What is the Metaverse?
The Metaverse has been conceived as an online, fictional universe akin to the real world. Any online game or platform where players can create avatars, explore the virtual world and interact with each other can be considered a metaverse world. Examples of this include the popular games Fortnite and World of Warcraft, the world-building games Minecraft and Roblox, and even Club Penguin.
In 2019, the company Facebook (later renamed Meta) unveiled a virtual world called ‘Facebook Horizons’, where users of the social platform could create avatars and interact with each other using augmented reality (AR) and virtual reality (VR) technology. Using AR and VR, users could use real-life motions to do actions in the virtual world, e.g., make their avatar walk, dance, interact with objects or other users, and much more. The platform was later rebranded as Horizon Worlds, and Meta stated in 2021 that it was dedicated to expanding the Metaverse and making actions such as hanging out with friends, shopping, banking, and other services available as an alternative to the real world.
Why was the Metaverse established?
The Metaverse was created to give people a surreal online experience through new and interactive technology. With real-life becoming more hectic every day and loved ones spread out all over the globe, the Metaverse was designed as a way for people to interact and do activities with each as if in the real world, no matter how far apart they are in reality.
The pull of the idea of the Metaverse grew substantially stronger during the Covid-19 pandemic, with people looking for ways to meet and enjoy with their friends and family without actually coming in contact. Though there are still many developments and improvements are yet to made in the virtual universe, many users have begun to use it as an escape from reality into another. The Metaverse currently exists of several ‘worlds’ that users can explore, such as the Ethereum blockchain-based Decantraland, the VR game The Star Atlas (ATLAS), the HyperVerse, and Sandbox, where people can buy and sell plots of land akin to cryptocurrency and NFTs.
Many companies have bought out land or spaces in these virtual worlds to establish their digital presence and expand their online services in the future. Many companies and services have set up shop in the Metaverse, with many banks hopping on the wagon as well.
Financial crimes within the Metaverse
The Metaverse liberally makes use of new technology like cryptocurrency and blockchain, which gives users enhanced levels of privacy and anonymity. You would think that this would make financial transactions more accessible and more secure in the Metaverse. However, the way theft and scams occur in the real world is the same way many people fall for scams or become victims of hacks and data leaks in the virtual world.
Though the growth of Blockchain has been quite rapid, law enforcement and regulation sectors have not been able to keep up with the rate of growth, leading to improper implementation of cyber safety laws and measures. The rise of cryptocurrency has made it easier to transfer funds for illegal activities due to the lack of checking and verification of the transfer of large funds, as typically seen with bank transfers.
Blockchain promotes the decentralization of financial activities. This means that people can easily apply for loans using only cryptocurrency, transfer tokens to each other, and buy items without going through regulatory authorities like banks. Along with decentralization, blockchains also allow the user to completely conceal their identity. They do not have to undergo any verification before opening an account, investing in cryptocurrency or making transfers. Blockchains also store data in irreversible ‘blocks’, which helps further enhance anonymity and makes tracing the origin of illegal money extremely difficult.
The Metaverse promotes purchasing and selling virtual land and other commodities using cryptocurrency. Though the Metaverse has not yet developed enough to become a target for most large money laundering operations and other criminal groups, there is still potential for dangerous activities occurring in the future.
Through buying and selling expensive items like virtual land, properties, and valuable NFTs, criminals may be able to launder money without detection and make these transactions look legitimate. With the rising price of land and other ‘luxury’ items in the Metaverse, it may also help them grow their investments, giving them more money to fund their anti-social activities. In the real world, buying a piece of valuable property can take ages due to the number of formalities and background checks that must be completed. However, in the Metaverse, anyone with an account and sufficient crypto assets can snap up attractive virtual assets in no time at all without undergoing any KYC or AML obligations.
Illicit actors may also engage in wash trading- i.e., buying and selling wearables, collectibles, and other virtual assets- in quick succession to inflate the price and make them seem more desirable than they are. This may cause users to begin buying the inflated item and unknowingly contribute to funding illegal activities.
Similarly, as with cryptocurrency exchanges, the Metaverse may also become a hub for Sanctions evaders if regulations are not implemented. People looking to evade sanctions find cryptocurrency attractive as it helps them transfer large funds without appearing on the radar. Illicit actors in different countries may also use the Metaverse to conduct meetings without detection due to blockchains and the promise of freedom through anonymity.
The Metaverse also doesn’t have any regulatory bodies to oversee virtual transactions in the realm yet. Though few banks have set up shop in the Metaverse, these are not yet linked to the virtual economy and do not control the flow of cryptocurrency in the Metaverse yet. Transactions here do not follow the same flow and set of rules as the real world, which can complicate matters.
There are still many problems to smoothen out when it comes to regulating transactions and keeping financial crimes in check. Scammers may be able to hide behind untraceable virtual avatars, making it more difficult to find them in the real world and recover any lost money.
Conclusion
The Metaverse is a relatively new concept that has gained popularity in the past few years. The Metaverse aims to present itself as a world within our world- to become a self-sufficient virtual universe where people can live, hang out with friends, go shopping, and do other activities that we can do in the real world. Through the Metaverse, people will be able to surpass the boundaries of distance and build their own lives. However, the goal of conducting commercial activities comes with the risk of financial crime.
The Metaverse does not yet have many laws and regulations in place when it comes to buying high-ticket goods or transferring money. In order to fulfill its dream of becoming a virtual economy, the Metaverse must establish a secure and sound financial system in order to divert itself from unwittingly providing money-launderers with a platform to fund illicit activities.
