This guest blog was first published in Bankplass, which is a trade blog by employees of Norges Bank. Peder Østbye is Director of Analysis in the Department of Financial Stability.

What is the metaverse?

The metaverse is usually referred to in the singular as the totality of interactive and social virtual worlds that can interact with each other to a greater or lesser extent. Philosophers, computer scientists and science fiction writers have long toyed with ideas that we can live large parts of our lives in virtual worlds, as described in the book “Reality+” by philosopher David Chalmers. Developments in computer technology and the internet have made such virtual worlds increasingly visually realistic, social, and widespread: From text-based worlds in the 1970s such as the game “Colossal Cave Adventure” to graphics-based worlds such as “Second Life”, “Fortnite”, and “Roblox” in the 2000s and beyond.

The metaverse is often associated with social computer games, and it is its main application today. But the metaverse can also be more broad arenas for social interaction, such as for conducting meetings and other social gatherings, education, public services, and trade in (virtual) goods and services. The metaverse can encompass both purely virtual worlds accessed through VR glasses and other equipment intended to provide more or less authentic sensory experiences, and augmented reality (AR), in which virtual objects are woven into the physical world. The virtual objects become accessible/visible with augmented technology (like AR glasses).

Some think that the metaverse could become the next generation of the internet that will eventually take over for handheld devices (mobile phones) as the main gateway to social interaction on the internet. Although this is not unthinkable, there are still significant barriers both in terms of equipment and software, as described by Matthew Ball in the book “Metaverse”. The absence of secure and efficient payment systems in the metaverse is also an important barrier to its further development.

There are a number of reports from both stakeholders and research institutions that provide an overview of the economic activity associated with the metaverse and speculate on further developments. In a report from McKinsey & Company, it is estimated that the economic value of the metaverse could be US$5 trillion by 2030. In a report from the big bank Citi, the estimate is 8-13 trillion USD. Such estimates must be taken with a pinch of salt, partly because it varies how economic value is calculated and what kind of type of activity is associated with the metaverse, but they nevertheless provide an indication.

The metaverse is an important area of focus for many of the big tech companies. Facebook changed its name to Meta in 2021, among other things, to highlight its commitment to the metaverse. However, the future scope of the metaverse is a subject of debate, some including a report from the Pew Research Center in the United States shows.

While some are concerned that the metaverse will strengthen the market position and market power of large tech companies, others envision that the metaverse could exist on an internet based on decentralized technology. This is often referred to as Web3. We already see today that virtual assets in virtual worlds are traded for large amounts in crypto assets in systems based on decentralized technology. The decentralized technology should enable the user to have control over their own identity, data as themselves, and their digital assets (often referred to as NFTs — non-fungible tokens). It should be able to enable users and move their assets freely between different platforms. This stands in contrast to platforms controlled by tech companies.

While Web3-based metaverses may appear alluring, the assumptions have become criticized from a variety of teams. A major criticism is that these are not as decentralized as their proponents portray them as, but are more or less covertly controlled by a few actors. Moreover, Web3 users will likely still be dependent on the big tech companies, including as equipment manufacturers.

The metaverse raises a number of policy and regulatory issues, including topics such as digital identity, ownership of virtual assets, taxation, privacy, responsibility for activity in the metaverse, responsibility for code, etc. Many such questions are highlighted in a Report to the European Parliament.

What money and payment systems are used in the metaverse?

The money we usually spend - bank money and, to a decreasing extent, cash - is not available directly in much of the virtual worlds of the nascent metaverse we know today. Bank money must be exchanged for “money” that can only be used in these virtual worlds, such as in games such as “Second Life” and “Fortnite”. Often there are strict restrictions on the use of this money. It is difficult to give them to other users, and they cannot always be exchanged back into bank money. In some cases, the big tech companies are gatekeepers to payments in the metaverse in that they control the payment systems that can be used in applications mediated through their platforms. This means, among other things, the technology companies will have their share if bank money is to be exchanged for money that can be used in virtual worlds. It provides an opportunity to leverage market power, see blog post”An epic battle over payment solutions“

In virtual worlds based on decentralized technology, such as “Decentraland” and “Sandbox”, cryptocurrencies and other crypto assets, especially so-called stablecoins, are often used for payments. Traditional crypto assets such as Bitcoin and Ether fluctuate widely in value and are therefore poorly suited as a monetary unit. Stablecoins are supposed to be more stable, but also do not offer the regulatory security that traditional money does. While some stablecoins have managed to stay relatively stable in value, others have collapsed in a short period of time. An example is the algorithmic stablecoin USD Terra, which lost close to its entire value when it collapsed alongside sister currency Terra LUNA in a death spiral in early May 2022, see Figure.

