The metaverse: a new reality – how will it affect banking?

The metaverse and the importance of the virtual economy

In October 2021, the US tech company, Facebook, changed its name to Meta. At the same time, it announced that it wanted to expand the metaverse into the most important future business segment. Even though the idea of a metaverse was no longer new at the time, Facebook seemed to be outlining its vision for the internet of the future. But what exactly is the metaverse and what is the potential of this technology? 

Transformation of the internet

In order to understand the metaverse, you need to take a look at the history of the internet. While Web 1.0 was still a collection of websites connected to each other through simple links, Web 2.0 features an expansion of social networks and forced interactions between billions of users. The original promise of an open internet in which all users had equal access was gradually eroded by the ubiquitous presence of the big tech companies.

And now it’s the turn of Web 3.0. Web 3.0 is a reaction to the centralising effect of Web 2.0 by individual corporations and, as a result, sets its sights on a decentralised network: The aim is for people to (re)gain sovereignty over their data and digital goods, and have a say in the design of the internet. 

The metaverse in Web 3.0 

So, what is the metaverse now? While a decentralised Web 3.0 is – in simple terms – a vision of the internet of the future, the metaverse builds on the architecture of Web 3.0 and stands for the vision of an immersive internet which seamlessly integrates into our daily lives. According to Suresh Balaji, Chief Marketing Officer Asia-Pacific at HSBC, the metaverse is “how people will experience Web3, the next generation of the internet — using immersive technologies like augmented reality, virtual reality and extended reality”.

The metaverse is a digital 3D world in which real people move around and interact digitally. You can enter the metaverse via a metaverse platform, which is nothing more than a website or an app. Since the metaverse represents both a virtual (e.g. visual 3D environment) and a social environment, the user must ‘represent’ themselves to other users; this is done by creating a metaverse avatar. To make it more realistic and increase the visual depth of the metaverse, you can use technical devices like, for example, a virtual reality headset. 

Metaverse platforms include Decentraland and The Sandbox, which not only give users access to a virtual world, but also allow them to buy, for example, a virtual plot of land as a unique digital identifier that cannot be copied, known as an NFT (non-fungible token). They are paid for with the cryptoassets of the relevant provider: MANA (Decentraland) and Sand (The Sandbox). NFTs and cryptoassets are used in two ways, firstly to denote digital ownership and, secondly, as a form of money in the metaverse.  

Potential areas of application

There are plenty of opportunities in the metaverse for businesses from a variety of sectors, not just the gaming industry. An example from the entertainment sector: All kinds of events can be hosted in the metaverse – concerts, museums, fashion shows, film premieres, sporting events, theme parks and much more. The virtual environment could help complement these different events by seamlessly integrating an NFT marketplace.

The metaverse could also change the way we work day-to-day and move social interactions into the virtual space. Virtual conversations in the metaverse differ from those we have in 2D online meetings because of the realistic ways you can interact with other participants. You can move around and interact with others as if you were actually at a real live event together. For example, one European banking association is already planning to set up its own small version of the metaverse to act as a networking platform and create a space for meetings and events. Facebook’s Horizon Workrooms and Microsoft’s Mesh for Microsoft Teams already allow you to organise virtual events in the metaverse. Although both companies offer platforms for mainly business users, Microsoft has entered into a partnership to make its metaverse solution compatible with Meta’s VR headsets. Microsoft’s 365 tools will be accessible on these devices.

An example from e-commerce: According to a white paper from Deutsche Bank, the metaverse has the potential to spark the next revolution in e-commerce due to its visual and immersive experience. Since the e-commerce experience in the metaverse allows products to be extremely personalised, not only can users customise the colours and imprints on a product, they can even design it themselves.  And this is why businesses that use omnichannel sales strategies for their products and services could benefit most from the 3D world of the metaverse. 

The metaverse is also very interesting for the manufacturing industry: The manufacturing industry is already exploring the opportunities of what they are calling digital twin technology. It refers to the virtual representation, for example, of a manufacturing plant which you can then control or conduct simulations for via the metaverse. This will save manufacturers money, time and resources. The first projects are already being implemented:  For instance, Boeing is researching digital twin technology to build and maintain aeroplanes. Siemens Energy has developed a digital twin to provide predictive maintenance for power plants. Ericsson is building digital twins of cities to examine the interplay between 5G cells and the environment for maximum performance and coverage.

There are also examples of applications in the medical environment. Surgical procedures via telemedicine can be implemented with extreme precision across considerable distances using metaverse applications. For example, in the treatment of claustrophobia, sufferers and therapists can train specific situations created in the metaverse.

On top of which, the hype surrounding the metaverse has also led to a boom in virtual goods, particularly in real estate. Virtual plots of land are already being bought and sold on platforms, such as the Sandbox, Axie, Infinity and Decentraland. 

Market potential of the metaverse 

But how much economic potential is there really in the metaverse? The size of the market depends very much on the definition of what the metaverse is supposed to be. Due to the lack of a uniform and generally applicable definition, there have been a plethora of individual interpretations. 

According to Bloomberg, the metaverse could achieve a market volume of around 800 billion US dollars in 2024 with the market share for entertainment, games software and services, and advertising being particularly high. According to one report from Brandessence Market Research, the market volume of the global metaverse market for 2021 was estimated at 209.77 billion dollars. By 2027, it could reach a market volume of 716.5 billion dollars, which corresponds to an average annual growth rate of 22.7%. Gartner, one of the world’s most respected companies for market analyses, has not published any growth figures, but predicts that the metaverse will need at least another ten years before it has a major impact on the economy and on society.

