Payments In The Metaverse Will Be Huge, But They Won’t Be Based On Cryptocurrencies (Or People)

Over on Wall Street, JPMorgan says that the demand for using cryptocurrencies as payment methods is falling off (and that was before the events of the past week, where FTX’s antics nudged the climate so that the crypto winter gave way to the crypto Ice Age.)

(I have to say that I am unconvinced that a mass market demand for cryptocurrency payments was ever there, but that’s a different point.)

Meanwhile, on Main Street, Walmart
WMT
CTO Suresh Kumar says that crypto will become an important payment tool across the metaverse and social media, areas of great interest to retailers because these are where customers will find and learn about new products.

What these statements, from people who ought to know, seem to mean is that no one will be paying with Bitcoin
BTC
in the future but on the other hand they will be paying with Bitcoin in the future. How can these views be reconciled?

Well, it depends (as so many of these stories do) on what you think “crypto” is.

If you think crypto means cryptocurrencies (eg, Bitcoin and XRP
XRP
) then these views appear to be at odds, with the Wall Street saying one thing and Main Street saying another.

If, however, you think crypto means a decentralized means of trading digital assets, then there is no contradiction in those views: people will indeed be paying each other in the metaverse using tokens exchanged using decentralized finance protocols but those tokens won’t be cryptocurrencies valued by supply-and-demand but they will be tokens linked to actual assets: dollars, gold, Walmart points or whatever.

This is an interesting area to think about because payments in the metaverse will be a big deal. Deutsche Bank experts predict a future in which there are multiple metaverse ecosystems, (with interoperability because of digital identity, credentials, and asset ownership). They go so far as to say this could usher in the next e-commerce revolution as it gains traction through advances in technology and becomes more mainstream.

(They also note that this means a significant role for financial services in those new ecosystems. If those metaverse ecosystems really were going to be nothing more than Fortnite with NFT Gucci hats to wear, or Call of Duty where you can buy ammo with Ether, then I wouldn’t be writing about them here. But the metaverses that I envisage, like Deutsche Bank, will require financial services of all forms to function properly as virtual worlds where scarce digital objects are traded between entities on the basis of their reputations.)

Whether you agree with the management consultancy McKinsey, which claims that the metaverse is “too big for companies to ignore….it has the potential to be the next iteration of the internet” and that by 2030 over $5 trillion will be spent their each year (more than the GDP of Japan) or not, there is no doubt that fintech players need a strategy for this new economic area. There will be money in the metaverse, but it will be digital objects (stablecoins and various other forms of fungible tokens) rather than Dogecoins.

Metamoney: More Radical Than You Think

If this view is broadly correct, then what will those digital objects be? It is not hard to see that in the short term they will be stablecoins. If I am paying for my car insurance in the metaverse, it will in the first instance be with digital Sterling. But in the longer run?

I have long thought that in this wholly online world, where digital objects can be continually traded in liquid markets, then the need for money as we know it as an intermediary fades. And while you might well not care that much for my thoughts on the future of financial services, remember that Matt Harris, a partner at Bain Capital
BCSF
Ventures and one of the key figures in the fintech investment community, predicted here in Forbes that this technology would mean the end of money as we know it because in the future “our assets will be 100% invested at all times”.

Matt’s view is that transactions will take place through the movement of these digital objects between counterparties without the intermediary of money and in my opinion he is wholly correct. The era of Dr. Edward de Bono’s “IBM
IBM
Dollar” is upon us.

(IBM, in de Bono’s early 1990s thought experiment, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. In other words, they would be what we now label digital objects, implemented using tokens. Dr. de Bono came to the conclusion that if you could exchange these objects directly between counterparties then you would not need to exchange them into money first.)

Metaverses full of digital objects continuously trading between digital identities may seem difficult to imagine but remember that this is not about transactions between people but, as I wrote in my book “Before Babylon, Beyond Bitcoin”, transactions between what Jaron Lanier labelled “economic avatars“. This is a world of transactions between bots capable of negotiating between themselves to work out how to value and fund deals.

Dr. de Bono’s vision of “pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements”. Dr. de Bono and Matt Harris are both visionaries who I take very seriously. So if they are right about this version of the future, what does that mean for fintech strategies right now?

Well, remember that Matt went on to write that “once identity is solved, credit risk becomes easier” and that Dr. de Bono predicated that this kind of ecosystem would depend on “instantaneous verification of the creditworthiness of counterparties” or, as I would put it in shorthand, reputation.

The metaverse economy is a reputation economy and it cannot exist without a digital identity infrastructure.

Wallet Wars

A consistent picture is emerging. Digital objects provide the scarcity that creates markets and reputation provides the confidence to trade in those markets. With these building blocks, the visions of Wall Street and Main Street are aligned and both depend on digital identity infrastructure, which is why there is so much activity in the sector right now.

The technologies of decentralized identity and verifiable credentials are evolving alongside the technologies of decentralized finance and tokens to create a dynamic (and, frankly, unpredictable) new relationships that regenerate the financial system.

If this picture is correct, and I have to say that I genuinely look forward to hearing readers’ critiques, then it highlights the key role of wallets in next-generation commerce.

In fact, it rather points to a world of smart wallets. By this I mean wallets with associated intelligent agents to do the financial donkey work that is either too boring (eg, paying for car parking) or too baffling (eg, deciding whether to put spare money into a tax-efficient cash savings account or one based on UK equities) for most of us to deal with. That will inevitably mean that the metaverse will be an environment where the overwhelming majority of transactions will be between smart agents, executed via wallets exchanging digital objects.

Payments in the metaverse are going to be huge, but they probably won’t have much to do with cryptocurrency (or people).