should not directly impact the balance sheets of other listed companies. We believe that investor confidence has been decreased however, and we expect it to remain so until the WSE takes actions to conform to the standards required by the investing public and set forth by the SLEC.
We will continue to monitor the situation and update our position accordingly. Please see our website for current information: http://www.freewebs.com/theslec/
The statement was work of TraderJohn Susa, SLEC Chairman, and at least some of his appointees, Patrickj Ah (CEO of CGI, listed on WSE), Marc Attenborough (CEO of NDX, listed on the WSE), Maelstrum Baphomet (COO of AVIX), and Rodders Holgado (founder and CEO of 8 Dragons Bank, listed on ISE).
The meeting included one big surprise: LukeConnell Vandeverre , CEO of WSE, showed up. Much to the disappointment of the many members of the SL press in attendance, however, he showed up merely as an observer of the meeting, and declined to answer questions. His statements did not extend beyond expressing a willingness to “keep an open mind with the potential to work together [with the SLEC] in the future,” and directing us to official statements already issued by the WSE, such as this one at http://www.wselive.com/research/announcement_detail/1951:
Just prior to closing down the WSE for updates, that include WSE 3.0, I noticed a large withdrawal by an avatar with no history. I then closed the WSE immediately and began to investigate. It appears that a past employee of Hope Capital, who assisted in fixing previous bugs in our ATM, had decided to try and use their inside knowledge of our ATM communication channel to their advantage. We can confirm that there is more than one avatar under investigation which are possibly controlled by the same person in real life. A detailed announcement will be released soon.
Linden dollars were withdrawn from the WSE by the avatar in question; however, there are a number of interested parties investigating the situation. We are hoping that most of the linden dollars will be returned.
WSE 3.0 is progressing well and should be released soon. The security of WSE has now been setup so that only the real life developers working for Hope Capital will know key site details. As part of the new WSE 3.0 update we were intending to increase security of the WSE ATM, along with installing Risk API supplied by Linden Lab. This could explain why the avatar in question tried to take advantage of their knowledge before we started the update. The WSE is financially stable and there is no foreseen security related risk to the WSE in future.
We are almost ready to release the latest updates which include an improved database structure, application improvements, and the full integration of the World Internet Currency.
The World Internet Currency (WIC) will provide the majority of Internet users with the ability to trade on the WSE.
The World Internet Currency will act as one fictional currency in both the real and virtual worlds. This will encourage growth in the virtual economy and provide everyday Internet users with the ability to invest in its future.
Connie McMahon of SL-Newspaper provides a comprehensive summary of the meeting at http://sl-newspaper-bnc.blogspot.com/2007/07/exchange-commission-chief-m..., emphasizing TraderJohn Suza’s personal belief (not an official SLEC statement) that there will not be a severe run on the WSE.
My own contribution to the meeting was to propose that the SLEC construct a list of specific disclosures they would like Luke to provide, and a deadline for providing it. For example, SLEC could ask Luke to report the current cash balances of WSE Huet (the account from which withdrawals are taken), when the ATMs will reopen, the cause for the repeated delays on reopening, etc. The SLEC would not “require” the disclosures, but would be able to state publicly their concern if the information is not provided. Investors can decide how reasonable the SLEC’s requests were, and draw their own conclusions from WSE’s response.
Analysis
The SLEC primarily emphasizes the need for regulations that are developed in concert with the exchanges, a desire for more (but unspecified) information, and that the immediate financial damage is limited to Hope Capital Limited (HCL), the banking arm of the WSE.
The last point of emphasis is an interesting one, because it points out a key difference between real-world exchanges and SL exchanges like WSE: the WSE (like AVIX and ISE) serve not only as exchanges for raising capital and trading securities, but also serve as banks for investors, who deposit cash into WSE, and then use that cash to purchase shares. The L$3.2 Million withdrawal is really just a run-of-the-mill banking embezzlement.
The SLEC is correct to note that the theft “should not directly impact the balance sheets of other listed companies.” However, all WSE investors may worry that they can’t withdraw their funds. If investors lose confidence in the banking arm of WSE, they will have to liquidate their shares in order to withdraw cash from WSE control, which will affect the prices of all shares. This may well lead to the shares being undervalued (relative to the firms’ true assets and dividend potential), with the undervaluation reflecting a discount for the risk of leaving funds in WSE control.
I expect many readers will find the SLEC’s response rather timid, and may well point to the current board/appointee composition, with heavy representation from the exchanges and companies listed on them. A repeated joke at the meeting was to question whether TraderJohn is simply an alt for LukeConnell. (I can put this one to rest…I have spoken with both through Skype, and unless Luke is a master of Chicago dialects, they are different people.) But like most jokes, this one points at an important truth: the SLEC is struggling to determine their relationship with the exchanges. Naturally, the people who are interested in regulation will have close ties to the exchanges and listing firms. Also, SLEC doesn’t have any power to impose standards upon the exchanges against their will, even if they wanted to. The exchanges could simply ignore the SLEC, leaving the markets no better off than they are now. Thus, ‘conspiracy theory’ isn’t the only reason for the SLEC to want to cooperate with the exchanges.
