The Bank of International Settlements (BIS) has published a report calling on regulators to “future proof” themselves against the adverse effects of an unregulated metaverse on the digital economy.
The 31-page report warns that future money and virtual environments run the risk of “becoming fragmented and dominated by powerful private firms.” To counter this threat, BiS recommends that policymakers “promote more efficient, interoperable payments that can fulfil user demands.”
In addition, the report calls on regulators to draft frameworks that can “provide clear standards on data privacy, digital ownership and consumer protection.”
However, the report also strikes a skeptical tone. While it argues that a virtual reality crypto-fuelled internet may bring benefits in education, healthcare and gaming, it claims that the last two years have seen overall metaverse interest wane.
Centralized vs Decentralized Metaverse
BIS’s new report weighs up the pros and cons of a centralized vs decentralized metaverse. It argues that a centralized metaverse (where, for instance, a future Zuckerberg ultimately calls the shots on how payments work in the ecosystem), would likely not be interoperable.
Users could be prey top-down “rent-seeking behaviour” through fees, argues BIS. They may also forfeit their control over their transaction data.
On the other hand, a decentralized metaverse, aka the Web 3 model, gives users direct control over the rules of the system, potentially through voting rights as is widely seen in blockchains today. The report argues that these mechanisms may only provide the illusion of participation.
Citing a study on Web 3 game Decentraland, the report said: “In almost 27% of all polls, the most influential voter essentially decided the outcome, which was not necessarily in line with the consensus among the other voters.”
Whether the metaverse is centralized or decentralized, BIS believes the volatility of current cryptocurrencies make them unsuited as its native forms of payment. It proposes stablecoins as a plausible alternative, but warns that centralized issuers like Tether or Circle could “act as a kind of dominant bank,” which would ultimately not be good for users if that bank were to fail.
BIS on Crypto
BiS is an international financial institution that helps to coordinate monetary policy across 63 leading central banks. In a report on crypto last year, the organization called crypto’s wider ecosystem “fragmented” and “characterized by congestion and high fees.”
The report also stated BIS’s concerns that crypto and DeFi “often feature substantial de facto centralization” and that decentralized finance “amplifies known risks” in the traditional financial world.
These observations followed on from its Annual Economic Report 2022, which said that crypto’s “structural flaws” make it “unsuitable as the basis for a monetary system.” However, the organization touted central bank digital currencies (CBDCs) as an indicator of blockchain’s future role in a potential monetary system, since—surprise, surprise—”central bank money offers a sounder basis for innovation.”
To that end, BiS announced a pilot CBDC project dubbed “Aurum“a few months after its 2022 report. Project Aurum began exploring the privacy of CBDC payments in January this year.
Adjacent to the Basel-based Bank of International Settlements is the Basel Committee on Banking Supervision. G10 central bank governors founded the Committee in 1974 and continue to shepherded it. Last year, the Committee published guidance tightening the disclosure requirements for banks exposed to crypto.
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