A Growing Metaverse Poses Systemic Risks Regulators Need to Recognize, BOE Researchers Say

Regulators need to be aware of the systemic risks posed by the possible increased use of the metaverse and be ready to mitigate those risks, Bank of England researchers said.

If an open metaverse develops, existing risks from digital assets may have systemic financial stability consequences, they said in a blog post on Tuesday. Regulatory bodies, including the BoE, international financial watchdog Financial Stability Board and the Basel Committee on Banking Supervision, the global standard setter for banking regulations, are looking to set standards and regulations to limit potential crypto risks.

“Widespread adoption of crypto in the metaverse, or any other setting would require compliance with robust consumer protection and financial stability regulatory frameworks,” economist Owen Lock and policy analyst Teresa Cascino wrote.

The metaverse is a virtual reality where people can buy and sell digital property using non-fungible tokens that are tied to the blockchain. Some see it as a digital representation of the real world, where people even hold jobs. Some artists have already set up galleries in it, and celebrities and even banks have dived in. In February, it was described as a $5 trillion opportunity by Morgan Stanley.

A larger metaverse means households may hold a greater proportion of their wealth in crypto and more companies may decide to accept crypto payments, the researchers said. Financial institutions and banks may decide to increase their exposure to crypto.

On top of that, people employed in the metaverse could risk losing their jobs if the crypto market performs badly and metaverse activity drops, the researchers said.

“An important step is therefore for regulators to address risks from crypto assets' use in the metaverse before they reach systemic status,” the researchers said.