Good evening.  It is my great pleasure and honor to be here at EUROFI Prague.  I wish to thank David, Didier, and Marc for organizing this important event.  Eurofi was launched more than 20 years ago during a time of great change and consolidation—in the middle of the launch of the common currency—designed for more efficient payments and price transparency, bringing its own promises and challenges.  Now, perhaps it’s no surprise that many are exploring the promises and challenges of virtual currency.

I also wish to thank the Czech Presidency of the European Council for hosting us in Prague. It is an opportunity for central bankers, finance ministers, regulators, and other policymakers to come together with key leaders to discuss the world’s most pressing issues and potential solutions.  It is in times of great challenge that it is more important than ever to remember that connection to others is one of the most defining characteristics of humanity.  Throughout all my exchanges with policymakers, both domestically and in Europe and Asia, I am struck more by the commonalities we share, and not so much by any differences.  I’m so pleased to be here, to reconnect with many, and to make new connections with you all.

It is fitting that we are looking into the present and future of banking and markets, including the further digitalization of finance.  We should remember our past as we imagine the future, particularly as we continue what’s been called a “150-year revolution” of financial technology.

Last year was the 100^th anniversary of the premiere of Karel Čapek’s play here in Prague that first used the word “robot.”  Today, we see much in financial technology that would have seemed science fiction not too long ago.

As you may know, I used to work in regulatory strategy. Now that I have returned to the public sector, it seems only appropriate that I share some thoughts on a regulator’s strategy for what may well be the next chapter in the digitalization of finance—science fiction come to life, the metaverse.

In approaching this topic, it is my hope to raise some key questions—what is the metaverse?  Why do we care?  What should we do as policymakers? that will spark ongoing dialogues and provide one approach to addressing the opportunities and risks to not only the financial system, but perhaps even society and community itself.

Before I proceed, I’ll say now that these are my views and do not reflect those of the CFTC or any other Commissioner.

The metaverse is here now

The metaverse is here now.  Corporations, venture capital, and private equity have already invested more than $120 billion into the metaverse space in the first five months of 2022.

I would like to share some statistics.  A recent McKinsey & Company report found that some 95 percent of business leaders expect the metaverse to have a positive impact on their industry within five to ten years, and 61 percent expect it to moderately change the way their industry operates.  The report also found that the industries most likely to be impacted by the metaverse include consumer and retail, media and telecommunications, and healthcare—and those industries are also among those already undertaking metaverse initiatives.  These are major mainstream consumer brands, beyond large technology companies like Meta (formerly Facebook), Microsoft, Apple, and Alphabet (Google).

In the near term, the metaverse may generate up to $5 trillion in impact by 2030—if not more.  High potential consumer use cases include e-commerce, and high potential enterprise use cases include banking, discrete manufacturing, professional services, retail, telecommunications, media, and process manufacturing.  The examples beyond the financial sector show the value proposition in the real economy.  Major corporations and others have invested significantly, and I note that one of the top corporate capabilities they’re focused on to deliver these metaverse strategies is legal, risk, and compliance.  This isn’t all the Wild West.

I believe that studies like these show that the metaverse is far more than speculation on crypto assets—it is “the real business of the virtual world.”  Some describe the metaverse as the next iteration of the internet, something we are immersed in, a three-dimensional version.  I also find compelling the vision of the metaverse offered by some that focuses on the ability to have a unique identity coupled with an economy.

The metaverse may very well be our next life: a life where the lines between our physical and digital lives are increasingly blurred, where we seamlessly switch or exist in layered experiences simultaneously, which ultimately creates a new dimension to society and community.  It could even materialize a “network state” of the minds, not the lands.

We’ve long seen conceptions of the metaverse in the realm of science fiction.  William Gibson’s Neuromancer described people connected to what he called cyberspace almost 40 years ago, and Neal Stephenson’s Snow Crash imagined the metaverse a few years later.  And more recently, the movie Ready Player One presented an immersive virtual reality world called the Oasis.

In some ways, online gaming is a preview, a “proto-metaverse,” of what’s in store.  Online video games provide experiences of digital, interactive worlds involving identities and economies.  I expect some parents here agree: not only is the metaverse here, but they wish their kids would spend less time there.  And gaming is already big business.  I was surprised to learn that gaming is larger than other subsectors of the entertainment industry like movies and music, with more than three billion users globally and a total value of more than $200 billion.

