Crypto use in Metaverse could threaten financial stability, says BoE
The potential widespread use of cryptocurrencies within a fully developed metaverse could pose a systemic risk to financial stability, according to Bank of England researchers.
If the metaverse were to become a viable decentralized digital platform, significant volumes of real-world financial transactions could be conducted through cryptocurrencies, according to researchers Owen Lock and Teresa Cascino. However, a subsequent collapse in crypto prices could have a significant impact on real financial systems, they said. Accordingly, any such system operating on the metaverse will 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 can scale to have systemic consequences for financial stability,” Lock and Cascino said. “An important step is therefore for regulators to address risks from the use of cryptoassets in the metaverse before they reach systemic status.”
Crypto finance
In an ideal scenario, Lock and Cascino believe that consumers will spend more of their time and money in the metaverse, for things like shopping, entertainment, employment or socializing. Households will then be encouraged to keep a portion of their wealth in crypto in order to easily make payments on the platform. In addition, companies may 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 to facilitate payments, which could then lead to participation by lenders. Banks can also consider increasing their exposure through services such as digital asset custody.
At the time, a fall in crypto prices could easily cause “balance sheet losses for households and businesses, an impact on unemployment, fire sales of traditional assets by non-banks to meet margin requirements on crypto asset positions, and negative profitability effects on exposed banks,” Lock and Cascino wrote.
Although major fintech firms have staked their reputations on the potential of the metaverse, many questions remain. For example, it remains unclear whether the metaverse will take the form of cryptonative, 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.
What do you think about this topic? Write to us and tell us!
Disclaimer
All information on our website is published in good faith and for general information purposes only. Any action the reader takes on the information contained on our website is strictly at their own risk.
