Written by James Thomas on Monday 11 July, 2022
The global pandemic accelerated the expansion of our digital and online lives, with video conferencing technologies rapidly becoming part of our daily routines and virtual currencies continuing to grow as a means of exchanging value. The speed of this change has turbocharged the familiar challenge facing regulation, namely, of keeping up with the risks and opportunities that new technologies present. Arguably, regulation has in particular struggled to keep pace with the emergence of blockchain technologies, resulting in a fragmented global regulatory landscape for crypto.
The momentum gathering behind the metaverse – a universe of virtual worlds built on blockchain technology and dubbed by some the ‘next evolution of the Internet’ – should therefore be of keen interest to everyone in the regulation and compliance space, given its potential impacts in terms of business, ethics, financial crime and safety. These issues formed the focus of a recent ICA webinar, chaired by ICA Vice President Pekka Dare, featuring panellists Tara Annison, Elliptic, Jeeva Moni, EY, Independent AML and Financial Crime Expert, Dev Odedra, and Charles Kerrigan, Partner CMS.
Decentralisation, trade and money laundering risk
According to Annison, the advent of blockchain has positioned digital ownership front and centre within the metaverse, distinguishing it from previous virtual environments. ‘We’re moving from metaverses like Minecraft, that are owned by a central intermediary, towards 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,’ she explained. Within these environments, people are already spending considerable sums on NFTs, including digital wearables and digital real estate (one notable example being a piece of land in The Sandbox next door to Snoop Dogg’s property, which sold for $450,000).[1]
Odedra – who shared his experience of conducting financial crime investigations involving Second Life, an early metaverse – suggested that the scope for money laundering has increased in line with the value of transactions taking place within these virtual environments. Annison agreed that volumes of economic activity within the metaverse are not insignificant, with $500 million worth of activity across Decentraland and Sandbox in 2021, but suggested that, from a money laundering perspective, the metaverse does not yet offer sufficient liquidity to be a prime target for major organised 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’.
‘Big ticket items’ such as digital real estate could, nevertheless, provide an attractive avenue for potential money launderers, she continued, adding that digital wearables in particular offer opportunities for trade-based money laundering, given the subjectivity that exists around the valuation of such items.
Shaping the rules of play
Decentralisation is also a key question when it comes to the governance and regulation of activities within the metaverse. In response to the question ‘Can we regulate the metaverse?’ Kerrigan suggested that there is an obvious need for compliance practitioners to be involved in that conversation. ‘In general, where there is a provider of a service there is someone to regulate,’ he suggested. ‘In contrast in a decentralised 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 concurred, pointing out that, while the metaverse remains in its formative stages, compliance should engage with the shaping and setting of standards and controls that will govern activities within these online environments and ensure protection for consumers and businesses alike. ‘How is trade going to be settled in the metaverse?’ he asked. ‘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 remains in its infancy but, if recent history provides any guide to likely future developments, its evolution will be rapid and the challenges and opportunities that it presents from a business and compliance perspective could be significant. Compliance practitioners must involve themselves in the discussion.
[1] Kylie Logan, ‘Snoop Dogg is developing a Snoopverse, and someone just bought a property in his virtual world for almost $500,000’, Fortune, 9 December 2021: https://fortune.com/2021/12/09/snoop-dogg-rapper-metaverse-snoopverse/ – accessed July 2022