Bank of England analysts say cryptoassets can play an important role within the metaverse. “Broad adoption of crypto in the metaverse … would require adherence to strong consumer protection and financial stability regulatory frameworks,” they added.
Bank of England analysts on Metaverse, Crypto and regulation
Bank of England economist Owen Lock and political analyst Teresa Cascino published a blog post on Tuesday titled “Cryptoassets, the metaverse and systemic risk”.
“Crypto-assets can play an important role in the metaverse,” they began, warning:
If an open and decentralized metaverse is developed, the existing risks associated with cryptoassets can be assessed to have systemic consequences for financial stability.
“Wide adoption of crypto in the metaverse, or any other framework, would require adherence to strong consumer protection and financial stability regulatory frameworks,” they pointed out.
Lock and Cascino explained that “the open metaverse will require a way to own and manage digital objects that are interoperable across virtual worlds,” adding, “We believe that cryptoassets are well positioned to play an important role here .”
They are detailed:
If a large open metaverse materializes, households can hold more of their wealth in cryptoassets to make metaverse-based payments or for investment purposes.
In addition, businesses can increasingly accept crypto payments for goods and services and sell digital assets, such as non-fungible wearable tokens (NFTs), in the metaverse, they added.
The authors also pointed out that non-bank financial institutions could increase their crypto holdings if a growing open metaverse improves investment prospects for crypto assets and their supporting infrastructure.
Lock and Cascino noted that “this evolution of the metaverse is uncertain,” adding that their view is a possibility rather than a certainty.
“That said, if these exposures materialize, the crystallization of cryptoasset risk could lead to: balance sheet losses for households and businesses, impact on unemployment, divestment of traditional assets to non-banks to respond to margin calls on cryptoasset positions, and impact on profitability of exposed banks,” they warned.
“All things being equal, the larger the size of the cryptoasset market, the greater the risks and the more systemic they can become,” the authors concluded, validating:
An important step is therefore for regulators to address the risks associated with the use of crypto-assets in the metaverse before they reach systemic status.
Do you agree with the Bank of England economist and policy analyst? Let us know in the comments section below.
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