Series 3 Episode 11: Demystifying the Metaverse

Transcript

Andrew Strange: Hello everyone, and welcome to our latest episode of Risk & Regulation Rundown, giving you our latest insight and analysis on hot topics in financial services risk and regulation, and there are some hot topics. I'm Andrew Strange, I lead our financial services regulatory insights team, and I'm your regular host. So, in this month’s episode, we're going to be talking about the metaverse, is it the next big thing, what does the future look like in a metaverse world and what does it mean for financial services. Today I'm delighted to be joined by two guests. Yanna Zhu is from PwC's metaverse technologies team and Laura Talvitie, a manager for my regulatory insights team, who should hopefully be able to help demystify the metaverse for you, and if I'm honest, for me as well. Just to know, that due to a few COVID related issues, we're recording this partly remotely, so I do hope it doesn't impact the sound quality, but welcome to you both. So, Yanna, let me start with the really easy obvious question, the metaverse, what is it and why is there so much attention on it at the moment?

Yanna Zhu: Thanks Andrew, and it's really great to be here today. So, the metaverse is an aspirational term for a collection of virtual worlds that we can work, explore, play and collaborate in. The term has generated a lot of hype in the last nine months, but the word itself can actually be traced all the way back to the 1992 science fiction novel Snow Crash, a really good read, I would recommend. Meaning a blend of a meta and universe. Virtual worlds themselves have actually been around since the 70s as well, so that makes a lot of sense, you know, considering that we as humans have always sought to kind of use technology as a way to connect better and to communicate. Now, recently Facebook's rebranding to Meta has brought this idea a new life really. There are currently many metaverse platforms out there in the market, these are not connected to each other, but they're very much separate worlds with completely different interfaces, access credentials and users, and the idea of the aspirational metaverse is really having that one decentralised virtual world that is interoperable, persistent and governed by the community. Meta's rebranding isn't the only reason really why the metaverse has gained attention, we are now actually at a point in time where all the necessary technologies or the building blocks so to say, to build a true metaverse are synergising and becoming really viable. Kind of like the iPhone moment that we had a few years ago. We have these accessible desk top based platforms, but also big tech firms like Meta, Apple and HTC releasing self- contained, affordable VR headsets to access the metaverse, offering users this true immersion. We also have this range of vendors from Decentraland, over Roblox to the sandbox, offering really rich virtual world platforms where users can come together and collaborate.

Then, of course, we also have creators who constantly build new content, we have the emergence of 5G, offering us the connectivity and the infrastructure needed to access the metaverse from practically anywhere in the world. Then we also have computing and processing power becoming more available and more affordable to power these virtual worlds. So, a whole new economy can now thrive in the metaverse thanks to cryptocurrencies, exchanges, wallets and NFTs, and finally we have this big emergence of Web 3.0, which is essentially the idea that the new version of the internet is decentralised. So, it's not owned or it's not governed by just a handful of very big tech players in the market, but instead it's very much led by the community, creating a truly user centric new virtual world.

Andrew: Wow, thank you. So, I've probably got more questions now than I had before we started the podcast, that's a good start. I mean, so bringing all that to life, firstly what have we seen so far in terms of metaverse and how far along are we on the development journey? I mean, don't take this the wrong way, what are some of the use cases we've seen so far, what are we actually doing with this? We, I mean people, financial services, anyone?

Yanna: Sure, so at the moment one of the biggest use cases are very much marketing and consumer engagement focused. So, many businesses are establishing a presence on metaverse platforms to really just reimagine the way they interact with their customers. This can be through virtual clothing, one of my favourite examples is Gucci, they've recently sold a virtual bag on Roblox for over $4,000. Whereas the actual real life equivalent bag, the same thing, but in real life sold for a lot less, and that was around I believe $3,400. So, you can really see digital items and collectibles are forming extremely lucrative new revenue streams. Another use case for the metaverse is very obvious, kind of, remote collaboration focused. So, the metaverse really gives us the unique ability to come together in realistic, immersive 3D spaces where we can walk around freely, we can collaborate more effectively and especially during the age of hybrid working, it really gives us a whole new opportunity to come together. We at PwC are actually pioneers in this area, so you may have heard of our virtual park metaverse environment that we launched around two years ago to drive student recruitment during the pandemic and with that platform we managed to reach around 20,000 users across the country. That was a lot more people than we usually reach during our in-person, kind of milk round university activities.

