Digital Economy Dispatch #182 -- The Metaverse and its Role in the Future of the Digital Economy

Digital Economy Dispatch #182 -- The Metaverse and its Role in the Future of the Digital Economy
5th May 2024

The Metaverse has been hailed as "the next big thing" for so long, it has become rather lost in the on-going discussions about digital transformation and the journey we’re on to redefine business and society in the age of AI. It's unsurprising that many see it as an alien concept and have lost hope in its potential to make a meaningful near-term impact. Instead, for many people today the Metaverse is viewed as merely a playground for sci-fi enthusiasts, multi-player gamers, and Virtual Reality (VR) tech aficionados.

However, it's crucial to understand that the Metaverse represents far more than just a collection of eccentric headsets and virtual landscapes. It stands as a pivotal frontier in the digital landscape, offering significant opportunities for innovation, collaboration, and the reshaping of human interaction in the digital age. It is also where a combination of critical digital infrastructure technologies is emerging that illustrate a way forward for the digital economy, offering a glimpse into how we will perceive money and finance in the emerging digital world.

Into an Alternative Reality

The Metaverse holds the potential to be a revolutionary leap for the internet, evolving it from a collection of websites into a single, immersive, 3D space. The huge investment from companies such as Meta (and even its name change from “Facebook”) is a signal of the importance being place on creating a world where physical and digital seamlessly blend, allowing people to connect through customized avatars, work in collaborative virtual environments, and play in interactive digital experiences. This next iteration of the Internet could fundamentally reshape how we socialize, conduct business, and entertain ourselves. But, to understand why that investment matters, we need to go beneath the surface of the Metaverse.

The financial technology (FinTech) underpinning the Metaverse revolves around secure and seamless digital transactions. Imagine a digital wallet integrated with your avatar, allowing you to purchase virtual goods and services within the metaverse. This could involve cryptocurrencies, non-fungible tokens (NFTs) for unique digital items, and traditional fiat currencies converted for use in this virtual space. Secure payment rails and robust digital identity verification ensures this digital economy can thrive.

In this dynamic environment, digital currencies and tokens take centre stage, seamlessly integrated into virtual economies. Their proliferation challenges the dominance of fiat currencies, offering avenues for innovative financial exchanges. Virtual marketplaces flourish, facilitating peer-to-peer transactions where goods and services are exchanged using digital currencies or tokens, bypassing conventional payment methods with ease.

Yet, the disruption extends beyond mere transactions. The Metaverse's borderless nature facilitates seamless cross-border financial activities, obviating the constraints of traditional banking systems. Freed from exorbitant fees and protracted processing times, we can engage in global financial endeavours with unprecedented efficiency.

At the core of this transformation lies secure infrastructure such as blockchain technologies, a backbone for the Metaverse. Its intrinsic attributes of security, transparency, and immutability underpin a plethora of innovative financial products and services, heralding a new era in digital finance.

In this scenario, the Metaverse emerges not merely as a realm of digital exploration, but as a frontier for visionary digital leaders. As they traverse its virtual landscapes, they're not only navigating new territories but also experiencing the advantages of future financial paradigms.

Money in the Metaverse

Is this scenario realistic or science fiction? What might be the key steps along the way as this emerges? And what will be the implications if this vision comes to pass?

To gain a deeper understanding of this potential, Dave Birch and Victoria Richardson have just written an excellent guide with the release of their new book “Money in the Metaverse: Digital assets, online identities, spatial computing and why the virtual world means real business”. It explores the digital transformation journey being powered by the Metaverse and describes the implications of the Metaverse on banking, financial services, payments, and digital currencies. They provide the frameworks for deconstructing the building blocks of the Metaverse to support their belief that it will bring major disruption to finance and will reshape the fundamental infrastructure that underlies our digital economy.

What role does the Metaverse play in redefining the future of money? To understand this, Birch and Richardson take us right back to basics. Building on previous definitions, they describe how the Metaverse operates as a collection of interoperable shared virtual worlds where, critically, people take their digital identity and digital objects with them to navigate, interact, and transact.

Hence, what makes the Metaverse interesting for financial services organizations and institutions is not the stereotypical image of a user in an immersive role-playing game being able to buy additional skills with virtual currency, or a bank creating virtual branches in a virtual high street where a client can shop for the best mortgage. It is the core foundations of the Metaverse that offer a much more significant trusted infrastructure for commerce that allows businesses and consumers to transact in a safe, efficient, and robust way.

To support their position, the authors focus the majority of the book on describing the Metaverse in terms of its fundamental technologies, the building blocks that they support, and the services that can be offered as a result. They highlight several critical concepts, including:

• Digital identity stands at the heart of any form of digital economy. It is fair to say that the architecture of today’s Internet makes the delivery of a robust digital identity service complicated, expensive, and fragile. Much of the online fraud we see today is a consequence of weak approaches to digital identity. So, being able to move from a digitized physical identity approach to one that is based on digital credentials is very appealing.

• Digital credentials act as a core enabler for digital interactions. These allow the focus to be on “what” you are (e.g., showing you are eligible to receive a service) rather than “who” you are (e.g., showing your date of birth). Digital means of verifying these credentials are an essential basis for trust.

• Digital objects and ownership are defined in terms of tokens. A token is a digital representation of an asset (virtual or physical) tied to a record of ownership. The concept of tokens is fundamental to allow trade, manage provenance, determine value, and so on. Several different categories of tokens exist with distinct ownership characteristics.

• Digital wallets hold the identifiers, credentials, and assets that make them accessible to markets. Digital wallets are already widely in use. With the ubiquity of the mobile phone, they are now the receptacle for many forms of wallet. Making the task of managing digital wallets easier and more efficient across all forms of financial transactions is critical.

By defining these capabilities and placing them into context, Birch and Richardson demonstrate how they can provide a basis for delivering trusted interactions and transactions in many contexts while offering privacy and security to the stakeholders involved. They explain why and how these services become the foundation for a much more effective way to support a digital economy that can underpin a large part of how we see the digital world evolving in the coming years.

Future Forward

How will these ideas play out in practice? The authors acknowledge that the answer to this question is far from clear. Many factors must be taken into account, from international regulation and global politics to personal attitudes to finance. Furthermore, recent experiences with cryptocurrencies, Bitcoin, EFTs, and the like have both fired up people’s imagination and caused deep confusion at the same time. All of these bring uncertainty to the directions and pace of travel.

The starting point for all of us is to gain a deeper understanding of what’s at stake. Despite large investments from the Big Tech companies and growing prominence in discussions among experts, major misconceptions regarding the Metaverse persist. Frequently depicted as merely a virtual domain for gaming enthusiasts, the Metaverse's broader implications are too often overlooked. This limited understanding obscures the Metaverse's potential to revolutionize not only entertainment but also commerce, social interaction, and beyond. Such oversight hampers our ability to fully grasp the transformative capabilities of the Metaverse and may impede the strategic integration of its emerging technologies into broader digital initiatives.

It is in this context that Dave Birch and Victoria Richardson’s book provides a very welcome voice of clarity. Their definitions, frameworks, and examples take us beyond the hype and emotion that usually accompanies these topics to bring the insight we all need to look at the Metaverse with fresh eyes and to decipher its lessons for our future. “Money in the Metaverse" sheds light on the transformative potential of this realm as a tangible pathway to redefining business, finance, and society itself. It's time to delve deeper and to explore the technologies that may well point the way to a digital economy that is more secure, efficient, and trustworthy.