In a paper released today, the Bank of International Settlements (BIS) urged policymakers to “future proof” themselves against the negative consequences that an unregulated metaverse would have on the digital economy.
The potential of future financial and virtual ecosystems “becoming fragmented and dominated by powerful private firms” is highlighted in the 31-page paper. Policymakers should “promote more efficient, interoperable payments that can fulfil user demands,” according to BiS, in order to offset this threat.
Furthermore, in order to “provide clear standards on data privacy, digital ownership, and consumer protection,” the paper urges regulators to create frameworks.
But the report also expresses skepticism. Although it makes the case that a virtual reality internet powered by cryptocurrency could be advantageous for gaming, healthcare, and education, it asserts that the previous two years have
The Metaverse: Centralized versus Decentralized
The benefits and cons of a centralized vs. decentralized metaverse are weighed in a new report by BIS. It makes the case that a centralized metaverse—where, for example, a future Zuckerberg eventually decides how the ecosystem’s payments function—would probably not be compatible with one another.
Fees may lead to top-down “rent-seeking behavior” among users, according to BIS. Additionally, they can lose control of their transaction information.
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.
An international financial organization called BiS assists in coordinating monetary policy among the top 63 central banks. The group described the larger cryptocurrency ecosystem as “fragmented” and “marked by congestion and high fees” in a report published last year.
Additionally, the paper expressed BIS’s concerns that decentralized finance “amplifies known risks” in the conventional financial sector and that crypto and DeFi “often feature substantial de facto centralization.”
These comments came after its Annual Economic Report 2022 declared that cryptocurrencies are “unsuitable as the basis for a monetary system” due to their “structural flaws.” The group did, however, highlight central bank digital currencies (CBDCs) as a sign of blockchain’s possible involvement in a future monetary system because, surprise!, “central bank money offers a sounder basis for innovation.”
To that aim, a few months following the release of its 2022 report, BiS unveiled “Aurum,” a trial CBDC initiative. In January of this year, Project Aurum started investigating the privacy of CBDC payments.
The Basel Committee on Banking Supervision is located next to the Bank of International Settlements in Basel. The Committee is still being led by the governors of the G10 central banks, who established it in 1974. The Committee released guidelines last year that tightened the transparency requirements for banks that deal with cryptocurrency.