Andrew: So, and that's two years go, so actually this isn't new in that respect at all, I mean that's quite established if it was that recent, okay, interesting, yes.

Yanna: Exactly, virtual worlds have been around for a while, it was very much recently that they've been termed metaverse, but we've had them, you know, for several years now. Our team actually also holds, kind of, countless sessions in metaverse type environments, in virtual reality and that's very much end-to-end. We equip people with the headsets, we show them how to use the platform and we just immerse them in those custom sessions as well. And we also recently announced our global PwC metaverse campus, that is now accessible to all territories across the world, where we can collaborate across borders. So, these are just some examples but there are obviously many other use cases in different industries like immersive corporate training or remotely providing medical care and financial services. So really lots and lots of opportunities. Currently the metaverse is predicted to be an $800 billion market opportunity by 2024, some companies predict it's even more than that. Research really suggest that it could have 5 billion users by 2030, so it's ever growing and it's a really exciting time for any industry to explore this topic and to understand the metaverse better and how a company can leverage it.

Andrew: Wow, thank you, that's really interesting. So, let's move away from handbags and turn to financial services. I'm intrigued here, so as somebody who's got a big mortgage, I'm not sure I want a metaverse mortgage that's even more expensive than my current one, but anyway, turning to what it means for the financial services sector, Laura, can we bring you in? How have we seen existing financial services companies look to embrace the metaverse and how much attention has the sector as a whole really devoted to this?

Laura Talvitie: Thanks Andrew, good to be here, and yes, a lot of FS players are certainly looking into this and many have already entered as well. So, J.P. Morgan was the first leading bank to start the trend earlier this year and they say the metaverse opportunities are limitless. You've got HSBC, Fidelity, Standard Chartered, Mastercard, Amex and many others have also made investments. Many of these firms are not yet offering core services in the metaverse, but they want to get involved to ensure that they will stay current for the next generation of customers. So, at the moment what the FS firms are primarily doing is marketing branding and just learning. Some research estimates that within the next four years, 25% of consumers will spend at least an hour a day in the metaverse. So, it's about mitigating the risk of missing out and being left behind. Also just like in the real world, the best real estate spaces are snapped up quickly, so if you believe in this and I think you should, you want to be one of the first to purchase land before the prices go up and the best plots are taken.

Andrew: Wow, thank you, that's really interesting and I should say as a former financial advisor, things can go up in value but they can also go down in value as well, and FOMO isn't the best reason to make an investment. So, I mean, it sounds like parts of this could be a bit like the Wild West and clearly I don't really see how, you know, an established conduct of business source book based on giving people information documents on paper is really terribly appropriate for a metaverse type world. So, Laura, what are we seeing in terms of regulation so far of the metaverse, how are governments, and are even regulators responding to it at all?

Laura: Yes, that's a good question. So, we know from our regular discussion that the regulators in the UK and globally are certainly thinking and talking about how the metaverse will impact the FS sector and what regulation is required to support it. In the UK the visible front line reg focus this year has been largely around stable coins, new crypto firms, and the potential central bank digital currency. The government is expected to consult on wider regulation of the crypto asset sector later this year, digital assets are all linked, so the consultation could touch on the metaverse as well, we'll just have to wait and see. In any case, the starting point for authorities is likely to be the same risk, same regulation principle. Then the regulators would work from that to accommodate any metaverse specific requirements. It is clear that if you want to build the metaverse to be a safe place to do business, it needs regulation and controls. Just like in the real world. So, for instance, protection and safeguarding around KYCAML, cybersecurity, custody, taxation and so on. A blockchain technology which underpins the metaverse will support this, but it is that much trickier to design and apply regulation in the decentralised virtual world, and it will definitely need to be developed with a certain level of global cooperation as well.

