Enter the Metaverse: how digital assets could affect treasury functions

In the future, banks may go even further, connecting with customers and bringing their services into the metaverse, a fully virtual world.

Financial services have traditionally been slow to embrace new innovations because of the size and complexity of their operations and the stringent regulations that apply to them. But the pandemic has accelerated digitization to a new frenetic pace, and headlines about digital currencies, whether cash is a thing of the past, and the metaverse – a completely virtual world – are proliferating.

For some, digital currencies, or cryptocurrencies, are a cause for concern, others view them as a niche product, but still others see them as the future for central banks. The Bank of England has been investigating central bank digital currencies (CBDCs) since 2017 through research papers and experiments. In 2021, it announced a joint CBDC Taskforce with HM Treasury to explore a potential UK CBDC for use by households and businesses¹. The aim of the taskforce is to assess the practical challenges of designing, implementing and operating a CBDC, including analysis of use cases, financial inclusion considerations and data and privacy implications.

As of end-2021, nine countries had already launched a CBDC, including Nigeria and the Bahamas. China is currently running a pilot of the e-CNY, which started in February 2022. India has announced its intention to launch a digital rupee by April 2023, and Brazil is expecting to pilot a digital real this year. There are also stablecoins, cryptocurrencies whose value is tied to real-world assets, such as the US dollar. And there are cryptocurrencies like Bitcoin, which can be traded and used for purchases.

For the treasury, digital currencies represent many challenges. Whether it’s a multinational operating in regions with CBDCs or a company operating online, they need to assess whether to accept different cryptocurrencies and assets and, if they do, how to evaluate and manage their risks. Customers are coming to expect a wider range of choice in how they make payments, whether it’s cash or contactless, online or through their smartphone, and digital currencies may increasingly become one of the options that people want to use.

However, right now, their stability is still in question. That’s why the penetration of Bitcoin as a payment method is relatively low, for example.

“There are different attributes that we look for in payments. And the key things are that it's fungible, durable, stable, and not volatile. And so if you're standing in queue to buy a Tesla in cryptocurrency, and you say, ‘Okay, Elon Musk, can I have that $50,000 Tesla?’, and by the time you go to checkout, it's $40,000, he's gonna say, ‘Can I have that $10,000 difference?’ So there are still challenges around how cryptocurrencies are going to play a role as we move to move forward,” says Mark Williamson, Global Head of FX Partnerships and Propositions at HSBC.

But the rapid rise of ideas like stablecoins and CBDCs, as well as efforts to regulate this industry, show that the principle of cryptocurrency as digital money is considered worth pursuing. Banks, businesses and regulators want to stabilize digital currencies so that their key benefit of fast, efficient payments can be harnessed, while risk and volatility is minimized.

Stabilization is one challenge, but another is the depth and breadth of change that brand-new currencies could bring.

“Think about the last time there was a new currency, the Euro, and all the work that went on around that to change the thousands of systems across the industry for its new currency code. Imagine the amount of change that's going to have to occur off the back of multiple digital currencies,” says Williamson.

“It’s these things that we need to be thoughtful about, because there are opportunities and threats as we migrate, whether it’s from Blockbuster to Netflix or heritage to digital. We need to think about the opportunities and threats as these new forms of payments and currency come into the world.”

ISO is currently considering introducing four and eight-letter currency codes to account for digital options.

But that's just one example of the ripple effects of such sweeping change. It’s likely that, initially at least, CBDCs will be used to improve the wholesale payment experience between commercial banks and central banks. There are also clear use-cases for cryptocurrencies in FX, as a globally-accepted digital currency could, in effect, be borderless. As with all new technologies, there’s a wide range of experimentation right now, and not all ideas will make the cut.

What is clear is that tokenization and digitization of assets is a trend that is continuing, ultimately culminating in the idea of the metaverse. Whether it’s a piece of digital art or the fact that we ourselves have a plot in the Sandbox, the metaverse has arguably already begun and some see it as the logical next evolution for the internet. Similarly to digital currencies, however, it’s the use-cases that are important here.

How do we go from the metaverse to the real? What is the bridge to allow non-fungible tokens (NFTs) or other tokenized assets to be transferred back into value in the real world? There’s also the question of meeting people where they are. Take the example of online retail. This already works very well on Web 2.0. Will people want or need to enter a virtual world to go shopping?

Some of these ideas are speculative, but there are real-world cases of distributed ledger technology right now in supply chains. These use DLT, or blockchain, to trace the origin of food from farm to fork. In future, this technology could potentially expand to tracking goods in real time, calculating carbon footprints and many more applications, all stored in the ledger.

Digitization has been happening for some time, but even in the midst of transformation, businesses can find that technology has already changed. This is a unique challenge to treasury functions, which need to be flexible and agile to meet the needs of the business and stay on top of new trends. Digital currencies, tokenization and the metaverse are part of an evolving conversation. But it’s a conversation that’s starting now.