Our digital and online lives have expanded more quickly as a result of the Covid-19 pandemic, with video conferencing technologies quickly becoming a part of our daily lives and virtual currencies continuing to gain popularity as a means of value exchange.
The ongoing challenge of regulation, which is to keep up with the risks and opportunities that new technologies present, has been accelerated by the pace of this change. It could be argued that regulation has found it difficult to keep up with the development of blockchain technologies, leading to a disjointed global regulatory environment for cryptocurrencies.
Given its potential impact on business, ethics, financial crime, and safety, the "metaverse," a universe of virtual worlds built on blockchain technology and dubbed by some as the "next evolution of the internet," should be of keen interest to everyone in the regulation and compliance space.
A recent ICA webinar with Tara Annison of Elliptic, Jeeva Moni of EY, independent anti-money laundering and financial crime expert Dev Odedra, and Charles Kerrigan of CMS as panelists focused on these issues.
According to Annison, the introduction of blockchain has put digital ownership in the forefront of the metaverse, setting it apart from earlier virtual worlds.
"We’re moving from metaverses like Minecraft that are owned by a central intermediary toward metaverses (and all components within them) that are owned by the users themselves, with all core components within them being built on a blockchain so they can be immutably owned and traded," according to her. People are already spending a lot of money on non-fungible tokens (NFTs) in these environments, such as digital wearables and digital real estate.
Odedra talked about his experience looking into financial crimes in Second Life, one of the first metaverses. He claimed that as the value of transactions occurring in these virtual environments has increased, so has the potential for money laundering.
With $500 million worth of activity across Decentraland and The Sandbox in 2021, Annison acknowledged that the metaverse's economic activity is not insignificant. However, she argued that from the perspective of money laundering, the metaverse does not yet offer enough liquidity to be a top target for major organized criminals, "certainly when you compare it to the trillions of dollars in market cap across crypto generally and the billions of dollars that move across the NFT market."
sBig-ticket items, like digital real estate, could provide an alluring avenue for potential money launderers, she continued adding that given the subjectivity surrounding the valuation of such items, digital wearables offer opportunities for trade-based money laundering.
When it comes to the governance and control of activities within the metaverse, decentralization is a crucial issue. "Can we regulate the metaverse?" is the question that needs to be answered. Compliance professionals should be involved in that conversation, according to Kerrigan.
"In general, where there is a provider of a service, there is someone to regulate," he said. "In contrast, in a decentralized environment everyone is both a service provider and a customer. The challenge is that most people aren’t familiar with what is involved in operating within a regulated environment. Regulators are concerned about crime and consumer protection. The compliance industry has a role to play here because it understands these topics."
Moni agreed, pointing out that because the metaverse is still developing, compliance should be involved in developing the rules and regulations that will guide behavior in these virtual spaces and protect both consumers and companies.
He enquired, "how is trade going to be settled in the metaverse? Should we be replicating the same physical controls we have in the real world within the metaverse or finding a different way? As financial crime professionals, we should be thinking about these questions. For example, can we use technologies like blockchain to codify standards and find a new way of fighting financial crime?"
The metaverse is still in its infancy, but if recent history is any indication of likely future developments, it will evolve quickly and could present significant business and compliance challenges and opportunities. Practitioners of compliance must participate in the conversation.
By fLEXI tEAM