Andrew: Yes, I mean, that global point is really important. I think we could end up with a lot of fragmentation if we're not careful. I mean, it strikes me there are probably some commonalities here around some of the potential regulatory concerns associated with the metaverse and some of that, sort of, broader digitisation of technology and finance. So, I'm thinking about, like, the increased scrutiny we have over Big Tech and the collective and use of consumer data, for example. Yanna, what do you see as some of the biggest challenges and risks that firms are going to face from the metaverse and how do you expect existing scrutiny of Big Tech companies to continue in that kind of metaverse world?

Yanna: Yes, sure. So, if you look at any new technology, right, there are always going to be a few challenges that we have to overcome to enable a safe user experience and to ensure companies comply with regulations.

Andrew: Oh, I love your use of the word 'few', 'a few challenges', okay.

Yanna: You've got to be optimistic. So, data protection is at the forefront of these challenges in the metaverse. So, the use of the metaverse involves comprehensive collection of various types of personal data in a way that we haven't really seen before. So, we have now access to these enhanced analytics that allow platform providers and the companies that enter the space to really track everything, from users' movements over their habits, to their interactions, and this obviously provides really deep and valuable insights into consumer behaviour, especially when consumers spend more and more time in virtual worlds and, you know, they're predicted to do so. It won't be easy to determine who is responsible for this data processing and for data protection in the metaverse, especially when policing and governance is decentralised, and that's the aspiration, right? We must really reinvent how user consent is given, how privacy notices can be drawn if platforms are no longer owned by one central entity, and who really enforces repercussions for data breaches, for lost data and for stolen data? Another big challenge that, you know, is very valid from an organisational perspective is actually choosing the right metaverse platform. So, we're currently still at a point where we have different metaverse providers that offer completely separate, self-contained and isolated worlds.

So, for example, you can't buy a piece of clothing in Decentraland and wear it in Meta's Horizon Worlds, that just doesn't work. So, companies really have to commit to a platform when entering the metaverse and ensure that they make a really informed decision beforehand. In the future, the aspiration is to push for interoperability, so that we can have a persistent and a unified metaverse that is not owned by a few single tech players, and this aspiration for decentralisation and for a community-led metaverse should also reduce a lot of existing scrutiny on Big Tech companies, returning the governance really to the end-users. That's the whole idea of Web 3.0 as well.

Andrew: Interesting, thank you, and, I suppose, how does financial services really end up interacting with that? Certainly, from my world, typically, a lot of our regulation almost is, sort of, front running. So, if I think about the ESG regulatory world, FS is doing lots there that now actually some non-FS firms are catching up on, but it strikes me, I mean, can financial services firms work the other way round this time? Can they learn from the experience of other sectors in enhancing some of these opportunities, do you think?

Yanna: Definitely. I think we're very much at a stage where the metaverse is still evolving, and as we go forward, I think, you know, we can see existing platforms become more complex and offer a wider array of services and experiences. So, for instance, in the future, perhaps you'll enter a metaverse platform where you socialise and you work, and then, from there, after your work hours, you'll be able to directly visit your local Citibank or your J.P. Morgan branch also inside that same metaverse platform, rather than these being completely distinct and separate experiences. So, a recent J.P. Morgan report around, kind of, opportunities in the metaverse quoted that $54 billion are already spent on virtual goods right now and given the success that we're obviously seeing in wearables and NFTs right now, transactions in virtual worlds will only grow. So, banking in the metaverse will require lots and lots of financial expertise and regulation. So, as a taste for what's to come for financial services, I'll give you a few examples.

