Metaverse: cryptocurrencies as a systemic risk

The Bank of England (BoE), through its officials, has released its stance that the adoption of crypto and NFTs in the metaverse, poses a systemic risk to financial stability. 

Metaverse: the Bank of England sees crypto resulting in financial instability

According to a blog post by Owen Lock and Teresa Cascino, researchers at the Bank of England (BoE), it appears that the adoption of crypto in the metaverse could pose a systemic risk to financial stability. 

This is specifically what was written in the post:

“The importance of cryptoassets in the open-metaverse means that if an open and decentralised metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences”.

Despite this worrisome consideration by the BoE, the post describes how blockchain technology with its cryptocurrencies, DeFi and NFTs are essential to an open and decentralized metaverse, even though real financial instability could occur if prices collapse.

Among the many risks, the one that presses the BoE most is that as transactions increase, cryptocurrencies in the metaverse may become more crucial to households.

Metaverse: the BoE and the risks and solutions for financial stability 

The Bank of England also says that while many countries around the world are now accepting crypto as a form of payment in the real world, in contrast, in the global metaverse, cryptocurrencies are accepted everywhere from the outset. 

In this regard, the Bank of England suggests creating a robust regulatory framework dedicated to the crypto-based metaverse to avoid systemic risks. 

This happens because the nature of the financial stability risks currently posed by crypto-assets and DeFi has already been outlined by central banks and regulators, including the BOE, IOSCO, FSB and BIS.

However, these do not appear to include new risks, such as those dedicated to the metaverse. 

The need for a stricter regulatory framework

This requirement published by BoE researchers, adds to what was already stated last month also by the same central bank, namely that cryptocurrencies need a stricter regulatory framework because of their “extreme volatility”.

The BoE’s statements refer to the $2 trillion collapse that has made the crypto market more vulnerable. 

At the same time though, Bank of England Deputy Governor Jon Cunliffe had also stated that he thought some of the cryptocurrencies surviving the current “winter” could become tech companies of the caliber of Amazon and eBay tomorrow.