Source: tradingview.com

Stablecoins and various stabilization mechanisms are described in more detail in the blog post”Can cryptocurrencies be stabilized?“. In addition to weaknesses in the money used, the individual can quickly lose their values as a result of technical weaknesses and malicious actions in the individual systems. If values are stolen there are few opportunities to get them back. Reports from companies such as Chainalysis and Elliptic documents and analyzes many of the attacks against the individual systems. The vision of a single metaverse based on decentralized technology requires that one be able to carry values from one digital arena to another. We have seen that various “bridges” used to transfer values between decentralized systems have been particularly vulnerable to attacks. Furthermore, values could collapse in total in a short period of time if the trust fails.

In a world where the metaverse is gaining economic importance, and where consumers hold large shares of their value in such systems, the question arises as to whether governments should take action to provide consumers with more secure and efficient monetary and payment systems in the metaverse.

How can we achieve secure and efficient money and payment systems in the metaverse?

There are several paths to more secure and efficient money and payment systems in the metaverse. One of them is regulatory. Authorities can directly or indirectly influence or regulate which monetary and payment systems can be used in the metaverse.

In terms of the market power of the major technology platforms, many regulatory initiatives are afoot nationally and internationally. In the European Union, it is prepared multiple initiatives to reduce the unfortunate sides of the market power of the big tech companies. This would also include the payment systems that tech companies control on their platforms. Worldwide, there are individual cases under competition rules that directly target technology companies' own payment systems. One case that has received a lot of publicity is Apple's practice of payments for and in applications that are disseminated in the Appstore on the Iphone. This practice is assessed under the competition rules of several countries and is discussed in the blog post”An epic battle over payment solutions“.

There are also a number of regulatory initiatives aimed at crypto assets. The blog post”How are cryptocurrencies regulated?” describes in more detail how cryptocurrency systems can be regulated. An important regulatory initiative of the European Union is MiCa (Markets in Crypto Assets) the regulations governing various service providers in the crypto asset markets, including providers of stablecoins. It will be able to make stablecoins more secure. One can also imagine that banks themselves will issue stablecoins or so-called tokenized bank deposits, which can give the money used the regulatory security inherent in bank money today.

The MiCA regulations do not cover all issues related to the use of crypto assets in the metaverse. A key issue is liability if users lose value as a result of technical failure of the systems which, among other things, may lead to the unauthorized acquisition of crypto assets from a user. This includes, among other things, the responsibilities of those who developed the code and those who validate transactions in the decentralized systems. Such assessments are included in Norges Bank's assessment of the need for regulations related to crypto assets, and are discussed in more detail in the report. Financial Infrastructure 2022.

If the metaverse gains economic importance, it also raises the question of whether central bank money should be directly available in the metaverse. The majority of central banks worldwide are considering digital central bank money. Norges Bank has been investigating digital central bank money since 2016, and is currently conducting experimental testing. One of several purposes of the investigation is to ensure that the Norwegian krone and the payment system cover future needs for money and payments. Secure and efficient payments in the metaverse may be one such need. Various features, such as programmability, can help ensure that Norwegian kroner can be used as a secure and efficient means of payment in the metaverse. It can also make it possible to transfer values from one network to another. Moreover, digital central bank money can help simplify the exchange between different national currencies.

Summary

Secure and efficient monetary and payment systems are a prerequisite for a well-functioning society. That's true in the metaverse as well. To achieve this, regulation is necessary. Norges Bank will contribute to regulations that make the payment system secure and efficient. Future needs, where the metaverse may be one of them, are an important reason why Norges Bank is investigating digital central bank money. The investigation is now in a phase where we are conducting experimental testing. Programming capabilities and other functionality required by money and payment systems in the metaverse are included in this testing.

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