The metaverse or not

I would distinguish the idea of the metaverse from Web3.  In my view, what’s been considered Web3—a decentralized internet of ownership where users can own, monetize, and utilize their data to their own benefit, enabled by blockchain, digital assets, and smart contracts—isn’t a necessary condition or required for the metaverse.  But Web3 could unlock more of the open metaverse’s potential.  That is why I believe we must be forward-looking and deliberate in addressing the policy issues of Web3 and digital assets in order to protect users but not inadvertently derail our next life.  The great debate over crypto may be only a waypoint on the journey to the metaverse.

As a side note, it’s also my view that augmented reality (AR) or Virtual Reality (VR) is not required to experience the metaverse.  When I was in Seoul earlier this year for Korea Blockchain Week, I saw the metaverse with my own eyes on a regular screen.  AR/VR is an enhancement right now.

What happens when life goes digital?

Look further into the future and ask what happens when more of our lives, financial and otherwise, become digitized in the metaverse.  The top five metaverse activities that consumers are excited about are social, entertainment, gaming, travel, and shopping.  The top five enterprise use cases that companies are already implementing in the metaverse are marketing, employee learning and development, business meetings, events or conferences, and product design (digital twinning).

The public sector is also exploring use cases in the metaverse.  Dubai’s Virtual Assets Regulatory Authority (VARA) is the first regulator in the metaverse, establishing a headquarters in The Sandbox platform.  Seoul is the first city government that is set to join the metaverse with a virtual Seoul City Hall, plaza, and civil-service center and announced a five-year “Metaverse Seoul Basic Plan” in order to provide “civic freedom, participation, engagement, and communication,” and South Korea’s Ministry of Science and Information and Communication Technology recently released a consultation on eight ethical principles for the metaverse ecosystem: authenticity, autonomy, reciprocity, respect for privacy, fairness, data protection, inclusiveness, and accountability.

In financial services, use cases include marketing, infrastructure, and new products and services.  Potential opportunities in a future metaverse that embodies a next life could include multicurrency cash management for native metaverse wallet owners; servicing, like virtual real-estate mortgage origination and warehousing; funds and investing services for metaverse projects; enhanced customer engagement like unique loyalty experiences; but also potential financialization of everything through the use of digital assets in the metaverse, which may present unique challenges for financial regulators.

Metanomics and utility

One aspect of the metaverse will be facilitating use and engagement through digital assets sometimes called utility tokens.  These have sometimes been defined as digital tokens that provide digital access to a good or service, are available on blockchain, and that are valid within a particular economy.  These are things, not financial instruments.  Put differently, just because you can financialize something doesn’t mean that it is always financial in nature.  Real economy examples of true utility tokens—not fraudulent ICOs—show that they can be far more than just speculative financial instruments.

If utility tokens are the key to accessing much of the utility of our next life in the metaverse, we must be open minded and embrace possibilities in ways that do not stifle innovation, while still protecting against misconduct and abuse.

Gaming once again provides a way to understand these tokens.  As a kid, I remember going to the arcade at the mall and buying tokens to play the games.  I wasn’t an investor in the arcade—I was using a fungible good the arcade sold to access the games.  Today’s games have a lot more features.  And you can spend money for more things than just playing the game or extra lives.  But the essence is the same.

Another example of what are essentially utility tokens that we have today are transit rewards points.  Those of us who traveled to Prague by air may have been members of a frequent flyer program, building points that may be used towards future flights or services.  Perhaps more befitting of Web3, an airline recently sold blockchain-based tokens for use in purchasing charter flights and related services.[1]  These tokens did not offer any rights to the profits of the company, but rather only a more efficient and faster way to obtain the services.

In the EU’s MiCA Regulation, and the regulatory frameworks in Switzerland, Liechtenstein, Dubai, and others, utility tokens or usage tokens are distinct from other categories.  For our part, the CFTC’s regulatory framework is relatively asset- and technology-neutral.  Our focus on principles-based regulation, customer protections, market integrity, risk management, price discovery, and transparency has worked well for our markets for decades in part because it is flexible enough to allow for innovation and change while ensuring strong protections are in place.

