Automation is making traditional financial service models obsolete. In the short term, financial institutions will need to ensure seamless transitions between the physical and virtual worlds and across metaverse platforms. In the future, users will conduct all their essential activities, such as studying, working and socialising in virtual reality. Ahmet Faruk Aysan, Giray Gozgor and Zhamal Nanaeva list the actions financial institutions must undertake to survive in the metaverse.
The world is transitioning into a new era of virtual reality, a shift already evident as consumers increasingly immerse themselves in virtual worlds and businesses invest heavily in the metaverse. The rise of virtual real estate and the establishment of virtual offices by renowned brands further highlight this trend. Citi Group projects that the metaverse will attract 5 billion users by 2030, with an estimated market value of $8 to $13 trillion. Virtual reality is becoming the new reality.
As integral components of the metaverse ecosystem, financial institutions face an urgent need to adapt to this shift. They need to facilitate seamless instant transactions for buying and selling virtual assets, ensuring smooth access to financial resources. Banks need to provide real-time virtual payment systems and fair digital exchange rates, as well as managing complex virtual wealth portfolios and handling vast customer data.
With these objectives in mind, we try to present a holistic view of how financial services are applied within the metaverse, offering insights on how they should adapt.
The future of finance in the metaverse
Drawing on the framework proposed in 2002 by Paul Raskin and colleagues, we identify key driving forces steering this transformation from the present state to a future dominated by virtual reality: demographic trends, social dynamics, technological advancements, governance structures, environmental considerations and cultural influences.
We use these driving forces to delineate the future role of financial services within the metaverse.
Demographics
The metaverse predominantly attracts younger people, including minors, which requires ethical vigilance from financial service providers to prevent possible customer manipulation.
Because virtual reality transcends physical borders, the customer base will be geographically and ethnically diverse.
Financial institutions must cater to this varied clientele by offering tailored products, thorough customer education, streamlined onboarding processes, and non-financial incentives to attract and retain customers in the virtual realm.
Governance structure
The decentralised nature of the metaverse, envisioned as a collaborative effort among users, raises significant governance and management concerns. Virtual finance will hinge on decentralised systems operating initially alongside traditional centralised finance. Without central banks to regulate or ensure liquidity, the money supply in the metaverse, dominated by cryptocurrencies, poses serious challenges.
Financial institutions can assist in providing additional liquidity, stabilising digital asset markets and managing various forms of digital money, including in-game tokens, stablecoins, and central bank digital currencies. In the absence of centralised authorities, they must tackle the volatility inherent in digital assets such as tokens, which can be fungible and non-fungible (cryptocurrencies and NFTs). A short-term viable strategy to mitigate this instability involves bundling these tokens into diversified asset baskets.
The metaverse’s decentralised ecosystem facilitates seamless transactions across various decentralised platforms, which can be beneficial for financial institutions. Addressing interoperability challenges, institutions should establish a presence on multiple platforms, ensuring the effortless exchange of cryptocurrencies and NFTs. They can also bridge the gap between the physical and virtual worlds by offering products that cater to both realms.
For example, credit cards might function in both fiat and virtual currencies, enabling users to purchase digital assets in the metaverse or fuel in the real world. Digital wallets can be directly linked to traditional bank accounts and virtual asset mortgages can be secured against physical assets or NFTs. “Real-world” NFTs could tokenise physical objects.
Technological advancements
Technological advancements will compel institutions to embrace Web 3.0 standards and invest in cutting-edge immersive technologies.
Managing the extensive data generated in the metaverse will be a challenge. Protocols for data collection, ownership and distribution will define the future of virtual finance. Banks must be prepared to store and manage digital asset transactions alongside customers’ private information. Artificial intelligence can aid in this process.
This rising technological complexity demands comprehensive education for both customers and financial professionals. Institutions will likely expand their virtual offices and use avatars for customer interactions in the metaverse, which requires expertise in advanced immersive technologies like virtual reality (VR) and augmented reality (AR). Active advertising will be needed to attract customers to these virtual spaces. Additional attractions, such as gaming and virtual commodity sales can be helpful.
Managing complex investment portfolios that include non-fungible tokens, cryptocurrencies and other digital assets will be critical. Given the potential confusion from the vast array of digital assets, financial institutions will need artificial intelligence to streamline portfolio management. And they will need to provide key escrow services to secure digital wallet access, akin to traditional banks safeguarding valuables in vaults.
There will be competition from tech giants such as Meta, Amazon and Alphabet, which have already ventured into financial services and are set to extend their reach into virtual finance. That’s why upskilling and reskilling their employees is essential. These challenges will be met with investments in innovative technological solutions.
Social dynamics and cultural influences
Authenticating individuals for secure transactions is a notable hurdle. Persistent, verifiable credentials, such as unique non-transferable tokens acting as transparent and permanent CVs, can replace traditional identities. “Zero-knowledge proof” are mechanisms that verify transactions without revealing private information.
How data are used lies at the heart of concerns about potential customer manipulation. Clear definitions of data ownership, akin to regulations in open banking, are essential to address these issues effectively.
Technologies such as trusted execution environments (TEEs), which offer segregated and secure processing of code and data, enhance customer confidence. Blockchain technologies and quantum computing, which offer enhanced data storage and transfer security, are crucial for addressing cybersecurity challenges.
Environmental considerations
Shifting to virtual offices can alleviate environmental pressures by reducing construction, utility expenses, and transportation needs. However, blockchain operations demand significant electricity consumption. Data processing and storage remain energy-intensive activities and require new energy-saving solutions.
Conclusion
In the short term, financial services in virtual reality must ensure seamless transitions between the physical and virtual worlds and across various metaverse platforms. Over the long run, users are expected to immerse themselves deeply in the metaverse, conducting all their essential activities, such as studying, working and socialising in virtual reality. This immersion will foster new cultural norms and reshape consumption patterns, with the metaverse evolving into a unified global platform that enhances accessibility while potentially concentrating market dominance among a few companies.
Technological advancements and AI, including brain-computer interface technology, will revolutionise workflows, marginalising human roles in various occupations and streamlining transactions and customer data processing. As a result, traditional financial service models may become obsolete as AI and other technologies entirely automate financial processes.
We believe this forward-looking analysis of financial services in the metaverse is poised to offer valuable insights to academia, financial practitioners, and policymakers alike.
- This blog post is based on Technological perspectives of Metaverse for financial service providers, in Technological Forecasting and Social Changes.
- The post represents the views of the author(s), not the position of LSE Business Review or the London School of Economics and Political Science.
- Featured image provided by Shutterstock
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