Ginko attracted deposits by offering to pay 0.10 per cent daily accrued interest, which equates to a 44 per cent annual return. The bank claimed to have 18,000 accounts and deposits amounting to $US700,000 ($A800,000) in real money. The in-world currency in Second Life is called the Linden ($L) and it is freely convertible into US dollars at an exchange rate of $L270 to the dollar.

The idea of unilaterally converting deposits into bonds is to buy time for the bank to replenish its cash reserves. Account holders can still opt to withdraw their funds, but instead of receiving par value as a depositor, they will only receive the market value of the security. Currently, they are trading at a steep discount to their face value. "There are a lot of people who put money in there and they are not going to get it out again," said Robert Bloomfield, a professor of management and accounting at Cornell University and a close observer of the Second Life economy. "For some of those people it's enough money that it's actually meaningful to them." In a note posted on the Ginko Financial website and on its network of virtual ATMs, the bank said it had been forced to take the action after a run on its deposits that was triggered by a recent decision by Second Life's owners to ban gambling in the virtual world.

San Francisco-based Linden Lab ordered the ban after reportedly inviting the FBI to examine gambling activities in its 3D world. Legislation passed in the US last year makes it a crime to use credit cards or online payment systems to make bets on the internet. The Ginko notice said the bank began "experiencing a wave of withdrawals" after the ban was announced on July 26.

"This led the funds we keep in reserve for day to day use to be exhausted, which evolved into a full blown panic depleting even our last line of cash reserves and resulting in the current situation, with about L$50,000,000 [$US185,000] queued up for withdrawal." Faced with having to conduct a fire sale of its assets, Ginko instead opted to convert the deposits into bonds - a course of action that would not be open to banks in the real world. Ginko has long been criticised as being a scam and Linden Lab has also been accused of failing to use its powers to bring the bank into line.

But Luke Connell, the CEO of the World Stock Exchange and its parent company Hope Capital, has defended the move, saying it was necessary to avoid a banking collapse. "You don't want to have Ginko crash because if it does, it makes the entire Second Life economy look bad," he said.

Ginko is the largest shareholder in WSE's parent company, Hope Capital. Investor confidence in Connell's exchange has also been tested in recent week with news that a former employee defrauded WSE of $US12,300. Connell says the money has since been identified and sequestered by Linden Lab and some of it has been returned.

He accused some members of the Second Life community of spreading rumours about the viability of his exchange in an attempt to undermine him. In particular he pointed the finger at a couple of companies which had intended to float shares on the WSE but which subsequently withdrew their IPOs after failing to attract investors. Connell said they blamed the cancellation of the floats on troubles at WSE.

"At the end of the day at the WSE, everything is exactly as it should be," he said. He said in the interest of transparency he would be handing over data on trades, dividends and stock issues for firms listed on the WSE to Professor Bloomfield who is conducting a study into Second Life financial markets. Two smaller Second Life exchanges have already begun supplying the information.

Professor Bloomfield intends to analyse then publish his findings which he says should help boost confidence and ultimately attract new investors and listings. He said while some of the exchanges were getting better at making disclosure, the banks were not. "You just have no idea what's happening with the [depositors'] money," he said.