The Metaverse will be the new battlefield of financial crime

Technology, its advantages and its illegal use will always be in an arms race with regulations that protect us and prevent bad actors. And the metaverse will be the latest in a long line of historic struggles between innovation and regulation.

The global economy is worth about $100 trillion, with about $2 trillion linked to illicit funds. Using this same ratio, the Metaversum market is estimated to be about $1.5 trillion in size by 2029, meaning $300 billion worth of crime-related transactions could be made. This is a conservative projection of the value of Metaverse crime, as the anonymity of transactions and the opaqueness of asset prices make the Metaverse – inherently – far more crime-friendly.

The possibility of trade-based money laundering using illiquid virtual goods – handled anonymously – is terrifying. Who can tell what the price of a virtual slice of Malibu is worth? The top 10 real estate transactions average over $2 million each and I would suspect there has been very little monitoring of the fair market value of these transactions.

It’s extremely easy to purchase an in-game or metaverse item at a grossly inflated price in order to transfer money. But it’s important to note that it’s not just doom and gloom. It’s time to get this right and implement monitoring before the volumes get immense. However, we probably said this about crypto, and the value of this market rose sharply before regulations were close to being implemented.

3 challenges to overcome

There are a few hurdles the metaverse must overcome in order to tackle financial crime. This includes the true value of Metaverse assets, maintaining transaction anonymity while knowing the source of funds, and comparing transactions to a user’s online and offline patterns to determine if they indicate illegal activity.

Let’s dig a little deeper.

The first challenge is probably the hardest as the metaverse is still in its infancy and there aren’t many assets to compare against. For example, what do you think a monkey NFT is worth? Now ask the person next to you.

The second challenge is easier. I can have a Metaverse handle of my choosing to protect my anonymity, as long as my Metaverse service partners know who I am. In the real world, my financial institution is the bearer of this risk. It’s up to them to know who I am when I open an account and to confirm this regularly throughout the lifecycle of my relationship.

But who owns that risk and obligation in the metaverse? Is it the digital wallet provider, is it the owner of the particular metaverse I’m in, or maybe the third-party gaming or retail companies? Whoever bears the risk must take the necessary first steps, including a thorough Know Your Customer (KYC) program for all Metaverse participants.

We know how to do this in the real world – it’s standard practice for all financial institutions. And we must learn the same lessons for the metaverse. What is clear is that a fragmented online set of metaverses, each with potentially different policies, is a nightmare for transparent financial management.

The final challenge feels like starting from scratch for me. Understanding a person’s income, expense, and relationship profile is already incredibly difficult in the offline world — despite the multitude of data sources and the fact that most transactions are conducted in dollars. To do this effectively in the metaverse, you would need to do this for each user’s handles/avatars in all metaverses and combine this with their real-life profile.

As with many of the challenges we face, the answer is certainly collaboration. Governments, universe creators, and participants—both individuals and corporations—need to work together and create policies.

There is a very small number of people who could or would spend $2 million on a piece of Meta-Malibu. Starting with such edge cases seems like the perfect place. If we don’t, the volume and diversity of Metaverse participants, providers, and transactions will make it impossible to actively monitor.

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