What is the point of central bank digital currency (CBDC) if digital payments can already be made easily, efficiently, securely and cheaply? Central banks in the largest financial centres have been grappling with this question and the metaverse may offer one answer.
Imagine a world where more of your daily life is online, in different parts of the metaverse built by different providers. Work is online. School is online. Games, hobbies, socialising, initial medical appointments – all online. Moving to the metaverse provides the opportunity to sell goods and services to users - whether that's clothes for an avatar, digital versions of school books, NFT artwork for display in virtual houses or tickets to a virtual concert.
Today, in many jurisdictions, payments are made perfectly well via the existing financial system and there is no reason to think that this will not continue to be a viable payment option in the metaverse. However, payments in the metaverse are already heading towards some form of virtual currency and there may be demand for simpler payment methods, especially for smaller transactions as a replacement for physical cash. Also, if the metaverse becomes the new normal, the opportunity for unbanked (or underbanked) individuals to use cash disappears and why should they be excluded from engaging with the metaverse because they cannot obtain access to the existing financial system?
In our view, there are three key solutions: in-metaverse currencies; a private cryptocurrency solution that is accepted across all parts of the metaverse; or adoption of one or more CBDCs.
In-metaverse currencies can be used in a particular ecosystem but are unlikely to be accepted everywhere. This may be acceptable, or even beneficial, in some cases – for example, enabling children to gain an understanding of the financial system in a safe environment through the use of programmable money. “Schoolcoins”, for example, could be programmed to limit purchases to educational items and services. However, as a general proposition, users would need to keep track of a potential proliferation of different currencies and it may not be straightforward to convert between them (and there may be a cost attached). A payment method that can be used across different parts of the metaverse is likely to be more popular and result in less friction, but companies building their own ecosystems may be reluctant to allow payment in another provider’s currency.
A better solution might be a private currency that is able to be used across metaverses. A form of stablecoin seems the most likely – other types of virtual currency, such as bitcoin, are too volatile to be relied upon. However, legislators have significant concerns should a private stablecoin be widely adopted - this is one of the drivers behind central banks considering their own digital currencies. There are potential disadvantages to users as well. Stablecoins may develop as closed systems, rather than open, and might be limited to where the issuer of the stablecoin and the provider of the relevant part of the metaverse have reached a commercial agreement. Issuers of stablecoins might also wield the ability to restrict access to individual users. These concerns may be dealt with through proportionate legislation – for example, requiring that stablecoins be accessed on a fair, reasonable and non-discriminatory basis - but this may be difficult to enforce as issuers could be located anywhere in the world. Overall, a private currency is unlikely to be the preferred long-term solution.
CBDCs may offer a solution without the concerns that apply to in-metaverse currencies or private cryptocurrencies. Retail CBDCs currently under consideration by various central banks are intended to be widely accepted and accessible. There should not be any competitive concerns between providers of different parts of the metaverse in accepting a public currency and users may also prefer a public solution rather than one operated by the private sector. Further, a well-designed CBDC should be able to be used online and offline. There is also a benefit to users being able to understand the value of the digital goods and services in their native currency, which makes the metaverse more of a reflection of “real” life. If necessary, legislation could require acceptance of CBDC payments, especially where the services provided are systemically important for users in that jurisdiction.
There is much to think about when considering CBDC in the metaverse - not least that there will likely be CBDCs in different currencies, how the private sector can facilitate its adoption and how to legislate in a way that doesn’t hinder innovation. Many central banks are not yet ready for widespread adoption of CBDC. However, delaying the development of CBDC too long after the widespread adoption of one or more metaverses could result in the proliferation of private digital currency solutions. Playing catch-up will simply be too much of a risk for central banks.