Banking and capital markets issues are inherent to conducting Web3 cryptoasset transactions in the metaverse. Companies operating in this space not only have to deal with various licensing and supervisory obligations under banking and capital markets law, but also with numerous other legal challenges – for example in connection with the tokenisation of real assets or the issue and trading of cryptoassets. They also need to adhere to banking and capital markets compliance rules.
Until recently, many assumed that the metaverse and the technologies at its core – virtual reality (VR) and augmented reality (AR) – would mostly be used for online gaming and social media. In fact, there are a variety of practical applications in traditional industries such as the financial sector.
Banking and capital markets-related applications will therefore likely become an integral part of the metaverse. For example, transactions between metaverse users can already be conducted using Web3-based payment instruments (such as stablecoins). Banks and investment firms can also use VR and AR technology to provide a better customer experience. When giving investment advice, for example, AR can be used to simulate and better visualise different investment scenarios.
But the metaverse is more than just a platform that improves the delivery of existing products or services. It also makes it possible to create new financial products (such as tokenised real assets), and enables market participants to interact in new ways (e.g. using virtual marketplaces to trade virtual assets such as non-fungible tokens (NFTs)).
All of these applications raise diverse and often complex banking and capital markets law issues and challenges. For example, providers of new types of products and services should check whether they require regulatory licenses or permits. In particular, because the metaverse fundamentally has global reach, a given product or service may be governed by numerous – possibly conflicting – jurisdictions. The breach of licensing requirements often has serious legal consequences – and in Germany, may result in criminal penalty.
But even firms that are already regulated are facing new legal issues. What impact does providing a service in the metaverse have on compliance with customer protection obligations under conduct-of-business rules? Can the firm’s employees use the metaverse to break the law (e.g. through market abuse or fraud), and how can these infringements be prevented? Without sound analysis of these issues, compliance with financial and capital markets regulations is inconceivable.