The growth of an open and decentralized metaverse may scale up the existing risks from crypto assets and could cause financial instability in the real world, according to the Bank of England.
Despite reiterating the volatile nature of cryptos' amplification of losses due to overleverage, Bank of England researchers Owen Lock and Teresa Cascino stated that while the metaverse is in the early stages of development, it has become a hub for users to gain new experiences, including shopping and digital concerts and a new platform for handling cryptos.
Metaverse Risks
According to the researchers, households may spend more of their money in crypto assets if a substantial open-metaverse were to emerge and corporations might accept more payments in crypto assets for products and services, as well as sell digital commodities (such as clothes NFTs) in the metaverse.
If a developing open-metaverse enhances the investment potential of crypto assets and the infrastructure that supports them (such as custodians, KYC/AML checks and market liquidity), non-bank financial institutions may expand their holdings of crypto assets.
Additionally, banks can decide to take advantage of chances to leverage their DeFi lending and derivative protocol holdings.
“Finally, banks may choose to increase their exposure — through custodial roles, offering market-making services and extending credit to companies with significant direct exposure to crypto asset risks,” the researchers stated in a blog post.
A major fall in the price of cryptos could lead to “balance sheet losses for households and corporates, an impact on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on crypto asset positions, and negative profitability impacts on the exposed bank,” the researchers stated.
Combatting Challenges
According to Lock and Cascino, the first step authorities could take to reduce systemic risk is to identify the problem.
As the metaverse expands, more transactions will occur making metaverse crypto increasingly important to families.
To purchase products, users in the metaverse would hold a portion of their money in cryptocurrency.
Cryptocurrency is currently recognized as a valid method of payment in several nations across the world. A universal metaverse enables its acceptance everywhere.
“All else equal, the larger the size of the crypto asset market, the larger the risks are and the more systemic they might become. An important step is therefore for regulators to address risks from crypto assets use in the metaverse before they reach systemic status,” the researchers stated.
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