The Rise of the Metaverse – what are the risks that lie within?
@ the IERP® Global Conference, October 2022
As technology continues to evolve, the digital world or Metaverse has become more accessible, and is increasingly presenting itself as a parallel to the real world. Organisations and brands are getting on the metaverse bandwagon; it is predicted that the Metaverse economy could contribute as much as US$3 trillion to the global economy in the next ten years. But underpinned by real, not virtual money, the Metaverse is as vulnerable as the ‘real’ economy to a whole spectrum of risks, challenges and threats. Risk professionals need to understand what they’re in for, when it comes to the Metaverse – not just the hazards, but the opportunities it offers.
Moderated by Robin Lee, head of APAC at Napier Technologies, the panellists for this session discussed the Metaverse and its economic aspects; emerging risks and types of criminal activity peculiar to this environment; the identity factor; and what financial risk and crime look like, in the Metaverse. Panellists were Farah Jaafar, Managing Director & Chief Communications Officer, FUSANG Digital Asset & Securities Exchange; Jessica Chua, Country Manager (Malaysia), Chainalysis Inc; and Lau Su Kiang, Executive Director, SC Ventures.Lee invited the panellists to define the Metaverse, and give their opinions on its potential.
“The Metaverse mimics what you do in the real world, only virtually,” Lau said, divulging that SC Ventures, the innovation unit for Standard Chartered Bank, had already purchased ‘land’ in Sandbox, one of the two leading companies in the Metaverse. Its potential lay in the new spaces available for the market and for training, he added. SC Ventures is exploring its potential, particularly how to improve user experience, when it comes to encouraging people to bank in the Metaverse. Remarking that the Metaverse was not a completely new concept, Lee said that it made its first appearance in a science fiction novel in the 1980s, and has been improving since then.
Examples of what the Metaverse looks like can be seen in movies like Avatar and video games, where technology, which has improved by leaps and bounds in the past four decades, is so good that the Metaverse looks more real than virtual. This virtual environment has also given rise to platforms like cryptocurrencies, with their inevitable challenges, such as the struggle between centralisation and decentralisation. Explaining centralisation, Chua said that this indicated autonomy, where one person or authority, such as the Central Bank or Securities Commission, was in control or had the power to regulate or carry out certain enforcement actions.
Decentralisation, on the other hand, is where no one is governing. “The point of centralisation and decentralisation is because the Metaverse is built on blockchain,” Chua said. “Blockchain has four characteristics; it has to be transparent, public, decentralised and immutable. When you have this, there is no single person or authority who can make decisions. It will have to be a community, such as Facebook, for instance, making its own policies and data governance rules.” She added that if users moved into a centralised world, they would have to give up that kind of authority but if they wanted to move into a community, the community would have the power to make decisions.
Queried on the topic of cryptocurrencies, tokenomics and NFTs, Farah conceded that these carried their own risks, one of these being their novelty. The risks of these will not be quantified for a long time. “Exposure to this space has to start now,” she said, pointing out that since many things in the Metaverse were based on gamification, younger generations who were more exposed to this sort of environment would be pushed to consume more without even realising it. Explaining that there were different ‘branches’ in the digital space, she said digitisation was not the same as merely being online. She advised caution with the use of tokens, although she stressed that not all tokens were bad.
“Tokens are a way to create an interest in something; what is important is what’s underlying,” she said, adding that tokens can represent currency like Bitcoin or Ethereum. “You can have a token that represents a certain value. For example, Bermuda has a central bank digital currency (CBDC), a token which represents their currency. It’s the underlying asset quality that matters.” She urged caution and to be always conscious of what is in the space. Regulators were only now starting to consider consumer protection; there were still many risks. To a query by Lee if the potential of the Metaverse was just hype, Farah said, “There is hype but if you stick to the underlying asset quality, you cannot go wrong.”
Lau opined that it will be a way of life, going forward, as earlier generations are brought into the Metaverse, while it simultaneously remains relevant for future generations. Chua remarked that there was a lot of hype about NFTs because, for many age groups, owning one was considered ‘cool.’ “But this can be considered market manipulation,” she said. What are the main financial crime risks in the Metaverse? “The buyer and seller are very close,” Chua said. “Sometimes there’s no difference; it could lead to market manipulation. When someone encounters such a situation, they should make a police report. It’s hype – but buyers beware. ‘Caveat emptor’ applies.”
The governance perspective of the Metaverse is a matter of centralisation and decentralisation. “If it’s centralised, one body is ultimately responsible for applying the laws of the land,” said Lau. “If it’s decentralised, who is responsible? Who sets the moral standards in a decentralised environment? Who sets the standard of what ‘good’ looks like?” Government agencies are thinking about whether they have a role to play in a decentralised environment, from the governance perspective but the problem is, can these things be codified in a Metaverse environment? How does the Metaverse govern itself, and what will the role of risk professionals look like?
The Metaverse is a very new area for risk professionals, Lee said, suggesting that they may want to look at how to convey the risks of the Metaverse internally and externally. Reiterating that there has to be underlying value for an asset or property rights, Farah said that even trading platforms are claiming that almost 80% of all trades are faked. Legal rights are lacking at the moment but “When this evolves, it will be a safer environment,” she said, urging users to understand the space and that it does not exist independently or in a vacuum. “You need to think about blockchain, communities, IoT, smart contracts, AI, biasness, big data – all these converge to create a very exciting but uncertain future.”
Yet another area of concern is that real people can operate in different versions of the Metaverse using different identities, increasing the need for more robust governance. When risk practitioners come into the Metaverse space, they have to rely on transactional monitoring,” Chua said. “Humans are not really there, but they have to develop a profile and get a sense of the way actors are behaving in the respective spaces. Education and training are required for this, (together with) the appropriate technology and public-private sector collaboration.”