The metaverse has become the buzz word of the next decade. Ask a hundred people and they’ll give you a hundred definitions of the word. A Reddit user, however, made a great metaverse alignment chart which gives a great overview of what it entails to different people.
It’s usually seen as a persistent, simulated virtual environment where users can interact with one another. It’s at the crossroads of virtual reality, augmented reality, blockchain and cryptocurrency. It’s the future that Neal Stephenson envisioned in his 1992 science fiction novel, Snow Crash.
I have an opinion on whether it will succeed or fail. You have an opinion. Your next-door neighbor has an opinion. There are haters and there are fan boys. That’s life.
But which giant entities, those that we trust with our savings and investments, are the ones to really watch in this debate? The big banks. Follow the money.
As we wrote in a post a few days ago, the early-bird AR developers are worried about the future of their own technology in shaping the metaverse. The metaverse is often seen as a double-edged sword.
But are banks equally worried or do they see this as the goldmine of the century.
It’s never about fear or morality, but about opportunity in the financial world. It’s leaning more towards the latter.
Morgan Stanley, for example, sees the metaverse as an $8 trillion market. Goldman Sachs has officially stated that blockchain in general is one of the most “breakthrough technologies” since the 1990s.
Morgan Stanley, the Wall Street giant that manages $6.4 trillion in assets, said the meta-universe would be “the next big investment theme” in a note to clients two months ago. Goldman Sachs has also described blockchain as key to Web3 development.
For insight into how Web3 ties into it all, the book Token Economy: How the Web3 reinvents the Internet* is a great place to start.
More and more large financial institutions are turning to the metaverse for clients and investors.
They are thinking ahead – a wise decision considering the potential prospects of the future of finance.
Finance in Virtual Reality
We can remove opinion from the equation and look at some of the trends that are already happening when it comes to finance in the virtual world. The rise of the metaverse is already leading to the emergence of powerful virtual regulators, exchanges, banks, and payment companies. Individuals and legal entities in virtual space will also need to make payments, pay taxes, obtain credit and invest. These are already being integrated into the blockchain space.
For a great overview into the financial services revolution, the book, Financial Services Revolution: How Blockchain is Transforming Money, Markets, and Banking, by Alex Tapscott explains this in great depth**
Today it is already possible to make payments in the virtual space using PayPal and cryptocurrencies, but it is logical that large corporations, the creators of large “metavillages”, will want to create their own financial infrastructure and currency.
For example, Facebook plans to develop its own digital coin (even though Libra/Diem has so far failed), which can be used to make safe purchases within the virtual world, and it will be tied to the value of Meta shares.
So what are the decision-makers at these banks saying?
“[The metaverse] can fundamentally change the environment through which we communicate with others,” Edward Stanley, an equity strategist at Morgan Stanley, stated.
Stanley added that some stocks in the gaming and technology sectors, such as Roblox and Meta (formerly Facebook), as well as augmented reality-oriented stocks such as Alphabet Inc. could also benefit from the growing adoption of the concept.
Banks are keeping the subject close, especially considering the undying hype around Meta.
What advantages does the metaverse bring to banks?
While initially hesitant to usher in the era of blockchain, banks have started to realize that the virtual space may actually complement their existing services and add new ones. While there are a multitude, the principal advantages for banks in the era of the metaverse include: analysis of customer behavior for scoring, providing payments and transferring goods between meta communities (tribes), collateral and collection services, and cybersecurity.
Analysis of customer behavior for credit scoring
Banks still need credit scoring, and the data for it can be obtained from meta-villages. There will be a demand for tools to analyze customer behavior in the virtual space, on the basis of which loans can be issued for both virtual and real needs.
According to a paper published by MetaVisa, credit scoring in the metaverse will be based on some form of a “badge of honor” NFT which will be tied to an address.
Customer behavior is currently in the very early stages of being studied in the metaverse, but the right tools to do so are currently being developed. As banks are seeing this transition to the virtual space, did you think that you wouldn’t be credit scored in this new digital system? Think again.
Providing payments and transfer goods between meta communities or tribes
The metaverse will not be a single centralized system in the beginning, that’s for certain. This has already been proven to be the case as a multitude of worlds, communities, tribes and horizons currently co-exist and will very likely continue to do so.
Banks understand this and have, therefore, identified these “borders” between them which is the perfect opportunity as a means of trade finance. It’s all about exchange and value in this case and is a noteworthy advantage once the mechanism is developed.
There will definitely be a demand for services which will provide a fast and inexpensive conversion of virtual currency and goods between different virtual realities, which will be a key part of interoperability development. An interesting case of facilitating this process for enterprises and financial institutions is already done by the Singapore-based Xinfin (XDC) network.
Collateral and collection services
In the future metaverse, banks will be interested in granting real loans against the collateral of virtual goods, which have a stable value. It will be necessary to create an infrastructure that would ensure the transfer of virtual property as collateral, as well as the seizure of funds in case of default on the loan agreement.
Of course, the principal debate in this case relates to centralization and privacy, between private and public blockchains. But we don’t have answers as to how this would be done in practice.
There are more questions that arise in relation to this point:
When the metaverse becomes so ingrained and part of societal processes, does it not become an unavoidable, inhumane machine that would dissuade from giving you extra time to pay off a loan?
Which services will be barred from accessing as punishment?
How do we exchange value between the virtual and the physical accurately?
Banks will be able to easily capitalize on this.
The role of securing virtual assets, protecting against fraud, and restoring access to assets in cases of lost identity will increase. The technology itself, however, is not the issue, even though we read about the scares of hacking scandals from various exchanges on a weekly basis. Cybersecurity on the blockchain derives from the pillars of cryptography and consensus, so it is fundamentally robust.
The issue lies elsewhere: in the compliance of anti-money-laundering regulations and delivering compliant customer communications.
Just like the above point, this is an issue that is still in development from the perspective of banks, but once they nail the framework, the metaverse will be an optimal system to work with from the perspective of cybersecurity, due to the nature of blockchain itself.
But is the picture as rosy as presented here? Goldman leaves us on a note of caution
“It’s hard to predict the investment implications at this stage, but companies that depend on centralized control of user identity are likely to run into problems in their business models because of blockchain adoption,” Goldman said.
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