Plugging in: financial services in the metaverse
If there’s one industry buzzword this year that is on almost everybody’s lips, it has to be ‘metaverse’. Since social media giant Facebook rebranded to Meta, pivoting to what the company believes is the future of the web, the concept has brought interest and bewilderment in equal measure.
For something so hard to pin down, a number of financial institutions (FIs) have already taken to the metaverse with aplomb. These firms believe they’ve spotted a golden opportunity to provide metaverse participants and inhabitants the services they need to buy, sell and hold goods and services, such as digital assets and concert tickets, non-fungible tokens (NFTs) and digital real estate.
FinTech Futures recently spoke with Glenn Friedman and Jerry Eitel, CEO and chief metaverse officer (CMVO), respectively, of New York-based accounting and advisory firm Prager Metis, to get down to brass tacks – how will people transact in the metaverse, how will the real world and the metaverse connect and what are the opportunities for financial services?
Seeing is believing
“Many people view the metaverse as a complex concept, which it can be, but once you experience the virtual world, it is much easier to comprehend,” Eitel says.
“I like to compare the metaverse to a television show; however, you are actually in the show but from within your physical location instead of watching it. It transforms the two-dimensional world of the internet into a multi-dimensional reality.”
In short, the metaverse is a virtual world where people can go to school, work, play games, attend concerts or festivals, shop and meet friends. Essentially, everything one can do in the ‘real world’.
“It’s what I would describe as the internet on steroids. I believe it’s the future,” Friedman says.
After Prager Metis set up a digital presence in the metaverse, the firm initially thought they’d just be handling mining clients and exchanges.
But soon, partners started calling them up. “I don’t think any firm is going to be able to ignore this in the future. My advice to every firm out there is that the future is now,” Friedman says.
“You can’t dabble in it. You need someone in your organisation who will champion it and has a passion for this.”
New world order
In 25 years, when the metaverse is potentially commonplace and we all transact and do business in online realities, what will the digital landscape look like?
Eitel believes that as the infrastructure behind the internet continues to evolve, so will the metaverse. Roads, streets, communities, districts and shops are only the start, with the metaverse ever-evolving as a community of decentralised virtual worlds.
“The more people create metaverses, the more it continues to evolve,” Eitel says. “The capabilities will be endless, and the future of this new immersive, virtual landscape will eventually become the foundation for how the real world operates and engages.”
As such, people can expect to use the same services as they do now. They will clock in for work in the metaverse, receive payment in cryptocurrency, make purchases and attend social gatherings. Future financial service providers will need to know as much about the virtual world as they do the real world.
“I think the future holds a seamless meshing of the two worlds which will require education, accessibility and community,” Eitel adds.
While Prager Metis clients are eager to learn and avoid major mistakes by seeking expert guidance from the get-go, Eitel believes that utilising any financial service providers who aren’t well versed in this new technology “may be like asking your family physician to perform heart surgery”.
In this new reality that requires learning and listening to the experts, “you can’t expect even a great accountant or tax preparer to be a specialist”, Eitel says.
Businesses need to think carefully about the scale and type of opportunities present in the metaverse. Friedman and Eitel outline three main opportunities: scaling a company and finding new customers, branding and monetising intellectual property.
Organisations could also leverage the metaverse to improve internal operations and processes. “For example, look at today’s workforce, which is predominantly remote,” Eitel says.
Businesses could use the metaverse for upskilling employees, retaining and acquiring talent, training and onboarding, for example.
Sensing this opportunity, many firms are already doing business in the metaverse. In January, Prager Metis opened the first-ever CPA firm HQ in metaverse platform Decentraland and is actively working with businesses looking to enter the metaverse.
Aerospace giant Boeing also announced plans to build the next aircraft in the metaverse, using virtual design and engineering tools. It plans to use the metaverse to access every piece of information about the aircraft and certification documents to help with the precision of the plane’s development. “This could help with potential supply chain issues,” Eitel believes.
In terms of regulations, the metaverse is still something of a Wild West environment, “but operating as a business, we must apply the same business practices to businesses and transactions in the metaverse as we do in the real world”, Eitel says.
The legal fees are “astronomical” and there is more to just buying and selling NFTs. Payments with any of these assets will result in gains or losses from the original basis compared to the fair market value at the time these assets are used to pay a vendor. Proper forms such as 1099s must be issued. Taxpayer IDs must be obtained if you are in a metaverse business.
Additionally, many independent contractors from all over the world are paid in crypto. There are formalities that must be followed. Treaties may even have to be examined if royalties are paid.
Investing in metaverse assets is like buying and selling physical property and are treated as capital assets. Also, certain NFTs could be taxed as collectibles and therefore at higher rates. There are some issues as to whether an NFT might be considered a security. The list goes on.
“The metaverse is an extension of society. As much as people want to think rules don’t apply, they do apply, and authorities will be addressing it in the future,” Friedman says.
Through interplay and interconnection, people and services will move seamlessly between the metaverse and the real world. For example, there are already real objects being sold in the virtual world and vice versa.
“I prefer to see this as an expansion of the world. If you don’t see it that way, you need to. The metaverse is a geography and demographic. It’s just a new place to expand your market. Whether you call it Hawaii 2, it exists,” adds Friedman.
Eitel believes the metaverse offers a tremendous amount of growth opportunities for businesses as well as opportunities for the so-called real world to develop new business concepts. As technology evolves and more people enter the virtual worlds, companies will need to rethink business models and learn how to operate in both physical and digital worlds.
“Years from now, businesses will see increased efficiency because of the metaverse. In-person processes that took time and money will be streamlined through the metaverse, improving speed to market for many industries,” Eitel says.
For the metaverse to gain traction, “increasing accessibility is going to be important”, Eitel says.
The more big-name brands who enter the metaverse, like Disney and Nike, the more consumers will follow. More consumers mean more profitable opportunities. If authorities treat digital currencies, NFTs and virtual land in the same way that they do all real-world assets, the metaverse will remain as accessible as our real-world economy.
As it stands, the metaverse is currently being regulated by different organisations. “The technology isn’t where it needs to be for the government to be able to accurately predict what needs regulation, but I think applying physical world business practices to the metaverse and keeping it open to anyone who wants to join will keep it profitable for businesses to utilise,” Eitel says.
Friedman says that the metaverse, and the financial services it needs to operate, has already expanded beyond wealth management, risk management and technology.
Smart contracts and blockchain provide immediate appeal, although where those technologies are today, they are not ready for primetime or commercial use.
“When you think about what it takes to do the accounting for a wallet that can have various cryptos and contracts in it, there is a lot that has to go into accounting for those gains and losses,” Friedman says.
“It’s kind of like when wire houses didn’t exist, and you had to go back and look to see what somebody bought something for. It’s pretty intensive.”
A land of opportunity
While it’s still a very nascent concept, there are many ways the metaverse could go wrong. It could be choked by too much centralisation, become too lawless with too little regulation or dominated by big players, stifling competition and innovation.
But Friedman believes the biggest challenge the metaverse faces is something more prosaic – people.
“Even though everyone thinks it’s all about avatars, it’s about finding good and qualified people who understand the metaverse. Educating our team too also takes a great deal of resources and time,” Friedman says.
Time is also a big challenge for the firm. “Every day I get on a phone call with somebody and learn something I never thought of,” adds Friedman.
“We’re getting so many queries and opportunities that it’s difficult to keep up with it. You have to separate the ideas and decide what you think is going to be the future and profitable.”