Metaverse and policy

There are key areas that need to be further developed and matured to achieve the full metaverse and its potential for engagement, community building, self-expression, and commerce.  They include technology; commercial infrastructure; privacy and identity; workforce of the future; and regulation, tax, accounting, and social infrastructure.

As these areas are developed, one question in particular stands out: how do regulators address the development of solutions and services to support virtual worlds that are globally accessible, but may be required to adhere to local jurisdictional requirements and rules in commerce and payments?  Luckily, this question is not a new one, as it is a further extension of how regulators have approached globalization and past technological innovations that enable cross-border activity.

Just as regulators have had to tackle the digitalization of finance, so too must we look ahead to the future and the increasing digitalization of life.  In many ways, much of our life involves transactions.  Some say that the foundational layers of the metaverse—the “enablers”—are security, privacy, and governance; identity; and payments and monetization.  These are issues that are very familiar to financial regulators, financial institutions, and new entrants like fintechs.  You could say that money is life.

Some of the other critical issues for policymakers to consider include open access to the metaverse; competition and promoting innovation; intellectual property rights; commerce, monetization and distribution models between stakeholders; promoting diversity, equity, and inclusion; securing user safety and awareness; and ensuring data privacy.

The metaverse also has broader societal implications.  Relevant stakeholders will need to define a road map toward a metaverse that is ethical, safe, and inclusive.  This likely will include rules relating to data privacy, security, ethics and regulatory compliance, physical health and safety, and equity and fairness.

Because metaverse development is still in its early stages, I believe a principles-based approach to emerging policy issues appropriately reflects the need to anticipate and adapt to issues and risks quickly.  I also believe it is imperative for regulators to proactively engage with the private sector, and ensure the responsible development of products and services that have embedded protections.

A regulator’s strategy for the metaverse

As I have previously said, I believe that the way to get things done is to get all the information, learn as much as possible, and then find pragmatic solutions.  Just as business leaders need to identify a strategy for the metaverse, I believe that it is incumbent upon regulators to do the same.  I believe that we must learn more about the metaverse, assess the policy issues, create expertise and resource, connect with other policymakers, and establish a regulatory approach that is fit-for-purpose with each of our singular legal structures and authorities.  Throughout all this, we must ensure global cooperation and coordination, because the metaverse is truly a world without borders.

The internet’s emergence led to the profusion of social media, mobile connectivity, and cloud computing.  The emergence of the digitalization of finance has led to what a few decades ago would have been the realm of science fiction: using pocket-sized supercomputers to make and receive near-instant payments across the world.  And today’s technologies may put us on the verge of a metaverse of real-time, immersive, massively multi-person content, experiences, and connections, potentially with a financial transaction layer powered by Web3.  We could be moving from crypto and blockchain as a wrapper on value to a wrapper on reality.

If the metaverse is too big for companies to ignore, then it is too big for regulators to ignore as well.  If the metaverse is, at the very least, another iteration of our current life, all current regulatory issues will iterate there as well.  And this digital layer imposed on our physical layer may bring new issues as well.

And if the metaverse is truly our next life, we can’t avoid it.  It’s better to face it head on and build in now the protections we will need.  But we can’t be so shortsighted that we foreclose the future by regulating the technology out of existence.

Karel Čapek’s play coined the term robot but also anticipated key concerns of systemic risk posed by technology.  There’s no guarantee that new technologies such as AI or the metaverse will follow Isaac Asimov’s 1942 Three Laws of Robotics by default, especially the Zeroth Law: A robot may not harm humanity, or, by inaction, allow humanity to come to harm.  For that, it will take careful observation, foresight, and nimbleness from policymakers and regulators.

***

References

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Board of Governors of the Federal Reserve, SR-26 / CA2-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations (Aug. 16, 2022).

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Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, speech at Eden Hall, the British High Commissioner’s Residence in Singapore, “Some lessons from the crypto winter” (July 12, 2022).

Dubai Virtual Assets Regulatory Authority, see www.vara.ae.

Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal, “Fintech and the digital transformation of financial services: implications for market structure and public policy,” Bank for International Settlements Working Paper No. 117 (July 2021).

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[1] Response of Division of Corporation Finance, U.S Securities and Exchange Commission, In re Turnkey Jet, Inc. (April 3, 2019).