Although anticipatory talk around an impending metaverse revolution may have quietened so far in 2023, with Meta’s Metaverse Chief Vishal Shah admitting “the hype is dead” – this by no means suggests the future won’t be metaverse-dominated, despite the fact AI has come to rule the technology discussion surrounding Web3.
Franklin Templeton’s Rafaelle Lennox believes the metaverse market could be worth US$5bn by 2030. She says to Forbes: “It’s too big to be ignored. In the first half of 2022, over US$120bn has been invested in the metaverse, double that of 2021, from start-ups to large tech companies, venture capital & private equity.”
Talk of an expanding metaverse has come hand in hand with discussions of a bigger role for cryptocurrencies – which have been touted as a primary means of digital payment in the metaverse.
But cryptocurrencies have seen a growing competitor emerge in recent months, with many centralised banking institutions experimenting with the introduction of Central Bank Digital Currencies (CBDCs). Could CBDCs rival crypto as a primary means of metaverse payment in the future? How much purchasing power will crypto have in the metaverse?
Crypto’s metaverse purchasing power
“In a completely virtual environment where all goods provided are non-physical and the transfer of ownership is instantaneous, everything you might want to buy, is technically a non-fungible token.”
Paysafe’s SVP of Wallet as a Service & Crypto/Web3, Elbruz Yilmaz, expands on this, noting compatibility between crypto’s decentralised nature and the metaverse’s principles of user autonomy and ownership.
“Programmable features of certain cryptocurrencies enable the creation of smart contracts and decentralised applications within the metaverse,” he explains. “For example, users can buy and sell digital assets such as virtual real estate or rare virtual items using cryptocurrencies such as Ethereum or users can hire virtual services from freelancers to design custom avatars or digital artwork.
“Cryptocurrencies can also act as a unified currency for cross-platform transactions, enhancing interoperability.”
Despite the perks of cryptocurrency as a viable option for completing digital payments in the metaverse, Publicis Sapient’s Senior Director of Financial Services, Zack Michaelson, is not so convinced.
While admitting the use of crypto could grow in parallel to the metaverse, “a cumbersome process of setting up a crypto wallet, lack of comfort and ease around custody, negative headlines in the crypto world, and the volatility of the coins themselves all contribute to making cryptocurrencies a less-than-ideal choice for the average user.”
He adds: “With regulatory uncertainty clouding the picture and environmental concerns on many people’s minds, I wouldn’t bet my last bitcoin on cryptos ruling the metaverse. For those who aren’t crypto enthusiasts, to begin with, the ease, familiarity, and stability of paying with money (“fiat” as crypto enthusiasts would say), rather than cryptocurrencies, will be more appealing.
“If consumer interest in metaverse transactions continues to increase, banks and other financial institutions will rise to the occasion, offering easy and secure payment solutions, translating real-world trust into the virtual realm.”
Are CBDCs a viable digital payments option for the metaverse?
It is, perhaps, that banks and central financial institutions are already rising to the occasion, experimenting with CBDCs as a more trusted form of digital payment to rival cryptocurrencies.
Transact365 CCO Scott Major says that while “the metaverse is driving CBDC development to some extent… the preferred payment method remains uncertain due to regulations and conflicting views on central banks and decentralised tokens.”
This is echoed by Yilmaz, who says the success of CBDCs in the metaverse depends on both their technological design and integration with virtual platforms, while interoperability is also important across different metaverse platforms for CBDC adoption.
It could be that CBDCs don’t end up as a payment option in the metaverse at all, with Michaelson sceptical about central banks' interest in retail CBDC offerings, saying “evidence of serious discussions on retail CBDCs is limited.”
He expands: “Large central banks like the US Federal Reserve and European Central Bank (ECB) have not yet decided whether a CBDC would be necessary or valuable and speak primarily about wholesale use cases as the ones they would consider anyway. Central banks are currently only involved in wholesale settlements between financial institutions.
“Whether there is a need to provide these settlements on blockchains (which is what we mean by “CBDC”) is a reasonable question, especially if on-chain transactions continue to grow at large financial institutions.
“That, however, has nothing to do with reinventing the entire purpose and operating model of central banks to become consumer-facing financial institutions. I think it would take a lot more than some trending metaverse worlds to make that happen.”
So, while the scope of CBDCs in the future remains murky, Yilmaz disagrees with Michaelson’s assessment, believing “ CBDCs may play a greater role as a payment method in the metaverse”, in combination with “cryptocurrencies and stablecoins, depending on their respective strengths and market dynamics.”
Payments in the metaverse: The risks
With preferred methods of payment in the metaverse unclear, there is arguably a greater unknown – the future risks associated with completing metaverse transactions, and the security of digital accounts in the space.
For Yilmaz, the risks extend to all of “security vulnerabilities, the lack of regulation, scalability challenges, privacy concerns, fraud and scams, cross-platform interoperability, cryptocurrency volatility, accessibility and inclusivity, the absence of centralised authority, and the need for user education.”
An extensive list with an extensive amount of issues to resolve, DXC Technology’s SVP of Security, Mark Hughes, adds to them. For him, payment security in the metaverse is a question of veracity, “especially in open metaverse environments where it can be challenging to verify the identity of the people you interact with.”
He adds: “How do you know that the person you think you are talking to in the metaverse is who they say they are when their “identity” is that of a digital avatar that may or may not resemble their physical being? Such verification is crucial when it comes to exchanging confidential information or making payments.”
With regulations and identity processes yet to be fleshed out, Michaelson feels the prospect of a metaverse will be just as thrilling for cyber criminals as it will for users. “Scams and theft are real concerns, especially given the current state of security practices, which are yet to mature,” Michaelson explains.
“Balancing innovation while ensuring security will be an ongoing juggling act. Add to this the serious matter of data privacy. With the metaverse churning out vast amounts of detailed user data, it's a dance on a tightrope of ethics and privacy.
“Maintaining user trust through protecting privacy will be integral to the reputations of businesses in the metaverse, especially given the focus of many in that world on anonymity.”
How big can the metaverse’s virtual economic system become?
With the issues of implementing payment infrastructures in the metaverse laid bare, it poses a question of how big virtual economic systems can become.
Michaelson notes that while “there’s considerable momentum building, with tech titans like Meta, Microsoft, and NVIDIA laying down heavy bets on the metaverse”, he cautions that digital industries “should not get carried away before considering the challenges that will have to be solved”.
“First, not everyone is so universally excited about the concept. A recent poll by Axios found more people were 'scared' than 'excited' about the metaverse, with 60% admitting they hadn't heard much about it. That doesn't exactly scream 'widespread adoption', does it?
“There are technical hurdles to clear, too. Developing a standard payment infrastructure, ensuring regulatory compliance, and bolstering security measures are just some of the challenges on the horizon. Throw in the data privacy concerns and the potential misuse of user information, and the picture becomes murkier on large-scale adoption quickly.”
While Transact365’s Major agrees that the virtual economic system is uncertain, “the introduction of mainstream virtual reality (VR) platforms like Apple Vision Pro could cause it to expand significantly.”
Monavate’s Peck agrees, should innovation and architecture ramp up, “the economic system within the metaverse could enable a mainstream way that people make payments.”
He concludes: “The potential is enormous and global, but the metaverse isn’t what people currently think it is. For the metaverse to become what it needs to be, people need to be able to exchange something of value – so until that properly exists, it won’t be utilised in the correct way.”