The new virtual environments offered through the metaverse will enable innovations that enhance both the customer and employee experience. And this will happen in the curator economy, as well as the creator economy.
As a result of these ‘virtual worlds’, changes in client expectations around product delivery channels and new product design are appearing. The layers of the metaverse have such strong interconnectivity that services can be deployed seamlessly with minimal interruption to the client, for example, when they make a payment or when a microtransaction is processed.
Machine learning, with increasing machine interactions, is changing how banks and large corporates service their customers and clients, for example, engaging with them through a ‘virtual branch’, which saves the customer time and effort travelling to a branch, while at the same time, reducing the cost of running the branch.
But creating products for consumption in the metaverse that are exchangeable in the real world is a new challenge. FinTechs and disrupters are taking advantage of the opportunities within the expanding internet of things (IoT) from new sensors and processing ability. This in turn will impact how firms advertise to clients, as well as the ability to offer immersive employee experiences, such as training.
All of these changes will inevitably have cost implications. Corporates will need to reevaluate how they design products to ensure maximum utilisation, while at the same time ensuring these products are brought to market effectively and safely.
And let’s not forget regulators. Ensuring consumer protection and applying appropriate anti-trust regulations will be a key priority. As buying and selling activities increase in the metaverse, privacy and personal identifiable information (PII) will need to be looked at, as well as the interoperability between different metaverse environments.
Driven by demand from clients, market players will need to determine how they incorporate digital assets into their product strategy and roadmap. Banks will need to consider digital asset custodial arrangements alongside changes to treasury operations, hedging, accounting integration and valuations, and reporting: They will need to make sure their clients have the ability to make their desired transactions with digital assets both seamlessly and immediately. Similarly, corporates will begin accepting digital assets as a payment mechanism. As a result, Treasury will need to change their operating models and ways of working
The next move within Decentralised Finance (DeFi) will be to develop business services that enable low or no network cost transactions. Provision of these business services is an opportunity area for new entrants. Those that get on the front foot will be able to provide compelling propositions that will allow them to compete with the incumbents or to partner with existing banks, FinTechs and corporates.
And with all industries defining and delivering ESG strategies and making net zero commitments, consumers, businesses and regulators will need to clearly understand the impact of digital assets on the environment, as well as exposure to climate risk.
There are several marketplaces that have popped up around NFTs, which allow people to buy and sell. But what does that mean for businesses? At the most basic level, banks will need to enable clients to buy NFTs through their existing accounts. They will also need to consider how they use NFTs to create secure accounts, to automate or govern both standard and bespoke billing contracts, and for NFTs to become interbank products or agreements. In the future, we would expect that NFTs could actually replace existing bank accounts and be used to facilitate Know Your Customer (KYC) processes.
In parallel, FinTechs and disrupters are utilising NFTs as programmable doorways to services which shape propositions and revenue generators. This enables corporates to offer rewards for engagement with NFTs, introducing changes to their products and marketing channels. For example, NFTs can be used as collateral to earn interest or even as security for loans.
The technical innovation and popularity in NFTs could push the incumbents to develop propositions resulting in a wide range of partnerships with disrupters and FinTechs. This could lead to new solutions provided to both retail and commercial customers. And then there is tokenisation. Over time it is predicted that real life assets can be tokenised and added onto the blockchain. There are already companies offering tokenisation of assets to use as collateral for loans. Structures will need to be in place to value the underlying tokenised assets.
Opportunities aside, there are some fundamental questions that need to be answered around classification and legality in different jurisdictions – should NFTs be classified as commodities or should it be its own separate market? There are also blurred tax boundaries: treatment of NFTs will depend on characteristics of the NFT and its linked asset, which isn’t always clear. To facilitate use of NFTs, and critically mitigate the increased potential for money laundering, AML regulations will need to be appropriately defined, ie enhanced customer due diligence, transaction monitoring and obligations to report suspicious transactions for higher threshold amounts.
Despite its potential to reduce the fraud, identity theft and money laundering, distributed marketplaces — the forum for transacting fungible tokens — are disparate and hard to regulate, adding complexity for the regulator. For example with ensuring crime prevention, KYC implications and new financial reporting and tax implications. Consumer protection laws are paramount to ensure transparency of services and safeguarding of customer assets, yet a challenge with crypto that regulators, banks and corporate need to address is how to navigate the pseudonymous and borderless nature of crypto. This leads to questions surrounding financial integrity and difficultly in imposing sanctions due to decentralised nature.
On the flip side, the secure nature of decentralised finance technology means these records cannot be manipulated or obscured. This makes fraud prevention a less costly and difficult activity.
The automated market maker (AMM) also creates possibilities to trade assets in a fully open automated way. To take full advantage of the AMM, banks will need to make adjustments to their existing operating models and processes.
Innovation in payments and technology, alongside the disruption caused by Covid-19 has created interest in CBDCs.
Digital monetary systems lack the features that are critical for sovereign monetary regimes such as the ability to access central banks as a lender of last resort (LOLR). Implementation decisions are therefore needed regarding the architecture for CBDCs, including privacy features and whether they are directed by the central or retail banks.
As with other digital assets, CBDCs will be able to react quickly to regional and global changes. Smaller groups of individuals can be impacted in very different ways meaning the application of monetary policy becomes essential.
Key challenges remain in exploring tradeoffs between anonymity and KYC alongside risks of money laundering. Leveraging AI and big data technology for authentication of customers, as well as prevention of money laundering through automated caps on balances and limits, could help address these challenges in the future.
The use and evolution of shared CBDC platforms is on the rise. This could enable quicker cross-border transactions and reduce the reliance on intermediaries, but varying payments regulations, central bank autonomy and governance of the platform, and access rights will need to be explored.
DAOs are growing significantly, enabling joint propositions to be brought to market. There is increased scope for banks and corporates to collaborate with FinTechs and disrupters opening up the potential to reshape corporate governance completely.
Despite this traction, there are open legal questions regarding how DAOs are established and structured. As a specific example, there is a lack of clarity on asset ownership – Firms will need to address how a DAO can legally own an asset without having a corporate structure.
Internal operations in both banks and corporates will need updating to partner with and make use of the DAOs coming to market. This will have implications for treasury, payment channels and accounting, as well as new legal frameworks for engaging with DAO's as third parties. DAOs are not corporations, but they operate as such in many ways – questions remain on whether they should be taxed, can open bank accounts, can sign legal agreements and subsequently who would have the authority to do so.
ESG implications from DAOs are difficult to understand and complex. How this plays out in the coming years and what ESG strategies are developed by DAOs is still unknown.
Delivering products effectively, while creating the best client experience is essential for corporate and banks. With so many innovations in the market, they will need support from partners to understand and leverage the best technology platforms to do this. Developers are rapidly moving into DLT, such as blockchain, generating significant opportunity for disrupters. Interconnection between blockchains will be an appealing consideration as there is an evolution of mechanisms to connect in order to enable partnerships.
The cost implications and suitability for changing consumer needs will require deliberation when entering into vendor and partnership selections with blockchain and DLT enabled platforms. The implications for data ownership and the rights of clients is a consideration with DLT. Moving beyond GDPR, regulators will need to provide steer on what the role of Credit Reference Agencies could be.
The evolution of smart contracts will allow market players to transact in new, and automated ways, ensuring counterparty trust while removing risk. The role of the bank as an intermediary between corporates is called into question, with value-added services needing to be redefined if the bank wants to continue attracting liquidity.