How Virtual Banks may create the Next Financial Crisis - Trouble at EBANK
Steven d. Levitt reports in the New York Times that while the financial woes of Lehman, Bear Stearns, Washington Mutual may seem old hat, we may need to prepare for another round of bank failures in the virtual world.
In some respects, it’s already happened
Blame a character named Ricdic.
Ricdic is part of Eve Online, which has about 300,000 players. They all inhabit the same online universe and play games that involve trade, mining asteroids and the efforts of different player-controlled corporations to take control of swathes of virtual space.
Ricdic, who used to run a large virtual bank on Eve Online, stole virtual funds and traded them to other players for real money, making a down payment on a very real house and paid off medical bills.
The result of all this?
A huge run on Ricdic’s bank.
Mr. Levitt notes that there in some irony in Eve Online’s banking crisis. After all, Eve online is run by an Icelandic company and real Icelandic banks were some of the worst casualties in the financial crisis.
According to the BBC, one of the game's biggest financial institutions lost a significant chunk of its deposits as a huge theft started a run on the bank.
It reports that one of the bank's controllers stole about 200bn kredits and swapped them for real world cash of £3,115.
What happened next?
Just like in the ‘real world’, as news of the theft spread, there was a run on the virtual bank with many customers removing their virtual cash into ‘safer’ locations or converting their virtual monies into real dollar.
Reuters followed up this story.
"This character was one of the people who had been running EBank for a while. He took a bunch of (virtual) money out of the bank, and traded it away for real money," Ned Coker, of Icelandic company CCP which runs Eve, told Reuters.
The scandal is not the first to play out in Eve Online. In early 2009 one of the game's biggest corporations, called Band of Brothers, was brought down by industrial espionage.
What’s the response from EBANK?
EBANK were quick to address this on their site.
“There are a number of wildly inaccurate news stories floating around right now about EBANK. The most common one claims that EBANK had 8.9 Trillion ISK in deposits or that the Chairman committed the theft.”
Ricdic was the CEO, not the Chairman and at most, we've had 2.5 Trillion in deposits.
Also, the Bank run has ended for the most part and we have not been forced to tap other lines of capital infusions. We are very well capitalized at the moment and withdraws are being processed within our 48 hour SLA. More at http://www.eve-bank.net
In an interview with Massively.com, the directors of Ebank make some further clarifications.
"The run on the bank has come to about 600 billion ISK, which has been withdrawn. They add that it has deposits of about 105 billion ISK sitting in Sweep to keep it liquid. Currently the run seems to be mostly over with only a slightly higher withdrawal rate still, than deposit rate. That's to be expected, and in-line with EBANK's strategy to shrink to a more managable level."
EBANK has always been sound due to massive reserves. Checks and balances have proven themselves to work as a mitigation device and by having the reserves spread out over several directors, the embezzlement was kept to a minimum.
However, the run on the bank had the potential to do great damage to EBANK as people frantically made withdrawals to ensure they would not be caught if the bank ran short.
Massively: http://www.massively.com/2009/07/02/new-perspective-on-eve-onlines-latest-bank-embezzlement/
Annual Report: http://www.eve-bank.net/EBANKAnnualReport07-08.pdf
Regards,
Ivan Walsh
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