Crypto Use in Metaverse Could Threaten Financial Stability, Says BoE

The prospective widespread use of cryptocurrencies within a fully developed metaverse could pose a systemic risk to financial stability, according to Bank of England researchers.

Were the metaverse to become a viable decentralized digital platform, significant volumes of real-world economic transactions could be carried out through cryptocurrencies, according to researchers Owen Lock and Teresa Cascino. However, a subsequent collapse in crypto prices could then have a significant impact on real-world financial systems, they said. Consequently, any such system operating on the metaverse would require “robust consumer protection” frameworks.

“The importance of cryptoassets in the open-metaverse means that if an open and decentralized metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences,” Lock and Cascino said. “An important step is therefore for regulators to address risks from cryptoassets’ use in the metaverse before they reach systemic status.”

Crypto financing

In an ideal scenario, Lock and Cascino believe consumers would spend more of their time and money in the metaverse, for things such as shopping, entertainment, employment, or socializing. Households would then be incentivized to keep a share of their wealth in crypto in order to readily make payments on the platform. Additionally, corporations may come to increasingly accept crypto for payment, or sell digital assets in the form of non-fungible tokens.

The researchers said this could lead to non-bank financial institutions holding more crypto in the metaverse in order to facilitate payments, which could thereafter lead to the participation of lenders. Banks could also consider increasing their exposure through services like digital asset custody.

At that point, a dip in crypto prices could readily cause “balance sheet losses for households and corporates, an impact on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on cryptoasset positions, and negative profitability impacts on the exposed bank,” Lock and Cascino wrote. 

Although large fintech firms have staked their reputations on the potential of the metaverse, many questions still abound. For instance, it is still unclear whether the metaverse will take the form of crypto-native, community-based platforms or privately created tokens and virtual worlds. “This evolution of the metaverse is uncertain, and the above scenario is a possibility, rather than a certainty,” Lock and Cascino said. 

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