How a $700,000 Ponzi Scheme Happened In A Videogame

Human greed has a tendency to ruin all good things in our lives, and video games are no exception. As video games have become more deeply ingrained into our lives and pop culture, the line between virtual currency and real world currency has started to blur. This has lead to many monetary scandals such as FIFA hackers committing $16 million worth of wire fraud, teenagers flipping stolen Fortnite accounts for hundreds of dollars and even a full-blown Ponzi scheme.

Massively multiplayer online games (MMOs) started gaining traction in the late 1990s and early 2000s with titles such as EverQuest and Final Fantasy XI, but the first MMO to achieve mainstream attention was definitely Second Life. It was also the first video game to involve a real world Ponzi scheme.

What is Second Life?

Second Life was different to the MMOs that came before as it focused on socialisation rather than RPG concepts such as combat, quests and storytelling. This social emphasis was made crystal clear to users when the game’s creator, Linden Lab, said Second Life is not a game, but instead ‘an entirely open-ended experience’.

Launched in 2003, Second Life was (technically, it still is) a virtual world where users (called residents) create an avatar in their likeness, or whichever likeness they please — be it human, vampire, furry… They then use this avatar to converse, trade, go shopping or even attend live concerts and college classes! Due to the world’s focus on user-generated content, the possibilities are quite literally endless.

How people make money in Second Life

One factor driving this innovative content creation was the ability to exchange the world’s virtual currency, Linden Dollars, for US Dollars on their exchange site, LindeX. It is quite literally forex trading — they even let you place limit orders!

2006 marked the realisation of Second Life’s lucrative potential when avatar, Anshe Chung, becoming the first resident to make over 1 million US dollars. How exactly did Ailin Graef, the woman behind the Anshe Chung avatar, amass this digital fortune? By developing and selling virtual property plots (as well as some escorting and fashion design in her early days). This remarkable real estate feat even landed her on the cover of BusinessWeek magazine. The best part of the story is that Graef donated a lot of her internet money to supporting children in poorer countries!

However, not all Second Life entrepreneurs were as kind-hearted as Graef. Some saw the world as nothing more than an another place to exploit and scam individuals out of their hard-earning dollar. Throughout 2006 and 2007, hundreds of virtual casinos and betting shops began popping up in every region of the map.

With millions of Linden dollars now floating around, residents were looking for a place to use, store or possibly invest. This led to the creation of Second Life ‘banks’ who would place Linden dollar ATMs inside the casinos, making it easier than ever to gamble away your virtual and/or real-world money. Linden Lab took a very laissez-faire approach to gambling regulation, allowing these casinos and banks to operate completely unregulated for over a year.

The $700,000 Ponzi Scheme

The largest ‘bank’, Ginko Financial, was ran by an individual operating under the display name Nicholas Portocarrero. Ginko let residents open savings accounts with a supposed annual yield of 61%, extrapolated from a reported daily rate of 0.13%. At one point, they even offered loans to customers. To the financial savvy, these colossal returns are a clear indicator of Ponzi-like behaviour but to a regular individual playing an online game, it seems harmless. I mean, what could go wrong with a virtual currency? If things go wrong, the developers can just create more… Right?

Portocarrero organised this Ponzi scheme by luring in new investors with the promise of high yields, then he used these new investments to pay older investors. Ponzi schemes are very lucrative because it’s easy to attract new investors and the money keeps piling up and piling up with seemingly limitless potential. They had over 100 ATMs scattered across the Second Life world, with each one being used thousands of times!

However, this prosperity only lasts as long as the stream of income remains consistent and there isn’t a scenario in which multiple investors try to withdraw their funds simultaneously. When the income drops then the scheme will unravel — this usually occurs when the number of new investors slows down, the economy declines and people attempt to liquidate or the Ponzi scheme organiser decides to make an exit. Regardless of a Ponzi scheme’s reputation, size or longevity, it will always fail eventually.

The Fall of Ginko

Like any Ponzi scheme, the house of cards came tumbling down on July 25th 2007 when Linden Lab banned all wagering on Second Life. Immediately after this announcement a bank run occurred at Ginko, wiping out their small pocket of reserves. A 2006 interview with Portocarrero reveals they only held 5% in Linden dollar reserves and an undisclosed amount in US dollars for immediate withdrawals. Just 2 days later on July 27th, Ginko announced users could now make withdrawals but the daily limit was reduced from 300,000 Linden dollars (approximately $1100) to 5000 Linden dollars ($19). Despite Ginko claiming their management was ‘doing everything in their power’ to fix this, many users claimed that they were still unable to withdraw their funds at all.

During the bank run on July 27th and July 28th, the apparent amount of deposits Ginko held increased. Clearly someone was fudging these numbers.

Supposing the pre-collapse statistics on the Ginko website were accurate, the ‘bank’ once held approximately $700,000–750,000 (approximating an exchange rate of 270 Linden dollars to USD for 17,900 accounts. This makes it, as far as I know, the largest Ponzi scheme to occur in a virtual world whilst having real-life consequences.

Funnily enough, our aforementioned good Samaritan, Anshe Chung, and other well-known players accused Ginko Financial of being a Ponzi scheme as early as November 2005.

The Aftermath

Despite $700,000 vanishing, no one related to Ginko Financial was ever identified, sued or criminally charged. Speculation over the true identity of Portocarrero produced 2 potential suspects but nothing has been confirmed to this day. Long story short, Portocarrero got away with it scot free. Finding information on him is hard because he has only given a handful of interviews and always steered away from personal topics. All we really know is that he was in his 20s at the time and possibly Brazilian judging from his reference to the Baron of Maua as a “local banker” and an IRC transcript where he says he’s from Sao Paulo, Brazil.

Conclusion

Although many of us may see this Ginko Financial saga as a virtual farce, it wasn’t that way for the players who lost real world money back in 2007. Initially, I planned to end this article by attempting to place blame solely on Portocarrero however as I came to the end of my research, I realised it wasn’t that simple.

Second Life creators shouldn’t have allowed for ‘banks’ with no governmental regulation such as Ginko to operate in their game, Portocarrero shouldn’t have promised such ridiculous yields and the ‘investors’ shouldn’t have been so naïve as to fall for this. Alas, hindsight sure is 2020.

Special thanks goes to Benjamin Duranske, the author of Virtually Blind, a now defunct blog by a lawyer who carefully documented these events as they transpired in 2007–2008. Without his efforts, I wouldn’t have been able to write this article.