DAVOS, Switzerland – Conversations about blockchain on day three of Davos show architects of the metaverse are still trying to figure out what exactly it is – and regulators hinting central bank digital currencies (CBDC) could potentially do more harm than good to the global economy.
The World Economic Forum (WEF) released two reports on the metaverse on Wednesday. In an effort to encompass the broad – and at times vague – concept of the metaverse, the reports set it up as “an immersive, interoperable and synchronous digital world that will change how we interact, work and play.”
Despite the hype around the metaverse, propelled by Facebook’s transformation into Meta Platforms back in 2021, the world has yet to witness or experience anything concrete.
“It's an evolving concept. One that doesn’t have a standard definition yet,” said Cathy Li, head of media, entertainment and sport at WEF, during a Wednesday press conference.
Open-ended questions about how the metaverse should be regulated also require extensive testing, said Huda Al Hashimi, deputy minister of cabinet affairs for strategic affairs in the United Arab Emirates, at the same event.
“We also see that regulators will be acting more like referees rather than gatekeepers. And that code of conduct will actually take precedence over formulating policies,” Al Hashimi said.
Later on Wednesday, a panel heard two very different visions for the metaverse.
One came from Meta, whose Chief Product Officer Chris Cox said he believes that “one day that platform will become as important as the smartphone.”
Cox likened the metaverse he’s building to Meta’s other social media asset, Instagram, which is “focused on giving tools to creators and builders.” It will include “spaces that are self-consistent, oftentimes offered by big companies,” as well as startups and shops, he said.
He said, however, that the difficulty would be jumping from one ecosystem to another, with the ease with which you can go from, say, Wikipedia to Google Maps online, without losing coherence or connectivity. “Part of what doesn’t exist yet for the metaverse is the hyperlink,” Cox said.
Read more: Davos 2023: Crypto Is Down but Not Out
For fellow panelist Neal Stephenson, the influential sci-fi author, it’s clear what kind of model is needed.
“It doesn’t happen unless you create an open system analogous to the early internet, [where] anyone interested can latch on to a shared protocol,” said Stephenson, who coined the term “metaverse” in his 1992 novel "Snow Crash." “Right now the image one has about Facebook, it’s very much a centralized top-downish organization.”
(Keen to show no hard feelings, Cox invited his co-panelist to grab a coffee after the panel; Stephenson appeared to politely decline.)
Pros and cons of virtual fiat
Making different digital ecosystems interact was, in a different way, also a topic for central bankers, who joined with financial infrastructure bosses inside the Congress Centre to discuss central bank digital currencies.
Interoperability, as it’s known in the jargon, comes with plenty of difficulties, the discussion noted – not least as central banks don’t always trust each other. The obstacles as they apply to CBDCs are often about conflicting governance and legal systems rather than technology, South African central bank Governor Lesetja Kganyago told the panel.
The panelists’ comments suggested there’s still a long way to go in getting benefits from virtual fiat – and plenty of ways in which it could actually end up damaging the world economy.
“It is crucial that when we come up with new innovations, these can scale and these can guard against the potential cost of having digital islands,” said Javier Perez Tasso, chief executive officer of SWIFT, the messaging service used for making interbank transfers. Instead of unifying payments systems, central bank digital currencies could lead to further fragmentation, Tasso said.
There have been some limited success stories in trying out CBDCs for settlements both for interbank and retail settlements – but they have their limits. Amir Yaron, an Israeli central bank governor, spoke glowingly of a trial he’s carrying out to enable cross-border retail payments with Sweden and Norway.
But he admitted it hasn’t yet cracked the problem of anti-money laundering checks, one of the main reasons why cross-border payments using correspondent banking can be so slow and expensive in practice. There’s also a question about who will build any international hub – and whether it will be a grouping of central banks, the International Monetary Fund or some private-sector company that wins the prize.
Lieve Mostrey of clearinghouse Euroclear, which is also taking part in a trial to tokenize government bonds with the French central bank, warned there were costs to such experiments involving instantaneous payments such as potential liquidity losses that could end up delaying trades, especially if the transition to any new system isn’t smooth. “It's about interoperability,” Mostrey said. “If we don't get that right, I think migration simply becomes impossible.”
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