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Cryptoassets in the metaverse could cause systemic risk - BofE

Cryptoassets in the metaverse could cause systemic risk - BofE

If an open and decentralised metaverse grows, the risks from cryptoassets may scale to have systemic financial stability consequences, say a pair of Bank of England wonks.

While still in the early stages of development, the metaverse has been hyped as the next generation of the internet, with Big Tech, led by the rebranded Meta, going big on an idea that Citi has estimated could have an economy worth up to $13 trillion by 2030.

In a blog, Owen Lock from the BofE's resilience division and Teresa Cascino from its Fintech Hub explore how the metaverse and cryptoassets will affect systemic risk.

An open metaverse will require a means with which to own and transact digital objects which are interoperable between virtual worlds, say the authors, who think that cryptoassets are well placed to take on the role.

Cryptoassets enable verifiable ownership of digital items and, when built to common standards, can move interoperably between web applications. In addition, they can "align the incentives of developers, content creators, users and investors on metaverse platforms, and are required to incentivise miners and validators to add metaverse-based transactions to the underlying blockchain".

If an open metaverse takes off "households may hold a greater share of their wealth in cryptoassets to make metaverse-based payments or for investment purposes, and corporates may increasingly take payments for goods and services in cryptoassets, and sell digital assets (eg clothing NFTs) in the metaverse".

Not only this, if people are employed in the metaverse, their jobs could be affected by risks from cryptoassets, while non-bank financial institutions may increase their crypto holdings.

All of which risks "balance sheet losses for households and corporates, an impact on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on cryptoasset positions, and negative profitability impacts on exposed banks".

Conclude the authors: "All else equal, the larger the size of the cryptoasset market, the larger the risks are and the more systemic they might become. An important step is therefore for regulators to address risks from cryptoassets’ use in the metaverse before they reach systemic status."

Comments: (1)

Andrew Smith
Andrew Smith - RTGS & ClearBank - London 10 August, 2022, 12:04Be the first to give this comment the thumbs up 0 likes

It's interesting as to get into crypto assets there is an on and off ramp - based around FIAT currency. Many assets are backed by a FIAT so you would think the impact there would be neligble since ultimately a bank holds that FIAT. The wider issue will be when crypto assets obtain a FIAT value and there was no on ramp using FIAT. 

Crypto must be regulated like all other assets that are bought and sold. The issue here is that central banks and regulators are slow to understand the mechanics and the value - which I personally find odd since the vast majority of FIAT has been virtual/digital for decades....