FINRA begins a dialogue with financial market participants about the metaverse’s potential opportunities, applications, and risks.
By Jenny Cieplak, Ghaith Mahmood, Stephen P. Wink, Naim Culhaci, and Deric Behar
On October 24, 2024, the Office of Financial Innovation (OFI) of the Financial Industry Regulatory Authority, Inc. (FINRA) published “The Metaverse and the Implications for the Securities Industry” (the Report).
FINRA cited current estimates that around 37.6 million users spend over $28 billion a year in metaverse platforms, with economic growth projected to reach $5 trillion by 2030. OFI therefore consulted with securities firms and other financial institutions, hardware and software providers, academics, industry observers, and government entities to better understand the opportunities and risks that metaverse platforms may present for the US financial industry. The Report outlines OFI’s findings and covers an overview of how it defines “the metaverse,” market trends, potential applications for metaverse platforms that the securities industry is exploring, potential use cases, challenges and related factors associated with metaverse platforms, and potential regulatory considerations.
The Report is meant to be exploratory and informational only, and states that it “does not create any new legal or regulatory requirements or new interpretations of existing requirements.” FINRA, however, notes that its rules, and the securities laws generally, apply regardless of the technology used to facilitate brokerage activities. FINRA is requesting feedback from market participants on all aspects of the Report and metaverse use cases in the securities industry by March 14, 2025. Firms may also submit interpretive guidance requests on the application of FINRA rules to their specific uses of the metaverse.
What Is the Metaverse?
FINRA acknowledges that the term “metaverse” has no concrete definition and interpretations may differ. But for purposes of the Report, FINRA defines the metaverse as “virtual worlds that are immersive and interactive and may be experienced in new ways through technological developments in hardware and software . . . [that] may include digital spaces using various techniques to allow individuals to engage in social or business activities through the internet or other networked platforms.” As discussed below, FINRA also acknowledges that metaverse platforms can be more or less centralized, and that decentralized metaverse protocols have very different benefits and risks from centralized online environments. But the Report generally does not distinguish between these two very different types of platforms apart from a brief section discussed below on (de)centralization and interoperability.
The Report recognizes that while gaming platforms (as centralized metaverse platforms) have been the leading platform for metaverse adoptions, there are emerging opportunities for financial institutions to operate within metaverse platforms. These opportunities stem from the ascendancy of digital and mobile culture and the importance of digital engagement strategies that are calibrated to reach younger generations of consumers and investors.
Metaverse Use Cases in the Financial Services Industry
According to FINRA research, certain financial institutions (including broker-dealers) “are actively experimenting with incorporating metaverse platforms and their immersive technologies.” Firms are exploring metaverse opportunities not only for external purposes (marketing, client engagement, etc.), but internal ones as well (operations, internal training, staff development, etc.). FINRA highlights certain key areas in which the securities industry may be assessing metaverse-related use cases.
- Data Visualization: Metaverse platforms can enhance data visualization techniques to improve data consumption, analysis, and presentation, which may enable firms and sophisticated investors to more readily grasp trends, patterns, and connections across the data. For retail investors, FINRA said that “enhanced visualizations may facilitate investors’ understanding of concepts such as volatility, diversification, bull and bear markets, and the prospective growth of investments.”
- Virtual Trading: While no firm has yet implemented virtual trading capabilities, some firms have indicated that they are exploring the possibilities. Some benefits metaverse platforms may bring to trading include customizable data and research, data visualization and interactivity (see above), and new channels of communication with colleagues and counterparties.
- Digital Twins: In metaverse platforms, the ability to simulate physical objects while incorporating immersive, interactive, or collaborative features offers market participants “graphically enhanced simulation, analysis and monitoring in a range of daily business activities.” Some examples noted are reduced complexities in institutional client onboardings, IPO simulations, test-case scenario vetting, cybersecurity testing, fraud identification and prevention, and human behavior assessment.
