Metaverse and VR: Ready for Reality?

Today’s great emphasis on Metaverse technology must now be matched by the equally strong development of new types of programs to detect and deter Financial Crimes and to protect reputational risk. The failure to act now can lead to imposed external regulations and controls.

The Metaverse represents more than technological innovation: it is a different way of viewing the world. To date, our experience is founded in reality. In the Metaverse, we are offered an alternate reality, a “virtual reality”. Far beyond games, far beyond embedding fanciful 3D backgrounds into our real world, the Metaverse embodies the capacity to take us to worlds of new designs and experiences. Currently, larger commercial players dominate the development of the new worlds. However, in the fullness of time, the Web3 world will enable individuals to develop and create their own virtual worlds containing such people, places and things that are the products of their own choice.

Just as the Metaverse embodies an “alternate” reality, it is no surprise that it utilizes an “alternate” method of value transfer: cryptocurrency. Cryptocurrency and blockchains are the Virtual World’s “coin of the realm”. In a way, it all makes sense: a virtual world built on a distributed public ledger transferring value through an alternative currency.

The problem: is the Metaverse ready for reality? Has the Metaverse and VR considered real world risks? Surely the technology is advancing. However, does the fact that we “can” do something mean we are “ready?” Have we properly understood the risks, or are we even aware of them?

Most of the published information about the Metaverse centers on two topics: what more can be achieved from technology and how quickly the technology can be translated into significant commercial value. Beyond games, new VR worlds are exploding with a dizzying array of commercial opportunity. Purchase virtual real estate? Pick your site! Construct a virtual home? Easy! Purchase NFT artwork to decorate the walls of your virtual home? No problem! The value transfer will be accomplished almost exclusively through smart contracts, crypto currencies and blockchains.

However, is the virtual world moving faster on the technological and commercial side without effectively considering the risk and control side? This can become a significant problem down the virtual road. Beyond games, virtual chat rooms, NFTs, “virtual” real estate purchases….all of these and many more elements of the virtual world can be used as places where financial crimes can be conducted. Unregulated currencies in a multiple of unregulated virtual spaces…..almost the dream come true for storing, hiding and washing illicit funds or arranging the worst forms of financial crimes such as human trafficking. For developers and those who license or own these virtual platforms, the reputational risk can be enormous.

Consider the development of cryptocurrencies: the first major foray of Bitcoin as an unregulated alternate currency was a disaster: the Silk Road fiasco which hosted a haven of crime, criminal activity, fraud and misuse. This was followed by other big scandals. Today, key global regulators believe that, despite the public nature of blockchains, the crypto ecosystem is a major channel for money laundering, fraud, human trafficking, sanctions evasion, corruption and other serious financial crimes. In addition, the volatility of coins has reinforced regulatory concerns. In just the past year, bitcoin and other major coins have suffered several major collapses, stablecoins have been anything but stable and the NFT market is still largely unregulated. This is hardly a solid base upon which a major component of the VR world can be based.

The lesson learned: the crypto market developed faster than its controls. This mismatch between the speed of innovation and the lack of effective self-imposed controls designed specifically for the market is resulting in the nearly wholesale imposition of traditional regulatory and compliance frameworks. In many cases traditional frameworks (e.g. having exchanges register under the securities laws) simply don’t fit. The controls have the capacity to severely limit the main objectives of alternative currency and can damage the viability of the market itself.

The crypto example should be an important lesson for Metaverse and VR developers. If rapid technology, innovation and quick commercial success leads the development of the VR ecosystem without developing, as an equal tenant, reputational risk awareness together with ethics, responsibility, issue identification and measurable controls, the result can have great adverse reputational and legal risk consequences. Ultimately, these could lead to the external imposition of regulatory controls impairing critical aspects of the VR universe.

Senior management of development firms should consider the enormous reputational risk to their business franchise if their programs are used by criminal elements as a means of perpetrating or disguising serious crime. Management should require serious, deep and independent risk analysis to determine the manner in which their programs and platforms can be leveraged for use for criminal and nefarious activity and to develop appropriate controls.

VR presents an unparalleled opportunity of interest, enjoyment, community and learning and should become part of our future state. However, it is critically important that risk analysis and controls be carefully planned, designed and implemented within the VR fabric. VR is still in its early stage. This is the time to understand key risks and to design and implement effective controls which align with the VR environment. This will not only alleviate reputational and financial crime risk, but can avoiding costly controls being forced upon the VR industry from external sources.

IMAG’s Metaverse Advisory practice is expert in independent risk analysis and global financial crime in traditional, crypto and VR markets. We design enterprise reputational risk programs which create a culture of ethics and responsibility. We are also expert in developing key controls which are capable of measurement and reporting. We assist our clients in building a VR world which is safe, responsible, interesting and important.