The Metaverse: a New Frontier Needing Exploration

The media rejoices in either claiming the metaverse is dead in the water or that it is booming. The truth is that the metaverse has been an active commercial proposition (mainly immersive gaming, entertainment and shopping) for many years with substantial payment activity associated with it but also the vision that the likes of Facebook and Apple have is very much a work in progress.

Wherever it falls, payments are made in the metaverse, it is a global marketplace and there is the opportunity to do things differently.

Today’s card payments and automated clearing house transfers may work on e-commerce platforms but are unlikely to work unchanged in this new space.

Blockchain transactions are used, at the moment, in the metaverse because they are good for international value transfer and have relatively low fees compared with traditional payments. Some assume that this will continue. However, the large number of cryptocurrency products and the process steps involved in making cryptocurrency payments suggest this isn’t right without significant change.

Does the metaverse create different transactions?

Currently in the metaverse creators can earn value through micro-transactions. For example, users who attend a class in the metaverse, watch an ad, take a poll, attend a concert, or engage in a similar way can earn tokens from their school, favourite brands and entertainers, and advertisers. Users can accumulate these tokens to trade, cash in, or sell. On social media creators don’t earn value from their posts, although the platforms do. Unless this changes, that makes the metaverse a different payment that space from today’s social media.

Second Life is a virtual world that has existed since 2003. Created by Linden Labs, it has a Linden Dollar for transactions ¹. The Second Life ‘world’ has a GDP of $600 million with 600 – 900,000 active users.

Already there is a US real estate company that provides customers with a virtual reality experience that allows them to visit properties using an avatar. Its turnover is in billions of dollars ². The vision for the metaverse is more than just gaming and entertainment.

Perhaps this gives a hint of what is possible as the metaverse develops. Micro-payments at a person-to-person level, business-to-consumer and business-to-business, with everything in between.

New types of transactions and the need for flexibility about both the currency used, and the type of money means the back office processes will need to be flexible and efficient. Many of these can be automated using a series of smart contracts which will automate workflows along the blockchain. Payment is allowed when specific conditions are met, securely accelerating value transfers while meeting regulatory requirements.

Are the banks the ‘natural’ metaverse payment provider?

There is an argument that banks are ideally positioned to be the gateway between real-world payments and metaverse transactions. The suggestion is that banks are good at converting currencies, particularly where people are cashing out to spend money earned in the metaverse in physical stores.

Another suggestion is that banks can help customers acquire and manage ‘digital twin’ products, ie. if a customer buys a coat in an online store, they might also receive a token for a virtual duplicate for their avatar in the metaverse. The argument is that banks are in the best position to verify these virtual purchases and ensure that customers can securely store and use their virtual goods.

The familiarity of banks with the regulatory compliance do give them an advantage. There will be the need, of course, to adapt those compliance standards to new use cases that only exist in the metaverse.

An opportunity for banknotes?

At first sight the metaverse is a purely digital world with no need or role for banknotes. Is that right? When avatars meet, perhaps paying with a digital banknote might be an efficient way to transact. Identity is all important and the identity of avatars will link back to the real world even if not necessarily visible virtually.

Whether account-to-account or from a wallet, whether using bank money or a CBDC, why shouldn’t avatars take out a banknote and hand it to a third party? Settlement would be immediate and final. No intermediary. Easy to secure. #rethinkingcurrency

1 - Linden Dollar Definition (investopedia.com)

2 - eXp Realty – EXPI-eXp-World-Holdings-Annual-Report-2022.pdf (expworldholdings.com). Virtual Property Realty – About – Virtual Properties Realty