Metaverse Crypto use may pose a systemic risk to financial stability, according to The Bank of England staffers.
The Bank of England warns that more crypto transactions are being processed with the growing size of these decentralized digital worlds. This can lead to real-world financial instability if prices collapse.
The metaverse is in the early stages of development. However, it has become a hub for users to have new experiences. This includes digital concerts and shopping, as well as a new platform for handling cryptocurrency. Bank of England researchers Owen Lock and Teresa Cascino shared concern for the growing risk in a recent blog post.
“The importance of cryptoassets in the open-metaverse means that if an open and decentralised metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences”Owen Lock and Teresa Cascino, Bank Underground Blog
Falling crypto prices could lead to “balance sheet losses for households and corporates, an impact on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on crypto asset positions, and negative profitability impacts on the exposed bank,” Lock and Cascino also wrote.
BoE Response to Metaverse Crypto Risks
One of the first steps regulators should take to prevent this systemic risk, according to Lock and Cascino, is to first acknowledge the issue. With more transactions taking place as the metaverse grows, metaverse crypto can become more crucial in households. Users in the metaverse are holding a share of their wealth in crypto in order to purchase goods.
Multiple countries around the world now accept cryptocurrency as a form of payment in the real world. The global metaverse, on the other hand, allows for it to be accepted anywhere. The Bank of England worries that this feature will have consequences in the form of financial instability for individuals’ future.
Deputy Governor Jon Cunliffe of the Bank of England has also warned that a digital version of pound currency will be unlikely to work for years. The Bank of England has repeatedly warned that investors should be wary of using metaverse crypto. They are warning holders to prepare to lose all their money when buying digital tokens.