However, scepticism about the future prospects of the metaverse has grown considerably in recent months.  There are many reasons for this. Some experts believe investors are sceptical because the technology is not yet fully developed and because the required hardware is frequently unavailable. For example, it was unclear for a long time whether Meta’s virtual reality headsets could be sold in Germany due to a number of legal question marks. Others believed that the cryptocurrency crisis and unrealistic expectations of digital “miracle tech” sent a minor shockwave through large parts of the tech sector this year, which also affected the metaverse.

In June 2022, the Metaverse Standards Forum was founded to accelerate its development and introduction.  The forum promotes cooperation between standardisation organisations and businesses. In the two months after it was set up in June 2022, around 1500 businesses and organisation were involved in developing standards. 

What does the metaverse mean for the financial industry? Why are so many banks already buying up land in the metaverse? Can financial institutions also operate in the metaverse? We answer these questions and take a look at banking in the metaverse in part two of this article.
 

Banking in the metaverse 

Banking in the metaverse is currently still in its infancy. Experts assume, however, that a combination of decentralised finance (DeFi) and banking and financial services could lead to the creation of special products tailored to meet the specific needs of this new ecosystem in the future. But what does that mean, exactly? How can banks expand into the metaverse?

The next logical step would be for banks to open branches within the metaverse, in order to meet with customers from around the world in a virtual environment. This would save time and money for both banks and customers alike. And indeed, some banks have already taken this step: J.P. Morgan was the first bank in the world to open a branch in the metaverse – in February 2022, this major US bank opened an online lounge in Decentraland. The services it currently offers there include classic banking activities, such as asset management and lending. 

HSBC has also moved into the metaverse, purchasing virtual real estate in The Sandbox in March 2022, with the goal of developing new customer retention methods and creating growth potential. Deutsche Bank has also bought a plot in the metaverse and opened a 3D visitor lounge. At this metaverse branch, visitors can watch videos in an interactive space and get information on a variety of topics.

Of course, these activities do not yet represent incremental innovation, but they do represent the first steps towards learning to utilise the metaverse.

Business sectors for banks in the metaverse

Of course, purchasing virtual real estate and opening a virtual branch might be only the very first steps. It is easy to imagine a series of additional services that banks could offer within the metaverse. 

One example: Banks could utilise their asset holding expertise for digital products such as NFTs and cryptocurrency by offering a variety of consulting services covering the purchase, sale and financing of these products.  

These digital assets are kept in digital wallets, and security for these wallets must be a top priority. As banks already employ high levels of cyber security, they could develop an insurance model that would strengthen consumer confidence in these new technologies. In addition, banks could reduce complexity by offering a user-friendly wallet that makes it easier for users to manage a variety of different digital assets.

And banks could also secure transfers between cryptocurrencies and fiat money in the future, although it must be said that right now the role that various cryptocurrencies will play within the metaverse remains unclear. 

Economic infrastructure within the metaverse requires a seamless payment market infrastructure which allows for efficient and cost-effective transactions. One of the core characteristics of this infrastructure should be interoperability within the metaverse, that is the ability to work on and between different platforms. Right now, the assumption is that micropayments will be the most important type of payment within the metaverse. Here, banks could respond to customer requests by offering efficient transaction options. 

Finally, another obvious opportunity is for banks to make use of their many years of experience offering loans. By utilising their existing risk management processes, banks could, for example, perform credit checks for their own and other borrowers in the metaverse.

Regulatory and other issues 

There are many new business models possible within the metaverse, but when and whether these can be realised is currently unclear. There is as yet no way to implement them, not least because there are so many unanswered regulatory questions to clarify.  

Unanswered questions To begin, there must be a generally valid legal definition of the metaverse. One example: there are currently no rules regulating the legal relationship between various parties. Due to the digital nature of the metaverse, business is carried out independent of a person’s location. When selling or swapping assets, therefore, there are a variety of legal systems that might apply (in regard to taxes, AML regulations or application of regulations from civil law systems). If, for example, there was a legal dispute between users from different parts of the world, it would be very important to know which civil legislative framework applied to the dispute.

And what about data protection? Which regulations apply in the metaverse? The applicability of the General Data Protection Regulation (GDPR) is guaranteed throughout Europe; data protection agreements must be in place in order to exchange data outside of the European Union (EU). Not only that, the diversity of the data (movements, actions, focus, duration, facial expression, tone of voice and health) may not be covered by the GDPR. It remains to be seen what this means for the metaverse.

Banks as trustworthy institutions, in particular, require reliable legal frameworks in order to become active in the metaverse. Identification procedures, for example, must be designed in such a way as to ensure that the customer’s identification can be determined without a doubt.

And of course, it is not just legal uncertainties that make it harder to break into the metaverse. From an ecological perspective – given current conditions – it is obvious that these technologies will require large amounts of energy. Vast computational, server and transmission capacities are required in order to create digital worlds, save data on cryptocurrencies and carry out transactions in the metaverse. If no climate-friendly solution can be found, the amount of energy required to run the metaverse could significantly hinder its development.

And there is another significant problem which could slow the development of the metaverse: our current network infrastructure, which allows users to navigate the internet seamlessly, appears to be unsuited to the construction of a seamless metaverse experience featuring a variety of connected ‘worlds’. Not only that, it remains to be seen whether or not virtual reality technology is truly suitable for application scenarios above and beyond games and entertainment. Despite all that, the metaverse and its various forms will no doubt continue to draw our attention.