Analysts at the Bank of England say crypto assets could play an important role in the metaverse. He added, “Widespread adoption of crypto in the metaverse will require … . will require compliance with a strong consumer protection and financial stability regulatory framework.”
Bank of England analysts on the metaverse, crypto, and regulation
Bank of England economist Owen Lock and policy analyst Teresa Cascino published a blog post on Tuesday titled “Cryptoassets, the metaverse and systemic risk.”
“Cryptoassets may have an important role in the metaverse.” They began with a cautionary note.
If an open, decentralized metaverse grows, existing risks from cryptoassets could expand to have systemic financial stability implications.
“Widespread adoption of crypto in the metaverse, or other settings, will require compliance with robust consumer protection and financial stability regulatory frameworks,” they stressed.
Locke and Cassino elaborated, explaining that “an open metaverse requires a means to own and trade interoperable digital objects between virtual worlds.” We think crypto assets are well placed to play an important role here.”
and elaborated.
If a large open metaverse materializes, households may hold a larger percentage of their wealth in crypto assets for metaverse-based payments and investment purposes.
In addition, companies may increasingly accept cryptopayments for goods and services and sell digital assets such as clothing non-friable tokens (NFTs) in the metaverse, they added.
The authors also noted that nonbank financial institutions may increase their crypto holdings if the growing open metaverse improves investment prospects for crypto assets and their supporting infrastructure.
Locke and Cassino noted that “the evolution of this metaverse is uncertain,” adding that their view is a possibility rather than a certainty.
“That is, if these exposures materialize, the crystallization of crypto asset risk could lead to losses on household and corporate balance sheets, effects on unemployment, fire sales of traditional assets from nonbanks to meet margin calls on crypto asset positions, negative profitability of exposed banks impacts,” they warn.
“All else being equal, the larger the crypto asset market, the greater and potentially more systemic the risk,” the authors concluded, emphasizing:
Therefore, an important step is for regulators to address the risks from the use of crypto assets in the metaverse before they reach systemic status.
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