Digital assets’ role in the metaverse poses risks to financial stability: BOE researchers

Bank of England (BOE) researchers have warned of 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 digital assets growing interconnectedness with metaverses could put bank profits and the financial stability of economies at risk. 

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

Digital assets such as digital currencies, non-fungible tokens (NFTs), governance tokens, and utility tokens fulfill functions including unlocking value across multiple blockchains; proving ownership, authenticity, and uniqueness of virtual property; rewarding miners and validators; and as stores of value.

However, digital assets remain highly volatile and risky, as has been remarked on by several regulators, like the Bank for International Settlements (BIS), the Financial Stability Board (FSB), and the International Organization of Securities (IOSCO), the researchers note. Stemming from this, should metaverse platforms continue to take a more center stage role in everyday life, they would amplify the risks of digital assets. 

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

“All else equal, the larger the size of the cryptoasset market, the larger the risks are and the more systemic they might become. An important step is therefore for regulators to address risks from cryptoassets’ use in the metaverse before they reach systemic status,” the research added. 

UK keen on becoming a digital assets hub through regulatory clarity 

The research is not the first time the BOE has warned of systemic risks posed by digital assets. Previously, the U.K. central bank warned investors against engaging with digital assets as they risk losing all their money. BOE Deputy Governor Jon Cunliffe also recently revealed that the planned digital pound would not have anonymity features, according to a Bloomberg report

However, the U.K. is still becoming a digital assets haven with consumer safety and protection at heart on its agenda. The government is working on several proposed legislations and amendments to bring this vision to fruition in the coming days.

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