- Payments: Consumers are projected to spend more time and money in metaverse platforms in the coming years, potentially accelerating the trend toward digital commerce and away from physical commerce. “If users become more accustomed to conducting financial services in the metaverse,” FINRA notes, “this may ultimately shape how investors wish to interact with financial market professionals, including within the securities industry.”
- Training and Collaboration: By fully immersing students in virtual learning environments with realistic simulations, training in the metaverse has proven quite effective (possibly even more than physical or online learning with their attendant distractions). Collaboration between teammates in diverse physical locations may also be improved in a metaverse space as opposed to telephone or video communications. In light of these opportunities, some firms have been exploring use cases in the metaverse for training, collaboration, and presentations.
- Investor Education: Just as metaverse platforms may prove valuable for internal employee training and collaboration, they also show promise in the area of investor education, as a novel way to drive financial literacy through immersive and engaging content.
- Customer Solicitation and Service: As digital commerce, communications, social media, gaming, and entertainment play an increasingly dominant role in consumers’ lives, metaverse platforms may present firms with novel opportunities for digital engagement. A firm that is well-positioned in various metaverse platforms can drive brand awareness and loyalty, especially among younger investors steeped in social media and gamification.
Challenges
FINRA highlighted certain challenges facing firms that are exploring the metaverse as part of an internal or external engagement strategy:
- (De)centralization and Interoperability: FINRA notes that two types of metaverse environments present different benefits and risks to each that firms may wish to consider in developing a metaverse strategy: centralized (a platform that is owned and operated by a central entity, such as the popular metaverse games in the market now); and decentralized (an environment generally governed by a community and software protocols). Discussions of “interoperability” in the context of the metaverse usually refer to decentralized metaverse environments in which users can transition between different platforms within a single cohesive metaverse environment. However, the Report acknowledged observations that the economic incentives for developers of centralized metaverse platforms such as games and virtual worlds may lead to friction in actually realizing true interoperability within a single metaverse environment. When choosing either a centralized or decentralized application (or both), firms may wish to consider the ability of various applications to function together in a coordinated way.
- Resource Needs: To properly develop and implement a metaverse application or metaverse strategy, firms should consider any necessary technological issues such as distributed data storage plans and the capacity of their current wireless infrastructure. Personnel upgrades may also be necessary (such as through hiring or training), as firms may need staff with the appropriate skills and expertise to support a metaverse strategy.
- Data Privacy and Protection: Firms interacting with consumers (and collecting consumer data) in the metaverse “may consider whether they have adequate controls to protect their customers’ rights and to shield them from bad actors acquiring their personal data.” Appropriate recordkeeping and disclosure of data use may also be critical to meet consumer expectations for privacy in the metaverse.
- Cybersecurity: As in any digital environment, cybersecurity concerns are critical in the metaverse, especially given the ability of malicious actors to use the immersive technology to threaten employees and consumers with sophisticated impersonation, phishing, and social-engineering attacks.
Regulatory Considerations
Because metaverse platforms and environments allow financial institutions to engage and interact with people both internally and externally, firms should be aware of any existing laws, rules, and regulations that may apply to their metaverse presence, including those related to communication of financial advice, disclosure of risks, recordkeeping, and identity verification.
As far as regulatory compliance is concerned, the Report’s key message for financial institutions is that “FINRA’s rules—which are intended to be technology neutral—and the securities laws more generally, continue to apply if member firms use the metaverse in the course of their businesses, just as they apply when member firms use any other technology or tool.”
FINRA acknowledges that the Report does not provide a comprehensive list of all factors or regulatory issues associated with the metaverse, and therefore recommends that “[m]ember firms should conduct their own risk assessments regarding the potential regulatory implications of virtual spaces that pertain to their unique use cases and business models.” As metaverse adoption accelerates, commercial opportunities for securities dealers will proliferate. FINRA members exploring the metaverse should therefore be aware of the risks involved and plan accordingly.