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The Rise of the Metaverse: A Brave New World for Risk Managers?

FRMs must consider all of the challenges and opportunities presented by this shared virtual environment, which could impact everything from credit and market risk to cybersecurity.

Friday, April 15, 2022

By Tod Ginnis

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Metaverse is one of the hottest buzzwords in technology. Given its potential impact on financial services firms, it’s a good idea to examine this new digital reality and to consider what it might mean for careers in financial risk management.

What Is the Metaverse?

The metaverse combines real and virtual worlds. It is populated by digital, 3D representations of people, called avatars, who can interact in an endless variety of situations, from socializing to shopping to learning about new banking products. The virtual worlds use, among other technologies, virtual reality (VR), augmented reality (AR) and artificial intelligence (AI).

The most well-known metaverse applications are gaming oriented, like Roblox and Minecraft. Transactions are facilitated by NFTs, which are scarce, digital assets that are ideal for representing ownership in the metaverse.

Jason Ekberg, a Shanghai-based Oliver Wyman partner, believes the metaverse is ready to move beyond the gaming world. Global banks, including HSBC and JPMorgan Chase, have begun metaverse projects, and there are NFT financing platforms.

Jason Ekberg, Partner, Oliver Wyman

According to Ekberg, interest in the metaverse has exploded due to the discussion around web 3.0, the next generation of Internet, that focuses on decentralized applications. Banks that make the transition to web 3.0, he notes, will be able to “grow more seamlessly” and more dynamically operate in virtual worlds. “The ability to scale and integrate is fundamentally different,” says Ekberg. “Web 3.0 in the metaverse with a decentralized identity gives individuals more control over their data and gives businesses confidence in who they’re dealing with.”

Risk in the Metaverse

The metaverse contains both familiar and new risks. Ekberg sees virtual property rights and jurisdictional considerations as obvious ones. There are also risks surrounding financial market regulation like anti-money laundering (AML) and know-your-customer (KYC), and market risk for anyone trading NFTs.

Ekberg questions how firms will measure credit risk in the metaverse. Instead of traditional credit reports, for example, will they base decisions on how many friends a potential obligor has in the metaverse, or perhaps on the sophistication of his or her avatar? In short, even familiar risks might require new data approaches.

Of course, the metaverse also has implications for cyber risk, particularly with respect to regulation. Some question the need for governance in a decentralized world, because the algorithm and the crowd control it.

Ekberg, however, is quick to point out that data in the metaverse resides in “multiple versions and clouds and jurisdictions with varying standards.” He also notes that use cases are still low, and scale is limited, so “it will be interesting to see what kind of cyber risks emerge" when the metaverse expands.

The metaverse could also be a natural fit for financial services from a digital payments perspective. “Firms should be able to embed and enable payments in the metaverse to deliver better access and a superior experience,” Ekberg explains.

There may, in fact, be many ways for the metaverse to drive value at a financial institution, from opening accounts to selling NFTs to fractional ownership for trading. Ekberg suggests the virtual world will develop somewhat like the physical world, with people raising money, buying and selling real estate, and establishing credit.

New Opportunities for Risk Professionals

Risk management will likely play an increasingly prominent role as the metaverse develops. “I think it’s a very exciting time to be in risk; the disruption is inevitable,” Ekberg says.

As nodes and interactions expand, the growth of the metaverse will result in increased complexity. Indeed, with people and connections potentially growing “exponentially,” Ekberg notes, the metaverse could create a “brave new world” for risk professionals.

He also stresses that to really understand something, you need to participate in it. Senior risk leaders might have difficulty keeping up with the metaverse, because it is growing at such a rapid pace. Aspiring FRMs and early-career risk professionals could therefore benefit from their experience in gaming, NFTs and crypto. “There’s a great opportunity for risk managers to catapult their careers, because this is the next big thing,” Ekberg says.

 

Tod Ginnis is a content specialist at GARP. He is the author of a GARP blog that is aimed at early-career risk managers and professionals aspiring to earn their Financial Risk Manager (FRM) certification.




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