Bank of England analysts talk about the need for regulation and the significance of crypto in the metaverse.

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According to Bank of England analysts, cryptographic assets might play significant roles in the metaverse. They continued, “Rich regulatory frameworks for consumer protection and financial stability would be necessary for widespread adoption of crypto in the metaverse.”

Bank of England’s economist Owen Lock and policy analyst Teresa Cascino published a blog post titled “Cryptoassets, the metaverse and systemic risk” Tuesday.

“Cryptoassets could have important roles within the metaverse,” they began, cautioning:

If an open and decentralized metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences.

“Widespread adoption of crypto in the metaverse, or any other setting would require compliance with robust consumer protection and financial stability regulatory frameworks,” they stressed.

Lock and Cascino explained that “The open metaverse will require a means with which to own and transact digital objects which are interoperable between virtual worlds,” elaborating: “We think cryptoassets are well placed to play an important role here.”

They detailed:

If a sizable open-metaverse materialized, households may hold a greater share of their wealth in cryptoassets to make metaverse-based payments or for investment purposes.

Furthermore, corporates may increasingly accept crypto payments for goods and services, and sell digital assets, such as clothing non-fungible tokens (NFTs), in the metaverse, they added.

The authors also noted that non-bank financial institutions might increase their holdings in cryptocurrencies if a developing open-metaverse enhances the potential returns on investment for cryptocurrencies and the infrastructure that supports them.

This metaverse’s evolution is uncertain, according to Lock and Cascino, who added that their theory is merely a possibility.

However, if these exposures came to pass, they cautioned, “a cryptoasset risk crystallizing could result in: balance sheet losses for households and corporates; an impact on unemployment; fire-sales of traditional assets from non-banks to meet margin calls on cryptoasset positions; and adverse profitability impacts on exposed banks.”

“All else equal, the larger the size of the cryptoasset market, the larger the risks are and the more systemic they might become,” the authors concluded, emphasizing:

An important step is therefore for regulators to address risks from cryptoassets’ use in the metaverse before they reach systemic status.