The Bank of International Settlements (BIS) has recently released a report emphasizing the importance of regulatory measures to safeguard the digital economy against the potential risks of an unregulated metaverse. The 31-page report raises concerns that the emergence of future money and virtual environments may lead to fragmentation and the dominance of powerful private firms. In response to these threats, policymakers are urged to promote more efficient and interoperable payments that cater to user demands.
To ensure the smooth development of the metaverse, the BIS report calls for the establishment of frameworks that provide clear standards pertaining to data privacy, digital ownership, and consumer protection. By creating these frameworks, regulators can foster an environment that safeguards the rights and interests of users while facilitating innovation and growth within the metaverse.
The Rise and Fall of Metaverse Interest
While the report acknowledges the potential benefits of a virtual reality crypto-fueled internet, such as advancements in education, healthcare, and gaming, it also provides an honest assessment of the declining interest in the metaverse over the past two years. This shift in sentiment prompts a deeper examination of the pros and cons of a centralized versus decentralized metaverse.
The report critically evaluates the concept of a centralized metaverse, where a single authority, such as a future Zuckerberg, holds substantial influence over payment mechanisms within the ecosystem. The primary concern raised is the lack of interoperability in such a system, potentially resulting in users becoming subject to top-down control and rent-seeking behavior. Additionally, users are likely to lose control over their transaction data and privacy. While a centralized metaverse offers convenience in decision-making, it raises significant issues regarding user empowerment and independence.
Advocating for Decentralization
On the opposite end of the spectrum, the report explores the Web 3 model, characterized by a decentralized metaverse. In this model, users possess direct control over the system’s rules, often through voting rights as seen in blockchains today. However, the report casts doubt on the efficacy of these mechanisms, suggesting that they may only provide the illusion of participation. Citing a study on Decentraland, a Web 3 game, the report reveals that the most influential voter determined the outcome in nearly 27% of all polls, deviating from the consensus of other voters. This finding questions the true extent of user control in a decentralized metaverse.
Volatility of Cryptocurrencies
Regardless of whether the metaverse leans toward centralization or decentralization, the report argues that the current volatility of cryptocurrencies renders them unsuitable as the native forms of payment within the metaverse. Instead, stablecoins are proposed as a viable alternative. However, caution must be exercised as the dominance of centralized issuers, such as Tether or Circle, could create a scenario where these issuers become akin to dominant banks. The failure of such a dominant bank would have adverse implications for users and the stability of the metaverse.
BIS’s Concerns with Crypto and DeFi
BIS, an international financial institution coordinating monetary policy across 63 central banks, has expressed concerns about the fragmented nature of the crypto ecosystem and the congestion and high fees associated with it. In addition, the report highlights the substantial de facto centralization within decentralized finance (DeFi), amplifying known risks within the traditional financial world. These observations align with BIS’s previous statements regarding the unsuitability of crypto as a basis for a monetary system.
The Rise of Central Bank Digital Currencies (CBDCs)
In contrast, the report points out the potential of central bank digital currencies (CBDCs) as an indicator of blockchain’s future role in a monetary system. BIS sees central bank money as providing a more stable foundation for innovation. In line with this perspective, BIS has initiated a pilot CBDC project named “Aurum.” This endeavor explores the privacy aspects of CBDC payments and exemplifies BIS’s belief in the future potential of blockchain technology in providing secure and efficient monetary systems.
The BIS report urges regulators to proactively address the challenges posed by the metaverse’s rapid evolution. By establishing robust frameworks and promoting efficient and user-centric payment systems, policymakers can ensure the metaverse develops in a manner that benefits all stakeholders. Striking a balance between centralization and decentralization is crucial to empower users while safeguarding their rights and privacy. Ultimately, with the right regulatory measures in place, the metaverse has the potential to revolutionize industries and offer new opportunities for economic growth and social development.