A second thread of the discussion centered on the role and motivations of Mystik Boucher, who first reported the scam on her blog, and then provided interviews to various reporters, including me. (I believe I was the first to report her accusation of a coverup.) TraderJohn even suggested that “she does indeed appear to be working hard to kill the WSE.” I think the whistleblowing/coverup dimension of the story highlights the difficult position of regulators (in RL or SL) who are worried about investor/depositor panic. Demanding public reporting of risks reduces the risk of runs in the long-term, by forcing firms to maintain good policies, but can cause a run in the short term by inducing panic.
The SLEC is also struggling to determine the forms of regulation that they can and should impose. Regulations could include security requirements (e.g., limited numbers of people who can modify key software), requirements for minimum cash reserves (to ensure resilience against bank runs), and/or disclosure requirements for both the exchanges and listed firms. Disclosure requirements are likely to be the easiest to construct, and they need not be enforced by anything more than a statement of whether an exchange has met them. As I argued in the SLEC meeting, investors can draw their own conclusions, by assessing the reasonableness of the SLEC’s requests and the firms’ responses.
As it is, WSE has so far provided only the most limited disclosures, and the ATMs are still unavailable for cash withdrawals, and apparently will not open until noon SLT on Friday the 27th. When that happens, we will see what conclusions investors have drawn.
It is interesting that the need for internal financial regulation in SecondLife is becoming more apparent. It would be most useful if the SLEC had an in-world enforcement mechanism. Perhaps the SLEC could join forces with the Metaverse Republic?
I'm not seeing the value of joining Metaverse Republic with SLEC. Wielding a partial land ban-hammer will have exactly zero impact on bad actors who are pulling over US$12,000 out of the world. That kind of money will purchase more than a few alt-accounts. Heck, it will buy more than a few in-world islands. The only avatars negatively impacted by a "court decision" by any in-world entity would be ones that have lots of assets tied up in non-transferable goods. Even Linden Lab so far has only banned a few accounts and thus effectively impounding all inventory, L$ and land holdings. Go back a month or so and a creative character managed to sell the same island repeatedly, netting over US$10,000 of ill gotten gain. In the end Linden Lab threw up their arms and said "sorry about that". No recovery of cash for the victims, real world court cases still in motion.
If the Lindens can't police these events, it only points to the fact that events like this will be resolved in real world courts, not cartoon parodies thereof. Real world courts are demanding (rightfully) the information to uncover the real world bad actors in instances of this magnitude. Real world consequences can therefore be applied; a much stronger deterrent than a partial land ban-hammer.
Likewise, capitalization of companies who wish to do in world projects should be performed by real-world sources, not in-world banks that put all their working capitol inside avatars that can be manipulated via in world, semi-secure protocols.
Sure, if you want to avoid the gambling ban by putting your L$ in "virtual exchanges", knock yourselves out folks. Just realize that these virtual exchanges will kowtow, in the end, only to real world forces. It is just too easy to transfer your assets and vanish in a virtual world; second life is not far different from a message board in that regard.
I'm all for the use of rhetorical judgements if the entities making them have some credibility and don't try to wield a ban-hammer and steal your land, too.
That is, the entire machinery of international law, which Americans poorly understand and often loathe, is all about the value of entities like the UN, with almost zero enforcement power, nevertheless getting countries to follow resolutions, mandates, etc. making up "international law".
It's good to hold sessions to review cases, put great minds on them, and make rulings -- they have a kind of social weight if the people doing the deliberating have credibility (the problem is that anonymous and overbearing avatars in SL often don't have that). And to keep making the judgements, recording, publicizing them -- it has a kind of moral imperative and social deterrent if nothing else. If some kind of responsible and credible justice body tethered to some other representative and democratic branches of government got started, it wouldn't matter if, like the Pope, they have no legions of armies to enforce their will. But the Pope can speak with moral authority for many (not all) and that has meaning.
In the same way, even just a consumer advocates' committee in SL, which of course a game far less fun to play than "My Supreme Court" or "My SEC", could have an impact. So I don't start by saying, oh, big players who lift $40 grand out of the game can't heed judgements. I say, well, they can, it's a kind of social opprobrium. Someone could hold a hearings and issue some kind of evaluation of the whole WSE fandago and then publicize it so that future investors know what to avoid. It's highly imperfect, but you have to get started somewhere.
While I can see some parallel system to "moral agencies" actually impacting those who *are* moral; people who are lifting thousands of US$ probably are not moral. Likewise, international law does little to deter dictators who don't care if they are perceived as moral actors.
WSE is having a hard time with this... because they are trying to be moral, and heed a social code. They are deeply affected, concerned and I actually have a lot of respect for the challenges they face in this issue. The problem is that it appears that the "bad actor" is gone from Second Life. No moral agency is likely to touch this bad actor.
I have more respect for SLEC in the respect that they are trying to act as a moral guidepost and standards setter. However, the membership issues cloud their moral authority. Like a NGO (non-governmental organization), confused motives sap authority.
Meanwhile, the Metaverse Republic has clearly stated the ultimate punishment for delinquent imposed fines is the ban-hammer. That attempt to wield actually power over the actions of avatars saps *any* moral authority they may have: it creates an environment of fear that the ban-hammer might fall on you. Oh, you can dress it up in powdered wigs and procedure, and appeals, but the net *impact* of Metaverse Republic attempt is an imposition of will via force.
Neither agency has what it takes right now to deal with issues of the magnitude that currently are occurring.