Fool’s Gold: The Rise and Demise of Second Life Finance

ATMs promise “More than Expected”
in a lose-lose Proposition

by Pollywog Gardenvale

Of the many stories unfolding in the wake of the Second Life banking crisis, the rise and fall of the Arbitrage Wise financial empire will be one for the books — or for Hollywood, if he’s lucky. At the height of his success, Arbitrage Wise oversaw an assortment of companies under the Wise Metaverse umbrella that included the SL Capital Exchange, JT Financial, Wise Metaverse Ad Network (located on all ATMs), and the recently acquired SL Reports, along with additional companies in development.

In a fascinating and candid post entitled, “Why I Quit Second Life,” the founder of SL Reports, avatar Xavier Mohr, describes his own evolution from a “half-ass virtual land dealer who spent much more money than he earned” to CEO of the virtual corporation, SLReports.net, an in-world financial newspaper.

Mohr completed a successful IPO and raised nearly $5,000 USD for his company, eventually taking a management position with SL Capital Exchange. However, by this time, the world of virtual business had lost its luster. He describes seeing at least “three virtual banks close their doors, escaping with Linden Dollar amounts which equate to hundreds of thousands of dollars.” Looking for a way out, Mohr found “a savior” in Arbitrage Wise, who offered to buy his company.

In May 2007, Mohr sold his remaining interest in SLReports.net to Arbitrage Wise. As a result, SL Reports became a sister company and mouthpiece for JT Financial, operating under the umbrella company, “Wise Metaverse, LLC.” At the time, JT Financial was one of the largest banks in Second Life, with over L$82 million of investors’ money on deposit. At the current exchange rate of $L265 to $1 USD, that has a value of approximately $309,443.00 USD.

In November—and with uncanny good timing—Mohr announced his resignation from the company he had founded, as well as from Second Life. Only six weeks later, Linden Lab announced a change in policy for financial institutions operating in Second Life:

“As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter. We’re implementing this policy after reviewing Resident complaints, banking activities, and the law, and we’re doing it to protect our Residents and the integrity of our economy.”

Arbitage Wise immediately submitted his proof of registration for Wise Metaverse LLC (as a limited liability corporation operating in the state of Texas) to Linden Lab, hoping to gain accreditation as an authorized in-world bank. However, Linden Lab denied the request. In a philosophical tone, Wise described his predicament in an interview with Nobody Fugazi of Your2ndPlace.com, shortly before the new policy was scheduled to go into effect:

“We have invested over $50,000 USD in various businesses and ventures, many of which have not been completed, and may not happen unless we have a stable financial platform to operate on. The only thing I can do is apologize. There will be no winners in this situation. It’s just a matter of how much each of us will lose—we’re all in the same sinking boat. I know this may not be what most of us will want to hear, but the only thing I can say is, ‘This is just part of business, and sometimes, we’ll fail because of things that were not the results of our actions. If you’ve done the best you can, then there’s no need to lose sleep because there’s nothing more you can do. Don’t let what others did trick you into thinking that you did something wrong. Just take your losses, reload, and fire again—more and better opportunities will come. Afterall, there’s more important things out there than just money.’”

Certainly a hard lesson for anyone who lost real money playing a fool’s game.

Flags fly over a deserted mall at the Wise Metaverse corporate headquarters

Abitrage is now in the process of liquidating the assets of JT Financial, and is making an attempt to repay depositors. He described this effort in a post dated January 18th on SLReports.net:

“As expected, the $10,000 of capital injection into our Paypal account did not last more than 2 days. Hopefully, the funds were distributed to those that needed them first. There have been individuals who notified us that Paypal was not an option for them, and that they would prefer to withdraw their funds in-world. We will now move forward to bringing in more Linden Dollars into our reserve. Our target goal will be to bring our Linden reserve up to 4M before opening up the ATM for withdrawals. We expect this to take approximately 2-3 weeks from today. We wish that we could move faster to do this, but unfortunately, it takes time to liquidate investments and be able to purchase the large quantity of L$ without incurring significant loss.”

According to Xavier Mohr, JT Financial is in the process of being re-branded and reorganized into yet another new company called SL Wallet, to serve as a “payment gateway for Second Life, allowing third-party websites to accept Linden Dollar payments from SL Wallet accounts... thereby significantly increasing the buying power you have with your Linden Dollar balance.”

The transformation to SL Wallet has begun

To his credit, when the sky started to fall, Arbitrage Wise didn’t make a quick getaway or take the money and run.
For the time being, at least, he has been willing to stick it out and hold the bag—or SL Wallet, as it were. But it is a tall task, even for a 28-year-old from Texas.