So, we've got accounting firm, Prager Metis, they have opened headquarters in The Sandbox, which is one of the metaverse platforms, and they are really planning to offer metaverse-related financial services in that virtual headquarter but they also want to create an interactive hub for their customers, so customers can go in, they can tour their NFT gallery on the ground floor, displaying, kind of, digital artworks or they can attend social events on the roof terrace. Another really good example is HSBC. They've also partnered with The Sandbox. They've acquired a plot of virtual land that will host a stadium to connect with sports and with e-sports enthusiasts, and of course, this summer, we had NASDAQ ringing the opening bell, both physically, in Times Square, as usual, and simultaneously in the metaverse in a platform called Core. So, all this news really shows us that these big, trusted financial institutions are not only foraging into this space and starting to experiment, but they're also really reinventing how they interact with their customers and how they provide their services. So, we can really see a whole new world evolving there.

Laura: Yes, I agree there. The key, I think, Andrew, is not just to concentrate on digital twins, i.e. how to copy, paste the existing real-world FS services into the metaverse, but rather firms should think about what the banking in the metaverse looks like and how those experiences and services can be linked back to the real world, if that's even needed at all. Firms will need to think about the metaverse customer, their needs and expectations. So, for example, many customers will never visit a physical bank branch during their life and may even prefer digital assets and investments over fiat money. Also, what will their credit card or mortgage offers look like in the metaverse? That will a good one, but in the same way, many companies in the future may only exist in the metaverse and may need to be treated differently by the FS firms providing wholesale services. So, how will FS firms offer funding or investment opportunities to those companies? Some of the obvious FS use-cases will include crypto wallets, holding customers' currencies and NFT assets or payment enablers between companies operating in the metaverse. Also, firms will need support with AML and identity checks, technical interoperability between cross-border, cross-platform or cross-wallet payments. They'll need to comply with accounting tax, governance and reg requirements once we get there. One really interesting question for the FS firms will be which local rules apply and how those will be decided and centralised.

Andrew: Yes, I mean, I can see this is going to be incredibly complicated for firms because, you know, borders aren't a concept that will exist in the metaverse, so how on earth do you judge where your customer is or where your services or where your product is? Yes, interesting. So, I mean, I think, Laura, you said earlier on about FOMO. So, what should firms be thinking about? How do they enter the metaverse? What should they be considering?

Laura: Well, I'm a firm believer that the metaverse is an evolution not a revolution. It's happening right now, and firms shouldn't ignore the opportunities that it can bring to their business models. That's my bottom line but the basic starting point is to get up-to-speed with the concept, obviously. From there, firms can start developing strategies and test the waters with a few selected ideas, and the key is to focus on the trust early. So, we already talked about security, privacy and regulation, for instance, but it's also important to think about the consistent brand experience across physical and digital, and finally, not a minor thing at all, not many firms are likely to have the right skill set for this, so upskilling or hiring workforce is going to require some focus as well.

Yanna: Yes, completely agree with you there, Laura, and I guess, to add to that, you know, from a PwC metaverse technologies team perspective, we've worked with clients across industries for a while now and we have learned that, rather than spending lots of time on research and strategising, it can help to actually just go into one of the platforms and create a pilot space for testing. So, our team is doing that with clients right now, you know. We support them from initial platform and land selection, over developing the assets and interactivity, all the way to looking at how their pilot space actually performs and drives engagement. So, putting theory into practice and seeing what's actually out there, I think really helps to understand the metaverse better but also establishes the company as a pioneer and a really early adopter of metaverse technologies.

Andrew: Well, thank you both for joining us today. This has been a really fascinating discussion hearing about the metaverse and some of the transformative impact it could have. I guess, I mean, it's been around since the 1970s in various ways, and even we've been doing it for a couple of years on campuses but for me, this feels very embryonic in terms of the regulatory agenda that sits around it. Clearly, it's a huge opportunity for established firms but I guess there are an awful lot of new entrants who want to get involved in this as well, and it feels like something that I think we're going to have to come back on another podcast over the next year two because I think it's going to develop even further. So, thank you very much. To our listeners, I hope you've also enjoyed this conversation and thank you for joining us. As always, please do subscribe to future episodes and rate and review the series, as it helps other listeners to find us. I hope you enjoy your summer. We'll be back in the autumn with our next series of podcasts.