We imagine a day in the life of a regulator tasked with patrolling the financial services industry in the metaverse.
My flying unicorn broke down this morning, so I’m late for work at the meta-Financial Services Authority ("meta-FSA"). Normally my boss (avatar: a 9-foot tall centipede) wouldn’t mind, but today we’re dealing with the first panic-induced run on a stablecoin since the meta-FSA was set up. I’m supposed to be at a meeting with the CFO of the company behind Common Cents (avatar: a witch with flaming blue hair) to understand whether public concerns around the company’s ability to redeem the stablecoin are well-founded.
Even without the run on Common Cents, today was always going to be hectic.
7-8:30am (Coordinated Metaverse Time): Losing all Common Cents
Our worry is that Common Cents is too big to fail. It could induce additional runs in the small number of other stablecoins that can be used across all virtual worlds and have become (alongside CBDCs) the primary currencies of the metaverse. While stablecoin issuers are subject to the comprehensive prudential regulation of the meta-FSA, we’ve never been able to establish a ‘deposit’ protection scheme for those who hold stablecoins. A scheme was proposed in the early days of the metaverse – this would have looked like a fairly typical bank deposit protection scheme, and would have been funded by contributions from the financial institutions whose failure would trigger compensation for customers. However stablecoin issuers convinced enough members of meta-Parliament to vote against the proposal for fears that the scheme contributions would be too burdensome and would have had a destabilising effect (stablecoin issuers are barred from conducting lending business, so they always worry about eroding the fine margins on issuing stablecoins). Perhaps losing all Common Cents will prompt meta-Parliament to reconsider its position…
9-10:30am: Collaboration across the metaverse
The meta-Parliament and meta-FSA were set up to stop real-world authorities from spending more time arguing over conflicts of laws and jurisdiction than policing metaverse activities. However, even though the meta-FSA has sole jurisdiction over the provision of financial services in the metaverse, we still don’t operate in a vacuum.
Last week we met with representatives of non-meta regulators to iron out a memorandum of understanding on ‘cross-border’ cooperation. Since that meeting (location: 60’s style American diner on the third ring of meta-Saturn) my team has been working up a proposal for how the authorities should cooperate when regulating on-ramps and off-ramps for payments in the metaverse, i.e. fiat-to-crypto and fiat-to-stablecoin exchanges.
Our proposed draft MoU proposes to focus our collaboration on the already complex area of money laundering, and we’re asking for broader information sharing provisions that we think will ensure that metaverse avatars can be accurately matched up to real-world digital IDs and AML systems.
11am-1pm: Grappling with NFTs
Over its first few years of operation, the meta-FSA provided extensive guidelines to the public to clarify when NFTs constitute ‘security tokens’ or ‘payment tokens’ rather than digital assets. This helped digital asset NFTs to become the backbone of commerce in the metaverse – allowing people to protect, enhance and transfer digital assets (artwork, fashion, real estate, digital pets) from one virtual world to another. For example, I bought my unicorn NFT in the Minecraft virtual world, paid for a flying upgrade in the Fortnite virtual world, and have used it to fly into battle alongside the Millennium Falcon in the Star Wars virtual universe.
Unfortunately, the versatility of NFTs means their classification can still be a moving target. Recently, an artist describing themself as ‘meta-Banksy’ (avatar: tornado with cartoon eyes) has started minting NFTs that look exactly like digital dollar bills, with unique serial numbers and coding that prevents the NFTs from being transferred for any value other than one real world dollar. The meta-FSA steering committee is meeting (location: the Colosseum, hovering above a gladiator-style avatar fight) to confirm the final wording of a statement that clarifies exactly what it means for NFTs to be ‘non-fungible’ and decide whether meta-Banksy’s dollar bills should be treated as stablecoins.
2-5pm: Piercing the DAO veil
In one of its first acts, the meta-Parliament followed the example set by the state of Wyoming (back in 2021) and codified laws recognising 'decentralised autonomous organisations' or 'DAOs' as a new type of corporate entity. Because DAOs replace hierarchical management structures (such as a traditional board of directors) with consensus-based management and rules encoded in computer code (built on distributed ledger technology), they require legal recognition to protect their developers, users, and stakeholders from potentially unlimited liability.
However, it has been more difficult to allocate regulatory responsibility where the provision of financial services by DAOs goes wrong. We’re finding that it requires us to strike a delicate balance between touting the advantages of decentralised control (which arguably prevents too much power being held by a small C-suite of executives, improves stakeholder engagement and promotes transparent governance) while still ensuring there is sufficient individual accountability when things go wrong.
This afternoon I’m speaking with enforcement colleagues (avatars: masked superheroes – some people really struggle to separate their work and personal lives…) to work out how we can take action against some known bad actors who have been manipulating DAOs to administer a number of Ponzi and pyramid schemes.
Fortunately the controls that are in place to prevent unauthorised financial promotions (each user’s view of metaverse advertising is so personalised, and geo-blocking has become so prevalent and effective, that the meta-FSA doesn’t often worry about promotions being viewed by unintended recipients) has meant that the marketing of these fraudulent schemes wasn’t disseminated too widely. However, we’re keen to show that the meta-FSA still has teeth, and are hoping to take public action that will deter similar schemes in the future.
6:30pm: Logging off
Note to self: take flying unicorn for its annual check-up…
We hope this tongue-in-cheek look at the metaverse provides some food for thought on how financial services will continue to be shaped by the development of regulation and technology. If you would like to discuss what steps are being taken by (real world) regulators and what you can do to prepare, please don’t hesitate to get in touch with our team.
