How Fintech Will Shape the Metaverse

How Fintech Will Shape the Metaverse

In recent times, there has been a lot of talk about fintech, and a lot of talk about the metaverse, too. Therefore, it’s perhaps not surprising that both topics have intersected as they have, with numerous tech startups and established financial institutions and even governments making announcements about their intentions to deliver the next-gen, metaverse-based version of financial services. Earlier this month, JP Morgan was the first bank to open a branch in the metaverse[i].

Before we all begin to visit the metaverse branches of our chosen financial institutions to conduct transactions though, it’s important to be clear about where we would be going, because despite all its recent popularity, the meaning of the term “metaverse” is still opaque. 

What is the Metaverse?

If you’ve ever played an online role-playing-game, you have experience being in a metaverse. The term refers to a virtual universe in which people can interact and carry out activities as they do in the real world, but digitally. The difference is that as opposed to interacting through a computer screen, you’d access this universe using a device like a virtual-reality headset (and potentially; in the future, brain implants), which would allow you to see, feel, smell, taste and generally interact with other people and objects just as you would in the real world. 

If you’ve watched “The Matrix”, you should have a pretty good idea of what this might look like. But if that makes you think it’s too futuristic and science-fiction’y, have a rethink – products like Facebook’s Oculus already allow people to meet up in the metaverse and have experiences that feel real, ranging from having virtual meetings to, as I’m currently doing, taking a front-row seat in a Harvard Computer Science Class[ii]. 

Now for the technical side. As with any tech innovation, there are certain spec standards that have been set out by different people and organizations. My favorites, which I believe capture the essence of the metaverse well, are those published by Coinbase[iii]– 

1.     Open and Decentralized – This means that the metaverse will be open for individuals or groups to build their own communities, platforms, apps, currencies etc. at will without any restrictions using decentralized and ‘trustless’ protocols that work using self-executing smart contracts.  

2.     A fully-functioning economy – The metaverse will have a full-blown economy as in the real world, with communities issuing and maintaining their own currencies and trade happening on individual and communal levels just as they do on individual, corporate and national levels now. 

3.     Interoperability – The ability of people to move their data and experiences from one community or platform to another seamlessly. One example of this is being able to spend the money they earned in one platform in another. This is where cryptocurrencies come in, and this point will be crucial later.

So, what fintech innovations will be key in making the metaverse work?

Currency. How will we pay for goods and services?

Everyone has an option on cryptocurrency, ranging from being crypto maximalists[iii] to saying it’s a gigantic Ponzi scheme (almost $ Trillion at last count) scheme, but what is clear is that traditional currencies (fiat) are wholly unsuitable for use in the metaverse. They lack the interoperability needed to allow people located everywhere in the world to transact in real-time. Even within countries, funds are often siloed within specific financial institutions and thus difficult to move around, not to mention the hassle in making international transfers. Some believe Bitcoin is the answer to this, and others, Ethereum or any of the other numerous crypto tokens.  Those tokens have severe issues when it comes to volatility though, which make them unsuitable as currency and more akin to an investment which holders hope will appreciate in price. 

Governments round the world are betting on Central Bank Digital Currencies[iv], which are essentially digitized versions of their national currencies, but these are plagued by the same issues as normal national currencies – insular and difficult to integrate or send across borders and weighed down by disparate and often-conflicting regulations.

By far the most viable option though, are stablecoins, which we covered in an earlier issue. They are digital currencies created by creating a digital ‘coin’ to represent a single unit of fiat currencies (one USDC created by Coinbase with a backing of one US $, for instance). I predict that versions of these created by decentralized organizations would be the de-facto currencies of the metaverse simply because they offer stability while being free from the control of any single government. Also, because they are all backed by real-life assets, people will be confident to transact in stablecoins from multiple communities, thus satisfying the requirements for interoperability in a fully functional economy. For instance, today, you can exchange 1 USDT (created by Tether) for ~ 1 USDC (created by Coinbase) or 1 UST (created by Terra) very easily on several cryptocurrency exchanges.  

Digital Identity. How will we identify people?

How will people identify themselves and confirm their transactions in the metaverse? It might be decentralized as it is now, with people having a multitude of username and password combinations for logging into different websites, but that wouldn’t comply with the interoperability requirement, because for the metaverse to truly be a metaverse rather than just multiple open-world games, there has to be something as unique to an individual as your face and fingerprints are in the real world, that allow you to move from place to place and engage with a variety of institutions seamlessly on the strength of your identity. 

This is particularly important because of fraud. Of all the different kinds of fraud, identity theft is far and away the biggest, with up to $56 Billion total losses in the US alone last year. As cryptocurrencies have continued to grow in popularity, so too has crypto-related identity fraud. Those figures will certainly continue to rise as more (less-technical) people get into transacting with cryptocurrencies, but also because the nature of most cryptocurrencies is that transactions with them are final and irreversible. This is unlike a traditional bank or fintech that can block accounts and seize or revert funds. As blockchains are designed to be decentralized and ‘trustless’, no single entity can exercise such control, making it even more important that people are able to be identified securely when taking any actions in the metaverse. 

That’s where NFTs come in. Although they are most popular in the context of art now, as we analyzed in the very first issue of this newsletter, they are also perfect for assigning a unique identity to persons as well, in a way that is impossible to forge and with a history that’s impossible to tamper with. That would practically remove all possibility of identity theft.

Virtual Dangers, Real Consequences

It’s clear that the metaverse is a concept whose time has come. It is a logical extrapolation of the trends toward virtual interactions and decentralized communities, both of which have been accelerated, for better or worse, by the recent pandemic. It’s indisputable that it holds immense opportunity, but it certainly also has a range of pitfalls.  

First, privacy. On one hand, all transactions a person carries out in the metaverse will be linked to their unique identities which will very likely be publicly viewable, unless it’s in a community based on a private, centralized network. On the other hand, transactions and activities generally in a private platform will be fully viewable by the organization that operates it. That means beyond tracking which websites we visit, those companies will now be able to track everything from our heartbeats and other body functions to each word we say, step we take and person or object we interact with while in the metaverse. 

If a company can see what you buy in a store in the metaverse in real time, observe what items your eyes linger on, on the shelves and which ones make your heartbeat race, it won’t be very difficult to optimize their advertising to convince you to buy one thing or the other. While that would be a goldmine for advertisers and e-commerce companies, it would likely be very harmful to ordinary users – and their wallets. 

There’s also the risk of fraud, especially given how new the space is and how few people have expertise in the mechanisms on which it’ll run, as explained in the section on digital identity above. 

Conclusion – Meta-Opportunities

The metaverse might seem extremely convoluted now, but it’s quite straightforward on a conceptual level. All its elements, positive and negative (such as organizational structure for communities, payments, identity management, privacy, fraud prevention), are things that feature in other concepts, and which companies, governments and individuals have provided (admittedly often imperfect) solutions for in the past. The principles are well established and merely need to be adapted to suit this unique new environment.

For entrepreneurs and savvy businesses, it’s literally the frontier of business, with all the promises of the gold rush along with the risks of the Wild, Wild West. The only question is who the successful pioneers will be. 

What are your thoughts on the met averse? Are you eager to dive in and explore virtual worlds, or are you on the cautious side? Why? Share your thoughts in the comments and be share to share this to others who'll find it interesting.

[I] Opportunities in the Metaverse - JP Morgan

[ii] Harvard CS50

[iii] How Coinbase Thinks About the Metaverse - Coinbase

[iv] Central Bank Digital Currencies Are the Future of Money – Ademola Adekunbi