17.03.2023 15:17

Will Basel IV Apply to Banks in the Metaverse?

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Several banks have been experimenting in the metaverse. While the virtual reality space is often utilised for gaming and entertainment, it may soon be used for banking. Global Business Outlook reveals that some major banks, including JPMorgan and HSBC, have joined the metaverse.

JPMorgan opened a Decentraland virtual lounge, enabling people to explore their space and offering them financial services. Meanwhile, HSBC acquired land in The Sandbox, a virtual world for interaction. Currently, they provide brand experiences for their customers but also plan to offer banking services.

While banking in the metaverse appears convenient, the virtual world is unregulated. Consequently, the public can be sceptical about its security. This raises the question: will Basel IV—a set of standards for credit and operational risks—be applied to banks in the metaverse? Keep reading below to find out.

Current Regulation Status of Banks in the Metaverse

The metaverse is unregulated. No rules or authorities protect the people and processes in the metaverse. This is why our post ‘3 Ways to Create Sustainable Wealth in the Metaverse’ highlights how it’s easy to perform different activities, such as conducting business, buying virtual real estate, and making investments on the platform.

Unfortunately, being unregulated also means that potential crimes within the metaverse—like fraud or identity theft—will be unaddressed and unresolved.

Banking services, including withdrawals and deposits, that will eventually occur in the metaverse will likewise be unregulated. This puts clients’ financial safety at risk, so a handful of banking regulatory bodies are looking to set regulations for protection.

Plans to Regulate Banking in the Metaverse

The lack of financial regulations in the metaverse puts banks and clients at risk. It contributes to clients’ hesitation in using these services, leading to several banking regulatory groups pushing for metaverse banking regulations.

One is the Basel committee, which is responsible for formulating the Basel framework. Wolters Kluwer details how this framework enables banks to meet goals beyond regulatory compliance. Basel-compliant banks have examined the risks they may encounter, leading them to reform their business strategies to mitigate these and continue operating and growing.

While the exact metaverse banking regulations have yet to be developed, banks that plan to establish themselves in the metaverse can start building consumer trust by adhering to the Basel committee’s rules on crypto-assets finalised in 2022. These cover risk exposures regarding banks’ cryptocurrency and stablecoin operations.

One of its highlights includes having a 1250% risk weighting for unhedged cryptocurrency to protect banks’ loaning services. Adhering to these is the first step banks can take to build consumer confidence and trust while waiting for metaverse regulations.

If or when the metaverse regulations appear, here’s what banks can expect.

What This Means for the Future of Banking

The World Economic Forum reports that the metaverse technologies will take at least five years to mature. Presently, the metaverse is in its early adoption and traction stage. Industries, like content production, are still slow to adopt and utilise the virtual world. In 2-5 years, ecosystem maturity is expected.

This refers to more adoptions and standards development for industries planning to use the metaverse, including finance. Given this, regulations for banking within the metaverse can be presumed to arrive during this time frame.

This gives banks time to build trust with clients by exhibiting their expertise in handling cryptocurrency and similar digital assets, which will most likely be traded on the metaverse once banking services are more common. They can achieve this by complying with the Basel committee’s crypto-asset regulations discussed above.

To answer the question, Basel IV may apply to banks in the metaverse. If not Basel, there’s still a huge potential that a set of regulations will be implemented for financial services in the virtual world in the next few years.

Thank you!