The role of digital assets in the metaverse poses financial stability risks, say BOE researchers

Researchers at the Bank of England (BOE) have warned of the systemic risks that digital assets could pose if their adoption in the emerging open metaverse space continues to grow.

In the blog post titled “Cryptoassets, the metaverse and systemic risk”, Owen Lock of the BOE’s Resilience Division and Teresa Cascino of the bank’s Fintech Hub highlighted how the growing interconnection of digital assets with metaverses could put banks’ profits at risk and the financial stability of economies.

The post notes that the open metaverse, which are community-developed metaverse platforms, as opposed to those developed by centralized entities like Meta (NASDAQ: META)—is heavily reliant on digital assets to motivate developers, content creators, and users.

Digital assets such as digital currencies, non-fungible tokens (NFTs), governance tokens, and utility tokens perform functions such as releasing value across multiple blockchains; prove ownership, authenticity and uniqueness of virtual property; reward miners and validators; and as stores of value.

However, digital assets remain highly volatile and risky, as noted by several regulators, such as the Bank for International Settlements (BIS), the Financial Stability Board (FSB), and the International Securities Organization (IOSCO). note the researchers. . As a result, if metaverse platforms continued to play a more central role in everyday life, they would amplify the risks of digital assets.

While noting the uncertainty of the fears, the research envisions a scenario in which households hold more of their wealth in the form of digital assets, while businesses may increasingly accept digital assets as payment. for goods and services.

“All other things being equal, the larger the size of the crypto-asset market, the greater the risks and the more systemic they could become. An important step, therefore, is for regulators to address the risks of using crypto-assets in the metaverse before they reach systemic status,” the research added.

UK aims to become digital asset hub with regulatory clarity

The research is not the first time the BOE has warned of systemic risks posed by digital assets. Previously, the British central bank warned investors against digital assets because they risked losing all their money. BOE Deputy Governor Jon Cunliffe also recently revealed that the planned digital book will not have anonymity features, according to Bloomberg. report.

However, the UK continues to emerge as a digital asset haven with security and consumer protection at the heart of its agenda. The government is working on several bills and amendments to realize this vision in the coming days.

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