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Metaverse: a new reality – how will it affect banking? - Part 2

15.12.2022Article
Tobias Tenner
Zeynep Tolun
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Part 2: Banking in the metaverse 

Banking in the metaverse is currently still in its infancy. Experts assume, however, that a combination of decentralised finance (DeFi) and banking and financial services could lead to the creation of special products tailored to meet the specific needs of this new ecosystem in the future. But what does that mean, exactly? How can banks expand into the metaverse?

The next logical step would be for banks to open branches within the metaverse, in order to meet with customers from around the world in a virtual environment. This would save time and money for both banks and customers alike. And indeed, some banks have already taken this step: J.P. Morgan was the first bank in the world to open a branch in the metaverse – in February 2022, this major US bank opened an online lounge in Decentraland. The services it currently offers there include classic banking activities, such as asset management and lending. 

HSBC has also moved into the metaverse, purchasing virtual real estate in The Sandbox in March 2022, with the goal of developing new customer retention methods and creating growth potential. Deutsche Bank has also bought a plot in the metaverse and opened a 3D visitor lounge. At this metaverse branch, visitors can watch videos in an interactive space and get information on a variety of topics.

Of course, these activities do not yet represent incremental innovation, but they do represent the first steps towards learning to utilise the metaverse.

Business sectors for banks in the metaverse

Of course, purchasing virtual real estate and opening a virtual branch might be only the very first steps. It is easy to imagine a series of additional services that banks could offer within the metaverse. 

One example: Banks could utilise their asset holding expertise for digital products such as NFTs and cryptocurrency by offering a variety of consulting services covering the purchase, sale and financing of these products.  

These digital assets are kept in digital wallets, and security for these wallets must be a top priority. As banks already employ high levels of cyber security, they could develop an insurance model that would strengthen consumer confidence in these new technologies. In addition, banks could reduce complexity by offering a user-friendly wallet that makes it easier for users to manage a variety of different digital assets.

And banks could also secure transfers between cryptocurrencies and fiat money in the future, although it must be said that right now the role that various cryptocurrencies will play within the metaverse remains unclear. 

Economic infrastructure within the metaverse requires a seamless payment market infrastructure which allows for efficient and cost-effective transactions. One of the core characteristics of this infrastructure should be interoperability within the metaverse, that is the ability to work on and between different platforms. Right now, the assumption is that micropayments will be the most important type of payment within the metaverse. Here, banks could respond to customer requests by offering efficient transaction options. 

Finally, another obvious opportunity is for banks to make use of their many years of experience offering loans. By utilising their existing risk management processes, banks could, for example, perform credit checks for their own and other borrowers in the metaverse.

Regulatory and other issues 

There are many new business models possible within the metaverse, but when and whether these can be realised is currently unclear. There is as yet no way to implement them, not least because there are so many unanswered regulatory questions to clarify.  

Unanswered questions To begin, there must be a generally valid legal definition of the metaverse. One example: there are currently no rules regulating the legal relationship between various parties. Due to the digital nature of the metaverse, business is carried out independent of a person’s location. When selling or swapping assets, therefore, there are a variety of legal systems that might apply (in regard to taxes, AML regulations or application of regulations from civil law systems). If, for example, there was a legal dispute between users from different parts of the world, it would be very important to know which civil legislative framework applied to the dispute.

And what about data protection? Which regulations apply in the metaverse? The applicability of the General Data Protection Regulation (GDPR) is guaranteed throughout Europe; data protection agreements must be in place in order to exchange data outside of the European Union (EU). Not only that, the diversity of the data (movements, actions, focus, duration, facial expression, tone of voice and health) may not be covered by the GDPR. It remains to be seen what this means for the metaverse.

Banks as trustworthy institutions, in particular, require reliable legal frameworks in order to become active in the metaverse. Identification procedures, for example, must be designed in such a way as to ensure that the customer’s identification can be determined without a doubt.

And of course, it is not just legal uncertainties that make it harder to break into the metaverse. From an ecological perspective – given current conditions – it is obvious that these technologies will require large amounts of energy. Vast computational, server and transmission capacities are required in order to create digital worlds, save data on cryptocurrencies and carry out transactions in the metaverse. If no climate-friendly solution can be found, the amount of energy required to run the metaverse could significantly hinder its development.

And there is another significant problem which could slow the development of the metaverse: our current network infrastructure, which allows users to navigate the internet seamlessly, appears to be unsuited to the construction of a seamless metaverse experience featuring a variety of connected ‘worlds’. Not only that, it remains to be seen whether or not virtual reality technology is truly suitable for application scenarios above and beyond games and entertainment. Despite all that, the metaverse and its various forms will no doubt continue to draw our attention.