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Battling financial crime in the metaverse

We gathered an expert panel from across the financial sector, the AML sector, and law enforcement to discuss financial crime in the metaverse.

Napier AI
March 3, 2022

We gathered an expert panel from across law enforcement, financial and AML sectors  to discuss one of the biggest digital developments of this generation: the metaverse.

Although these worlds and their assets are virtual, they are funded by real money and are vulnerable to criminal ambition just like the “real” economy is.

In the session our panellists discussed what ‘the metaverse’ is, and crucially, what we should be doing to address the financial crime risks that this development will inevitably open consumers and businesses up to.

The panel consisted of:

We've summarised some of the key talking points below, but the full panel session is available to watch here.

Is the metaverse a new concept?

In her opening keynote, Karyn stated that the metaverse is not a new concept, citing games like the Sims and Second Life, and the invention of the world wide web as predecessors to what we now refer to as the ‘metaverse’.

Joshua then highlighted that, in many ways, immersing yourself in the metaverse can be just like in the physical world - money makes the metaverse go round. To interact with others, to receive goods and services, to rent or purchase assets like property – this all requires money to change hands and for crypto payments to be processed. There is huge potential for partnerships between payments providers and brands, for example fashion brands, who have virtual assets to sell and need the payments side of things handled.  

What financial crime risks does the metaverse pose?

Joshua warned that, just as the metaverse could be a place to work, socialise, and shop, it is also a place where criminals will inevitably seek – and find - opportunities to take advantage of the system for profit.

Hacking, scams, and identity theft are all examples of financial crimes that could potentially be perpetuated in the metaverse, exacerbated by the fact that your digital wallet is connected to everything that you do.

Karyn emphasised that currently there isn’t a clear idea of what financial crime regulations, if any, apply to the metaverse. Of most concern is the lack of Know Your Customer (KYC) checks performed on users, and more generally a lack of consensus on what rules apply to the metaverse. The internet is not subject to any one central authority or regulatory framework, and it looks as if the metaverse is set to follow a similar direction.

Could the metaverse make it easier to detect financial crime?

In the metaverse, Joshua pointed out, every interaction is facilitated by digital currencies. This, coupled with the lack of regulation, means every business in the metaverse runs the risk of inadvertently being involved with or facilitating financial crimes like money laundering.  

Interestingly, unlike the traditional financial infrastructure, every transaction also happens on the blockchain making the digital footprint of every transaction fully traceable.

What makes the metaverse different to games like Second Life?

There are plenty of similarities, Karyn said, between life simulation gaming and the metaverse, but it seems the metaverse is poised to become more popular.

Joshua added that the technology like Oculus VR sets, haptic suits, and the general advancement and increased availability of the internet will see more people globally able to enjoy virtual environments.  

How popular are cryptoassets and the metaverse?

Kamran said cryptocurrency and related concepts go through phases and trends, driven by the media narrative.  

The last few months of 2021 were a period when crypto was ‘blazing hot’ but Kamran warned, where there is a trend, it can be more susceptible to financial crime.  

In that way, the metaverse is no different from previous trends like Ponzi schemes or from standard investment scams, and inevitably there will be an uptick in metaverse tokens being issued as they rise in popularity - which will signal a rise in financial crime.

Kamran advised financial crime professionals that one of the best indicators of suspicious customer activity in the metaverse is a lack of links to the wider crypto ecosystem or projects prior to their involvement with the metaverse.

Regulation and decentralisation

As mentioned, all transactions in the metaverse are all completed using digital currencies, so what users keep in their digital wallets is very important.  

Jessica said every time you enter the metaverse, you bring your digital wallet - including all your digital assets like your avatars and their clothing – with you. This presents risk as your assets are then vulnerable in an unregulated environment. Measures like KYC checks and blockchain analytics could mitigate some of the risk associated with entering the metaverse.

But the task ahead is immense. If the metaverse is to be regulated in any meaningful way, Jessica argued, AML measures from 2018, for example, will not be sufficient to manage risk in this new world.

Kamran agreed, stating that AML efforts should be focused on the layering and integration stages, where fiat is converted to cryptocurrency and vice versa; or when transactions add an additional layer to obscure their origin.

“Metaverses are not intrinsic money laundering mechanisms. Rather, they are technologies that are susceptible within the layering and integration stages, and that's where our efforts should be focused.” Kamran Choudhary - Transaction Monitoring Officer, BCB Group

Why the metaverse needs regulation and KYC controls

Arguably, decentralisation presents the main barrier to the metaverse being a secure environment for users.  

Karyn highlighted that the metaverse is a product of capitalism. Consequently, there isn’t a centralised metaverse environment or clarity on who is responsible for the regulation and enforcement of it. This produces a situation where there is a desire to avoid the costs and implications that come with implementing regulation, but also a need to create a safe place, free of crime.

The Metaverse is going to mirror the world as we know it, said Karyn. Already there are countries working with FATF and their respective governments to ensure there are KYC and other protocols in place to control bad actors.

“The Metaverse is going to mirror the world as we know it” Karyn Kenny - SE Europe Regional Resident Legal Advisor, Department of Justice, Office of Prosecutorial Development, Assistance and Training

If the world will be fully mirrored in this new digital environment – does that also include global regulations, laws and government jurisdictions?

Reminding us that people cheat, steal, and lie all over the world, Karyn said we also need to consider how to protect citizens in virtual worlds from bad actors. Anti-money regulation is just part of that approach.

Clearly the global economic system also needs to be protected as it becomes increasingly incorporated with the crypto economy, as does the money of those who are using the metaverse. This can be done by making sure users understand the risks.

What we can do about financial crime in the metaverse

The path to battling financial crime in the metaverse is not straightforward and remaining aware of the possibilities is just the beginning. Going forward, it’s crucial to continue discussions with industry experts and subject matter experts, to keep tabs on regulatory developments around the metaverse and virtual assets, and to prioritise a robust AML approach that will hold up against emerging threats.

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