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Bank of England: Metaverse crypto raises the systemic risk

bank of england

Bank of England employees say that widespread use of cryptoassets in a fully developed metaverse could pose a systemic risk to financial stability and need “robust consumer protection”

In a blog post published on Tuesday, BoE researchers Owen Lock and Teresa Cascino said that if built, decentralized digital worlds and platforms could host a huge number of real-world economic transactions using crypto assets like Bitcoin and Ether.

They said that if prices fell, the effect on real-world financial stability could be bigger if there were more crypto transactions.

The importance of cryptoassets in the open-metaverse means that if an open and decentralised metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences,” Lock and Cascino said. “An important step is therefore for regulators to address risks from cryptoassets’ use in the metaverse before they reach systemic status.”

The metaverse is a future version of the internet that will be built in digital worlds. It is still in its early stages. Even though it’s still young, big tech companies like Meta Inc. have changed how they do business to take advantage of its potential.

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Lock and Cascino imagined a future where people would spend more time and money in the metaverse, doing things like going to virtual concerts, getting hired to sell things in a virtual store, and hanging out with friends in virtual settings. In this made-up future, families might keep some of their income in cryptocurrencies so they can pay for things in the metaverse. At the same time, businesses might start to accept cryptocurrencies or offer digital assets like nonfungible tokens.

In order to get more people to use the metaverse, non-bank financial institutions might decide to hold more crypto, while banks might look into getting more exposure by offering services like digital asset custody.

As a result, falling crypto prices could cause “balance sheet losses for households and corporations, an effect on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on cryptoasset positions, and negative profitability impacts on exposed banks,” according to Lock and Cascino.

It’s still not clear if crypto transactions will be widely accepted in the metaverse. Versions of the metaverse are still in the early stages of development, and a battleground is forming over whether it should be built by crypto-native, community-based platforms or by Big Tech companies like Meta, which may be looked at more closely because its virtual world uses only privately created tokens.

This change in the metaverse is unknown, and Lock and Cascino say that the above scenario is a possibility, not a certainty.

The Bank of England has warned investors many times to stay away from crypto assets and be ready to lose all their money if they buy digital tokens. Last month, Jon Cunliffe, the Deputy Governor of the Bank of England, said that a digital version of the pound that is currently being thought about is unlikely to work like currency and is not expected to exist until the end of this decade.

This article was originally posted on nftnewspro

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