What will the Bank of the Metaverse look like?

By Yusuf Ozdalga on Monday 27 June 2022

OpinionAlternative LendingDigital BankingSavings and Investment

VCs are preparing fintechs to translate Web 1.0 into the metaverse by enforcing contracts, storing, sending and investing currency as well as extending credit, writes QED Investors' Yusuf Ozdalga.

What will the Bank of the Metaverse look like?
Image source: Yusuf Ozdalga/QED Investors

The term “Metaverse” was first coined by Neal Stephenson in his cyberpunk style sci-fi book Snow Crash. As virtual avatars congregate in the metaverse, a lot of the action is centred around a hundred-meter-wide boulevard simply named “the Street”. The coolest place to hang out on the Street is called the Black Sun – but interestingly the book makes no mention of a bank building, or even a mere bank branch on the Street.

As every big tech company from Meta to Microsoft are falling over themselves to stake out territory in the twenty-first century version of the metaverse, it is interesting that relatively few banks have made a move to become the First Bank of Metaverse (let’s call this bank the “BofM” for short).

Given how fast our society is evolving, it will not be a surprise to see such a financial institution come into existence in our lifetimes. But what would the BofM look like? What would be the key attributes for success?

Speaking broadly, we can say that there are some attributes of traditional financial institutions that the BofM would have to retain, and also some new and unique skills it would need to have by virtue of operating in the metaverse.

Let’s look at the traditional skills it would need first. These, in a sense, are the classic attributes of any financial institution, and arguably these have changed relatively little over the ages since the Sumerians first invented lending and Hammurabi became the first regulator on record in human history.

In no particular order of importance, a successful BofM would have to be able to move money, store money, lend money, and invest money. 

To do all these things it would need to have the trust of the consumers that use it, so it would need a strong brand. It would also need regulatory legitimacy, in the long run, hence it would need to be on the right side of the law, so to speak.

It would need distribution channels, and it would need intelligent beings (presumably humans for now) that designed the products in a way that was easy and intuitive to use for its customers.

So far so good. But what would be the unique skills that the BofM would need?

For one, the First Bank of Metaverse would have to be a killer when it comes to foreign exchange. Traditional banks make a lot of their money from travellers exchanging their currencies from dollars to euros and back again, and even so, most banks only deal with a handful of currencies in practice.

The BofM would have to deal with an order of magnitude more currencies. These would not just include bitcoin, but also a myriad of other cryptocurrencies, and more importantly in-game currencies such as Robux. Knowing how to exchange these, and at what bid-ask spread will certainly be a key skill, as also where much of the profits will be made.

Secondly, the BofM will also have to security to a level never seen before. The first American banks in the wild west had to deal with armed robbers – the BofM will deal with hackers, viruses, DOS attacks, and much much more. And one successful attack could erode trust and ruin a brand that has taken years to build.

Thirdly, the BofM will require a new way of thinking of and dealing with identity. How people identify themselves is changing in so many ways, and verification is changing along with it. 

Somebody that has millions worth of Robux may be a minor, a big holder of cryptocurrency may be a citizen of virtually any country, the company that is trying to open an account may be a DAO (Decentralized Autonomous Organization) with no clear owner, just to name a few of the challenges.

And finally, related to the third point, the BofM will have to think of regulation in a way that only frontier banks have had to do in the past. To go back to the American wild west, many banks would issue their own currencies (bank notes as they were called), and these fluctuated wildly in value. There was no such thing as the Fed, and central governance was very weak. In other words, the wild west as we all know it. Those that aim to run the BofM of tomorrow would probably have a lesson or two to learn from the experiences of those frontier banks.

In summary, the journey will be far from easy, and there are new lessons to be learned as well as time-tested skills that need to be translated into a new environment. But from all the apparent discord today, harmony will eventually emerge, and there is big prize waiting for the winner at the end of the metaverse.

 

The views and opinions expressed are not necessarily those of AltFi.

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