After we wrote about Saxo Bank's opening an office in the virtual world Second Life, 24-year-old Australian entrepreneur Luke Connell contacted us to tell us about the securities exchange he opened recently in Second Life called World Stock Exchange. This simulated stock exchange opened on March 5 and trading volume has exceeded $23 million in virtual dollars (approximately $90,000 U.S. dollars). Connell, whose Second Life alter ego is called LukeConnell Vandeverre, explained how and why his investment firm, Hope Capital, and others are doing business on the computer animated Second Life site, and how people can make or lose real money by investing in a simulated stock exchange.Perhaps sensing our hazy knowledge of exactly what Second Life is and why people use it, Connell stressed that Second Life is a game. Users of the Second Life site pay U.S. dollars to purchase fictional currency called Linden dollars that can later be traded back to U.S. dollars at an exchange rate of about 290-to-one. It's similar to buying tokens to play video games at an arcade, except that in the giant video game that is Second Life, it's possible to make a real profit or loss.
WS&T: I read that a woman named Anshe Chung made a million virtual dollars in Second Life. Can she now ask Linden Lab [the operator of Second Life] for a check for the U.S. dollar equivalent?
Connell: She can choose to sell the in-game currency she has. First she would have to sell all her assets within Second Life and amass a large amount of fictional currency. Then she can sell them on the Second Life Exchange or the Lindex, the Linden Lab operated exchange. When she sells those lindens, she's selling the licenses for real U.S. dollars from another user.
WS&T: What if there isn't a market for that many licenses?
Connell: There is, that's the point. There's a market because there's demand. Right now that demand is being regulated by Linden Lab, which limits how many Linden dollars people can buy; otherwise, the value of the Linden dollars would drop down from 260-290 per U.S. dollar to 50 Linden dollars per U.S. dollar.
WS&T: If I wanted to buy 100 Linden dollars, would I make a micropayment on my credit card?
Connell: If you wanted to buy $10 U.S. dollars worth of Lindens, that would get you about 2,900 Linden dollars. You would pay using your credit card or PayPal.
WS&T: If I wanted to buy stock on the World Stock Exchange, would I need to buy the Linden dollars first?
Connell: That's correct. Say you went to the Second Life Exchange and you bought $100 U.S. dollars worth of in-world Lindens. You'd use those Lindens to pay the World Stock Exchange avatar, which is controlled by myself and Shaun Altman [an anonymous Second Life user whose avatar is a sinister-looking rabbit or maybe cat in a black suit and gold chain], so it's protected, it's like a company bank account in many ways. That money is credited to your trading or cash balance, which you can use to buy shares in one of the companies on the market. You can buy shares in an IPO or in a company that already successfully went past the IPO stage and is on the secondary market.
WS&T: Are these virtual companies?
Connell: Yes. For example, there is a Second Life business called Games Limited that makes casino games that are bought by Second Life casino owners.
WS&T: So is this almost like putting quarters in a video game?
Connell: Exactly. There's no difference between this and going to a gaming parlor, paying money to a machine that lets you play pretend stocks, and if you win you get paid back tokens, which someone might then buy from you.
WS&T: I read that you want to make $1 billion out of this?
Connell: No, that's a long-term goal for my real-life investment firm Hope Capital, which is completely separate from Second Life. I'm using the Hope Capital brand in Second Life simply to build brand awareness.
WS&T: Do you see what you're doing in Second Life as a fun game or an educational project for people to learn about investing?
Connell: The World Stock Exchange is a stock market simulator in a virtual world that uses the same terminology that you find in real life and that provides education on how to buy and sell shares. You buy shares in a company and the shares can go up or down depending on market sentiment. So everything is simulated to replicate real life.
WS&T: Could you make or lose real money in the virtual stock exchange?
Connell: If you choose to buy a large number of Linden dollars and then trade with them, you could accumulate a lot of Lindens, lose a lot of Lindens, or break even. If you bought $100 worth of Lindens and early on used it to buy shares in Hope Capital at one Linden per share, those shares are now worth between eight to 13 Lindens per share, that's a massive profit. I know someone who invested $50 U.S. dollars and sold their shares at an 800% profit, so they made $400 in real dollars. But in most cases, people want to reinvest, they're growing their portfolio and increasing their net worth of Lindens within the game.
WS&T: Does anybody stand behind these virtual dollars? If I accumulate a million Linden dollars, is there a guarantee I'll be able to cash those in for U.S. dollars?
Connell: When you buy Linden dollars, you buy them on the basis that you're aware that that market for Linden dollars could disappear at any time or that the licenses that you have for earning Linden dollars could be revoked at any time by Linden Lab.
WS&T: Is there a minimum age to participate?
Connell: You have to be 18 according to the terms of service to use the adult version of Second Life.
WS&T: How would you prove that you were?
Connell: That's a good question, you need to ask Linden Lab.
WS&T: Your press release mentioned that your firm includes a foreign exchange market and a retail bank that will begin offering home business and consumer loans.
Connell: Within Second Life.
WS&T: How do people buy real estate in Second Life?
Connell: A lot of people are buying "sims," a sim is about 55,000 square meters of real estate, which costs nearly $3,000 U.S.
WS&T: Why would anybody spend that much money on virtual real estate?
Connell: If they're a live corporation that wants to have a presence in Second Life or they feel they can develop that sim, sell it off to little landowners who want to have a virtual house with virtual real estate and a virtual dog. When that happens, they've got to be careful. If they borrow Linden dollars to buy a sim, they won't own it until the loan is paid back, the ownership will be under the name of the bank, or at least the avatar that owns the bank. Then when that user's paid off that loan, it gets transferred.
WS&T: Will you do credit checks for these loans?
Connell: I'm developing a credit system. At the moment it's a case-by-case scenario. When you loan people money in Second Life, you consider how many points, or compliments from other players, they have. If they have a minimum of five points, that says other people are satisfied with that person's Second Life character. Then you'd look at how long they've been in Second Life, if its been a few months, they're less likely to leave. In fact, they're highly likely not to do a runner, because the money isn't substantial enough in Second Life to give up entertainment factor, it's not worth it. Most people want to have that entertainment, that's why they're in it.
The only chance there would be risk like that would be with a company owner, a person who set up a virtual company. If they're on the World Stock Exchange, I have listing rules and a constitution in place. On top of that If I doubt their ability to live by what they say or I sense foul play, I'll send an email to Linden Lab, it's up to them to pursue it or not.
WS&T: How do you envision Second Life five years from now?
Connell: I see Second Life being a very big medium of the coming decade. Second Life is a new medium, as was MySpace and YouTube, that lets people express their opinions and creativity. What makes Second Life so special is the fact that it's a complete package, a complete user experience. Linden Lab is trialing voice technology so that avatars will be able to talk to one another. Now they can watch live video or prerecorded video in Second Life, so you can sit in your Second Life chair in your Second Life house and watch your Second Life television. To try and create a complete broadband entertainment experience is the objective of Second Life.