How to create your own financial crisis

When we think about “currency exchanges” — and certainly this is the idea often conveyed publicly — it looks like somehow L$ are transformed into US$ or vice-versa. Even to someone who is much more familiar with how exchanges work, there is this idea that somehow, physically, L$ cross the wire and are turned into US$ and vice-versa.

But a currency exchange is much simpler. What happens is simply that a seller of L$ can say to a friend: “I’ll pay your avatar L$ 1000 if you give me a US$5 bill”. This kind of thing can happen all the time. You don’t need any technology for that, just someone willing to send L$ to another avatar and happy to accept some US dollars (or Euros…) in exchange. The L$ never “leave” the virtual world. They don’t “exist” beyond it.

What GOM did was just to automate the process. Instead of avatars running around in Second Life looking for people willing to give them real US dollars in order to send someone else’s avatar a few L$, the whole process was much more easily accomplished, by transferring the money to a central authority (a master avatar for GOM), and announcing — anonymously — the offer on a website. Interested parties would nly need to log in, see what was being offered, and pay US$ to the system. It would automatically handle the L$ transfer to the buying party.

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