Whatever form of metaverse ultimately emerges, it will require huge technological developments in terms of network infrastructure, interoperability between platforms and the consumer-interface. What is clear right now, is that forms of payment will be fundamental to “VRcommerce”, which makes the metaverse an important market for all players in the payments space to consider. It seems that a diverse payments ecosystem will need to evolve to cater for all the forms of off-chain and on-chain payment options that could be required.

Payment mechanisms 

The economic infrastructure layer of the metaverse includes the tech that will enable people to buy, sell, and store/use virtual assets and services in the metaverse - and that will need to include payment rails. There is still uncertainty to the extent to which metaverse platforms will be built on blockchain infrastructure or remain off-chain, which will dictate what forms of rails will be needed.

Currently the few existing metaverse platforms each has its own economic system, with its own digital currency for its “in-world” payments (e.g. Sandbox has SAND, Decentraland has MANA and Otherside has APE).  But going forward any of the various digital payment technologies in existence could easily be adapted for use in a virtual environment. New digital payment mechanisms are also constantly being developed.  

As the metaverse starts to scale, seamless payment exchanges between metaverse (and other online) platforms will be critical to ensure a frictionless user experience. This makes interoperability in the metaverse ecosystem – which is a major technical challenge – a key priority.

Money in the metaverse

The scope of what counts as money in the metaverse is likely to be even more diverse than what we have in the Web2 digital economy. Given that the metaverse, or certainly parts of it, could be built on the blockchain-enabled Web3, different forms of cryptocurrency are expected to feature. Indeed, the metaverse could provide an opportunity to deploy cryptocurrencies on a broader scale as a viable form of payment.

But given the multi-chain trend in the current crypto ecosystem, it seems most likely that cryptocurrencies will coexist with fiat currencies, in-game currencies, private stablecoins and central bank digital currencies (CBDCs), a view supported by Citi Global Solutions in their in-depth report Metaverse and Money. 

The role of digital wallets and NFTs

One suggestion for delivering the interoperability that is key to an open metaverse ecosystem is for participants to have a single “metaverse” wallet. This would store the forms of metaverse money that they can use to purchase virtual assets and services which would work across different metaverse platforms.

Digital wallets can store all forms of digital asset from crypto to non-fungible tokens (NFTs). An NFT can link to a customer’s identity, providing a secure login into virtual or real world experiences which can then be securely tracked with permissions controlled directly by the customer (instead of by third parties such as Facebook or Google).

NFTs therefore present opportunities for brands (particularly those in retail and entertainment) to leverage the evolving capabilities of these digital assets when combined with smart contracts as “next generation” loyalty and rewards cards.

Crypto solutions and opportunities

A well-functioning VReconomy will need to be based on a solid and secure financial infrastructure, in which payments can be executed in real time and with low transaction costs. Crypto advocates would suggest that blockchain based cryptocurrencies provide the solution to this as well as a more secure way to make payments with a higher degree of anonymity and privacy than is afforded by traditional payment methods.

This would also provide real opportunities for players in payments markets in supporting the adoption and on-ramping of cryptocurrencies, so that fiat currencies can be exchanged for crypto seamlessly for use in the metaverse.

Cryptocurrencies will need to achieve scale and engender consumer confidence in order to compete successfully with the other forms of payments which could be deployed in the metaverse. However in a recent report, Forbes recommends that “with federal regulations likely to emerge, cross-chain operability issues likely to be resolved to be developed, and the simplicity of transacting commerce with crypto, brands should begin exploring their readiness for accepting payments via crypto”.

In-game payments moving on-chain?

In-game payments is also a huge area for development and greater interoperability between platforms. At the moment individual in-game currencies have been developed and are limited in not being transferrable between games (e.g. Fortnite uses V-Bucks, Roblox uses Robux, Call of Duty has COD Points, and Minecraft uses Minecoins).

However, commercial drivers for greater interoperability could be countered by regulatory challenges. From a legal perspective in-game currency payments can often be made without the need for licensing under, for example, the EU and UK payment services or e-money regimes. But as soon as in-game currency becomes between-game currency, exchangeable for fiat, or a blockchain-based application that could raise regulatory headaches.

Uncertainty around licensing requirements is likely to continue as new crypto-specific regulation is being considered and developed in the major economies. This is most notable with respect to the EU’s proposed Markets in Crypto Assets Regulation (MiCAR) which seeks to regulate unbacked crypto assets and regulate stablecoins more strictly.

The regulatory challenge

As with the Web2 digital economy, regulators face multiple challenges in policing the emerging virtual economy where novel financial products and systems involve elements of decentralisation, anonymity and automation as well as potential vulnerabilities to tech failures and hacking.

The prevention of fraud, money laundering and other cyber and financial crime such as theft or counterfeiting of digital assets will be a particular concern. Lessons learned from the emerging crypto-specific regulatory frameworks will need to be leveraged in order to provide the consumer protections needed to engender the trust essential for mass metaverse participation.

The cross-border nature of metaverse will also challenge existing jurisdictional licensing arrangements. For example, could a US bank offer financial services to users in the EU via a metaverse platform? How to set jurisdictional reach within a universal virtual space, without fractioning and impairing the user experience will be a key question to answer.

Well thought out regulation is key

The metaverse poses potential risks to markets as well as consumers. Regulators will be attuned to the risk of contagion effects impacting the stability of traditional financial markets. It is inevitable therefore that the metaverse will attract scrutiny from regulators and policymakers across the world.

We should not underestimate the scale of their challenge, especially given the need for international coordination. There are already question marks about whether regulators have the resources and expertise to manage existing frontier technologies, let alone the metaverse.

Equally we should appreciate the importance of the task. Ultimately, well thought out regulation will be key to a well-functioning, efficient and secure financial framework for the metaverse. And this financial framework will be fundamental to the development of VRcommerce, for the benefit of all future virtual market participants.

Read the full Metaverse blog series here Contemplating the metaverse: Opportunities and risks (linklaters.com)