The emergence of the metaverse presents a wild west for regulation. Nick Aronson, VP, Capital Markets, APAC, FIS, discusses the challenges and methods to tackle them as the metaverse is built.
The concept of the metaverse represents a multitude of opportunities across the digital economy, from NFTs to cryptocurrency to avatars. For some, experiencing a virtual world can feel like an exciting step into a new type of reality. But with the metaverse allowing more of us to embrace a limitless future, there have been concerns about the challenges that this new world presents – both to individuals and businesses.
While the promise of the metaverse is incredibly exciting, real-world controls are needed to protect users from abuse, fraud and loss. Implementing such regulatory oversight is difficult both from a political and practical perspective and can be tricky to apply globally. That said, builders of the metaverse can take precautions by creating their own ‘metacode’ set of conduct. To make the metaverse truly viable, it’s important for regulators and architects of these spaces to work on how to ensure the safety of its users.
Transactional risks in the metaverse
Regulation often lags behind technological innovation, which means there is currently a lack of reliable supervision over the metaverse (which, some would argue, is the whole point!). It is important to remember that regulation in the virtual world should be thought of as something that seeks to protect participants to foster innovation and growth.
Currencies exchanged in virtual worlds, for example, are not real money in the traditional sense. Most are either in the form of cryptocurrencies or in-game currencies and while they may be stored in virtual wallets or accounts, they are not protected by regulators or operators against loss or fraud.
The value of what we purchase or sell in the metaverse is also less tangible in the real world. There are no tangible forms of consumer protections, meaning that while a piece of virtual real estate or a Non-Fungible Token (NFT) may have a statable value, there is no right to refund or adhere to regulations and its value is only held in that particular space.
Of course, we also must consider traditional risks like fraud. There is little visibility on what cybercriminals are doing to exploit the metaverse and it is already clear that real-world security problems like hacking and identity theft are happening in the virtual world.
This leads to another significant risk which should not be overlooked – the possible damage to our mental health. Theoretically, if the metaverse operates like the real world but is unencumbered by criminal law and combined with extreme virtual experiences, users are potentially exposed to situations that can trigger negative emotions.
The question is: will regulation mitigate any of these risks?
Regulatory possibilities and practicalities
With over 500 companies working on the metaverse, it’s evident that more companies are jumping onboard the virtual ship every day. In theory these individual operators could indefinitely exist outside the regulatory framework and little can stop an offshore-based investment vehicle from running its own section of the metaverse and allowing people access to it from other virtual worlds.
Australia’s eSafety Commissioner has already claimed a seat at the World Economic Forum’s new initiative, Defining and Building the Metaverse, to support ethical outcomes within the metaverse.
Unless regulation of the metaverse is global in its reach, the more likely outcome is that some virtual worlds will be regulated, subjected to key rules or the transferability of assets and others not. In the latter, the chances of both fraud and profit could be equally high. In these situations, regulation is key for protecting the interests of everyone.
When it comes to making financial regulations viable, more emphasis must be made by implementing strong links between virtual and real-life personas. This can include know your customer (KYC) requirements, risk management methodologies, tax laws and so on as Virtual Reality evolves.
Simply put, the more real the metaverse becomes, the more we need regulation. Assets developed in the metaverse could potentially attract value in the same way as the physical world, therefore requiring similar methods of supervision and governance frameworks.
Three steps to a metacode of conduct
Responsible and practical regulation takes time to develop and while that is underway, a set of principles should be implemented for businesses engaging in the metaverse. Driving that change from the inside could not only give the freedom that users want, but also provide a sense of security that they aren’t at risk of fraud or loss of profits.
In purely commercial terms, this would attract advertisers and investors by providing a transparent risk framework with strong ESG alignment and less reputational risk.
Developing these principles will take co-operation and likely trial and error, but could include:
1. Set standards. Major reputable players in the metaverse could join forces to form an independent industry body and set the code of conduct.
Overseen within firms by a ‘Metarules Compliance Officer’, the metaverse needs four basic components:
i) KYC requirements for users to verify their real-world identity, with a focus on registering minors to minimize abusive actors.
ii) AI tools to monitor potential mental health issues including addictions, bullying and PTSD and creating safe spaces for mental wellbeing.
iii) The ability to choose the types of content that users would be comfortable with.
iv) Maintaining a cross-industry database of bad actors and their real-world identities.
2. Drive financial best practice. Processes should be well-defined to manage the financial risks of the metaverse. Exchange fees, for example, should be published when independent stablecoins are transferred in or out of digital wallets. ID verification processes should also be in place to provide some insurance against personal loss or even third-party injury.
Using the same technologies that underpin the real finance world is key to supporting these processes in the metaverse, as well as allowing for embedded finance, securitization, wealth generation and taxation. To offer these capabilities, regulated environments will therefore need the right plug-ins, APIs and user experience flows.
3. Give consumers a clear choice. The industry body could develop a quality stamp that shows if virtual worlds are self-regulating and whether they are marked as safe to visit. This would allow metaverse users to make an informed decision on whether they should visit these worlds or take the risk by stepping into unregulated environments. Virtual worlds with no real-world corporate presence would also make any regulatory standards difficult to apply. Most importantly, everyone should be aware of which safeguards exist and what could happen if they are absent.
As with external controls, the key to self-regulation will be to improve transparency, credibility and accountability, through best-practice processes. There is a high chance that crises will occur, however, we will all learn from them. The shape of the metaverse will ultimately come down to how we respond collectively, across governments, businesses and consumers, creating a place that is complementary to and an extension of our real lives.
The metaverse will continue to become a focal point in conversations in the years to come and we will see more interest from the general public as more companies jump on the metaverse ship. It is in the interest of netizens that companies seek to set boundaries within the realm and create a safe experience for all.
