Metaverse: Regulating A New Frontier

Metaverse: Regulating A New Frontier

The core Immersive Media (IM) technologies of Virtual Reality (VR) and Augmented Reality (AR) have continuously evolved over the last decade, and with the recently branded “Metaverse” by Meta, major corporations are already pumping money to establish captivating worlds that target day-to-day activities that range from socializing and gaming to finance and business.

Given the likelihood that the corporate-controlled Metaverse ecosystem will pervade widely over the next decade, it is critical to evaluate the challenges it poses to consumers as well as the necessity for a robust regulatory regime.

Considering the sophisticated technological framework and the nascency of the Metaverse, there exists a lack of oversight which is a cause for alarm on several frontiers. To begin with, the currencies we trade in virtual worlds are not actual money in the classic sense. They are either cryptocurrencies or virtual currencies that are purchased, mined or traded. There may be accounts or wallets to store these currencies, however, there exists no statutory protection in the event of a fraud or wrongful loss. Further, owing to the lack of tangibility of the virtual assets, the value attributed to the same may be blown out of proportion. Since the ecosystem is highly unregulated, scope for cheating, deception and fraud is a major concern in the Metaverse.

Certain Metaverse technologies, such as blockchain or distributed ledger, naturally minimize transaction risks and the need for financial regulation. In reality, blockchain not only makes it difficult to change transaction data without documenting the changes, but it also provides a public record of that data available to all parties involved. However, the Metaverse’s core premise appears to be in conflict with this type of traceability wherein anonymity is safeguarded at the cost of not being able to trace the perpetrators in the virtual universe.

As far as the commercial aspects pertaining to Metaverse are concerned, establishing a fool-proof regulatory framework with high ESG compliance and minimal reputational risk would potentially make it much easier to attract marketers and investors. Incorporating a secure Know your customer (KYC) prerequisite for Metaverse users, for instance, can enable verification of their real-world identities. It is crucial to ensure that there are well-defined protocols in place to handle the financial risks associated with the Metaverse. In addition, the virtual environment could consider outsourcing ID verification operations to a credible third party and offering insurance against personal loss and even third-party harm. The technology that makes the actual financial world run smoothly can be critical in enabling similar activities in the Metaverse, as well as offering capabilities for embedded finance, securitization, wealth generation, and taxation. Regulated environments will consequently require the appropriate plug-ins, APIs, and user experience processes to provide these capabilities.

The necessity for regulation will intensify as the Metaverse evolves and becomes increasingly like the actual world. Asset classes that emerge in the Metaverse could eventually garner interest in the same manner that tangible resources do, necessitating the same levels of monitoring and management systems to regulate them. To render any financial policy in the Metaverse feasible, there ought to be strong ties between virtual and real-life persons, as well as compliance to more or less the same norms that maintain the real economic world secure.

(Karan Garg, Managing Director, TLGS Consulting Group)

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