Guidance for financial institutions navigating the metaverse

Automation is rendering traditional financial service models obsolete. Financial institutions must ensure seamless transitions between the physical and virtual worlds and across metaverse platforms in the short term. In the future, users will engage in essential activities such as studying, working, and socializing in virtual reality. Ahmet Faruk Aysan, Giray Gozgor, and Zhamal Nanaeva outline the necessary actions for financial institutions to survive in the metaverse.

The world is moving towards a new era of virtual reality, evident as consumers immerse themselves in virtual worlds and businesses invest in the metaverse. The emergence of virtual real estate and established virtual offices by prominent brands underscores this trend. Citi Group projects that the metaverse will attract 5 billion users by 2030 with an estimated market value of $8 to $13 trillion, making virtual reality the new reality.

Financial institutions are crucial parts of the metaverse ecosystem and must adapt to this paradigm shift. They need to enable instant seamless transactions, provide access to financial resources, offer real-time virtual payment systems, fair digital exchange rates, and manage complex virtual wealth portfolios and extensive customer data.

This article aims to provide a comprehensive view of how financial services are applied within the metaverse and offers insights on necessary adaptations.

The future of finance in the metaverse

Using the framework proposed in 2002 by Paul Raskin and colleagues, we identify key driving forces leading to the transformation towards a virtual reality-dominated future: demographic trends, social dynamics, technological advancements, governance structures, environmental considerations, and cultural influences.

These driving forces help delineate the future role of financial services in the metaverse.

Demographics

The metaverse primarily attracts younger people, including minors, necessitating ethical vigilance from financial service providers to prevent customer manipulation. With a geographically and ethnically diverse customer base due to virtual reality transcending physical borders, financial institutions must offer tailored products, educate customers, streamline onboarding processes, and provide non-financial incentives to attract and retain virtual customers.

Governance structure

The decentralised nature of the metaverse raises governance and management concerns as virtual finance depends on decentralised systems operating alongside traditional centralised finance. Financial institutions must assist in providing liquidity, stabilising digital asset markets, managing digital money forms, and addressing interoperability challenges, ultimately bridging the physical and virtual realms.

Technological advancements

Financial institutions must embrace Web 3.0 standards and cutting-edge immersive technologies as technology advancements evolve. Managing extensive data generated in the metaverse requires defined protocols, data ownership standards, and AI assistance. Comprehensive education for customers and financial professionals on virtual realities, avatar interactions, and portfolio management is crucial.

Social dynamics and cultural influences

Secure transactions authentication remains a hurdle, with verifiable credentials and “zero-knowledge proof” as potential solutions. Data ownership definitions, TEEs, blockchain technologies, and quantum computing serve to address cybersecurity challenges and enhance customer confidence.

Environmental considerations

Transitioning to virtual offices can reduce environmental pressures, yet blockchain operations demand extensive energy consumption. Solutions for energy-saving data processing and storage are imperative.

Conclusion

In the short term, financial services must ensure seamless transitions between physical and virtual realms and across metaverse platforms. Users are expected to fully engage in the metaverse in the long run, reshaping cultural norms and consumption patterns. Technological advancements and AI will revolutionise workflows and potentially automate financial processes entirely, rendering traditional financial service models obsolete.

This analysis offers valuable insights for academia, financial practitioners, and policymakers preparing for the future of financial services in the metaverse.