Metaverse: From traditional finance to virtual finance

The financial world is not unaffected by the emergence of metaverse. Traditional finance is meeting the new virtual worlds. Some banks and insurance companies are entering this world, which is far from their traditions. Some institutions have even set up branches there. But what are these financial institutions looking for by positioning themselves on this market segment?

Some big names in finance

JP Morgan became the first bank to enter the metaverse by opening a lounge in the virtual world Decentraland. This banking giant expects potential financial gains in this new digital world. “The bank’s Onyx lounge, named after the bank’s suite of Ethereum-based permissioned services, offers institutions and businesses the opportunity to enter the metaverse. Here in the Onyx lounge, located in Metaiuku, a virtual version of Tokyo’s Harajuku shopping district, a tiger roams the second floor, overlooked by a portrait of the bank’s boss Jamie Dimon, while on the second floor, a person’s avatar can watch experts talk about the cryptocurrency market,” Fintechmagazine[i] reads.

Visit JP Morgan’s Onyx lounge

Major financial institution HSBC is closing physical outlets but has decided to open some in the metaverse. It has just revealed that it is entering the metaverse to engage with its customers. It has acquired a digital plot of land in the gaming platform The Sandbox. The amount of this purchase was not disclosed, but it shows the interest that the financial world has in this type of digital development. This bank sees great potential in the metaverse to create new experiences through emerging platforms. With this acquisition, it is targeting both new and existing customers.

The insurer AXA also made its first acquisition in the metaverse in February 2022. It is the acquisition of a piece of land in The Sandbox to become familiar with this new virtual world. This is an opportunity for the company to analyze the business opportunities in this universe and to cultivate a “tech” image for future recruitments.

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Decentralized Finance Explained in An Understandable Way

Unlimited possibilities?

JP Morgan has published a white paper entitled “Opportunities in the Metaverse”[iv], which outlines the possibilities the bank sees for financial developments in the metaverse. The report estimates that $54 billion will be spent on virtual goods, nearly double the amount spent on buying music online.

As far as messages are concerned, about 60 billion messages are sent every day on Roblox. NFTs currently have a market capitalization of $41 billion and nearly 200 strategic partnerships have been formed to date with The Sandbox. “New methods of transacting and owning digital assets allow creators to monetize their activities through tokens. In addition to monetization, and as a means of exchanging value, token holders can also participate in the governance of the platform (e.g., vote on decisions). This democratic ownership economy, coupled with the possibility of interoperability, could unlock immense economic opportunities, as digital goods and services are no longer captive to a single game platform or brand,” the report states.

DeFi: the blockchain-based decentralized finance approach

From DeFi to DAO

Payments in the virtual world will need to integrate both traditional credit card payments and new forms of payment (tokens, cryptocurrencies…).  In these worlds, payments are primarily made via “cryptowallets”, digital wallets and assets are held as NFTs.

Over time, the virtual real estate market could begin to see services like those in the physical world, including credit, mortgages, and leases. With the emergence of decentralized finance (DeFi), a next-generation finance company could potentially be created that uses digital objects as collateral to underwrite mortgages on virtual land and property.

A new form of financial offering is also emerging. Like crowdfunding in the real world, financing organizations are being created that are not traditional lending institutions. Instead, they function as a self-organizing community of people (or avatars). This community then gives itself a mission and registers as a Decentralized Autonomous Organization (DAO). This decentralized organization has rules of governance that are automated and registered in an immutable and transparent way in a blockchain[v]. In general, it is a smart contract developed on the Ethereum blockchain. Its operation resembles a decentralized venture capital fund.

Initially, the DAO was a tool to finance projects developed on the Ethereum blockchain. Unlike decentralized finance (DeFI), the DAO is owned by those who created and funded it. DAOs can provide specific governance mechanisms for platforms to ensure efficient product management while reducing human error. For example, they set the parameters for virtual land auctions and define rates of return.

In a DAO, the rules are always immutable and transparent. Therefore, all members of the DAO could review its operations while checking the correct application of the rules. “The governance of the MDAO (metavers DAO) proposes investments in the development of play-to-earn games, NFT-based games, and immersive experiences in metavers. In addition, the platform also aims to leverage direct investments in teams and companies working on a long-term vision for the development of play-to-earn games. of play-to-earn games and metaverse.

DeFi: Decentralized finance ready to change the rules of the game?

Decentralization really?

The DAO operates in a decentralized way outside of any financial system. It is in the context of decentralized operations that the term Web3 is used. It defines the new decentralized evolution of the Internet world. But how is this world so different from Web2? Web3 is thought to be more decentralized and no longer in the hands of GAFAMs alone. But, new forms of centralization are being created through large investment funds. “Web3 is somewhere between A and Z, referring to the American venture capital fund A16z (created by the famous duo Andreessen-Horowitz). This investment fund, located in Menlo Park in Silicon Valley, is now turning to massive investments in Web3 projects. You don’t own Web3. Investment funds do. Projects such as the cryptocurrency buying platforms Binance or Coinbase are not interesting because they take advantage of an effectively decentralized product (Bitcoin) to centralize it on an exchange that looks like a crypto bank,” notes Jack Dorsey, founder of Twitter. Crypto currencies that claim to be decentralized therefore end up being centralized on exchanges.

Adaptations in sight!

The challenges for the financial world are many. Financial intermediaries will have to adapt to developments in virtual currencies and digital asset-backed financing and mortgages. They will have to develop lending models based on decentralized finance (e.g., virtual world mortgages backed by NFT collateral). They will also need to find solutions for cross-border and cross-media exchange and liquidity and between the real and virtual worlds.

But one of the biggest challenges for these platforms will undoubtedly be cybersecurity. In March 2022, the gaming platform Axie Infinity was robbed of $600 million (€538 million) through the theft of two crypto asset transactions[viii]. There were 44 attacks in 2021 in decentralized finance that resulted in losses of around $1.3 billion. The bridge between the gaming platform and the blockchain where the currencies are converted is where the problem has been.

In many ways, the financial world will face significant challenges if it wants to be a stakeholder in the metaverse world.

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