The metaverse: new worldwide web or next Wild West?
Scale, complexity and risk
Even in an age of unprecedented technological progress, reshaping the world is no easy feat. A dramatic disruption of the status quo invariably demands an effort that is not just immense but genuinely multifaceted.
Arguably the most influential innovation of recent decades demonstrates this truth. The internet did not prove transformative at the mere flick of a switch, and it was certainly not the work of a single tech titan acting in isolation.
In fact, it cemented its centrality to our lives over the course of many years and required the successful coming together of numerous stakeholders. Its architects and enablers included businesses, policymakers and regulators – not to mention investors.
The realization of the metaverse will be similarly protracted and complicated. The conception and implementation of a massive network of 3D virtual environments can reasonably be expected to unfold over a significant period of time and involve far-reaching collaboration.
A key point for investors is that such a colossal and complex undertaking is likely to bring risks – just as it is likely to bring opportunities. With the metaverse era growing ever nearer, it is important to appreciate what these risks could be and how we might seek to mitigate them.
Innovation versus regulation
One way of understanding the risks that potentially surround investing in the metaverse is to reflect on the risks that surround investing in tech more generally. Maybe foremost among these is what is sometimes known as “the pacing problem”.
This issue has arguably existed for centuries, but it has never have been as pressing or as prevalent as it is today. IT industry analyst Larry Downes neatly encapsulated it when, writing more than a decade ago, he warned: “Technology changes exponentially, but social, economic and legal systems change incrementally.”1
At the heart of this quandary is the possibility that innovation will comprehensively outstrip regulation. We saw this during the early years of the internet, and we now are seeing it again amid the rise of concepts such as cryptocurrencies, tokenization, artificial intelligence and machine learning – all of which will be vital to how the metaverse functions.
The worst-case scenario is that an absence of meaningful frameworks results in a kind of state-of-the-art version of the Wild West. Such a perilous free-for-all could undermine and even completely derail the desired shift.
There have already been instances of metaverse-related projects winding down because of aspects of the pacing problem. One was proposed blockchain-based payments system Diem, whose CEO blamed the initiative’s demise on regulatory opposition and inertia2.
The dark side of the metaverse
“Metaverse” is still to be defined by any global standard-setting body. This is perhaps not particularly surprising, given that at present there is no industry-wide definition either.
There are, though, nascent signs of a legislative response. In late 2021 the UK government referenced the metaverse in the drafting of its Online Safety Bill, with Nadine Dorries, the Secretary of State for Digital, Culture, Media and Sport, directly addressing Meta – formerly Facebook – over the prospect of detrimental content.
“We heard that they are putting 10,000 or 20,000 engineers on to the metaverse,” said Dorries. “Put those 10,000 or 20,000 engineers now on to abiding by your terms and conditions and removing your harmful algorithms.”3
Such comments echo fears that the metaverse will amplify the “dark side” of the worldwide web. For example, according to the Center for Countering Digital Hate, popular virtual-reality app VRChat hosts abusive behavior – including bullying, sexual harassment, racism and extremism – an average of every seven minutes4.
“Our researchers discovered that the metaverse is a haven for hate, pornography and child-grooming,” said the Center’s Chief Executive, Imran Ahmed. “[It] connects users not just to each other but to an array of predators. If the metaverse is safe for predators that it’s unsafe for users, especially children.”5
Thinking in ESG terms
Not least for responsible investors who apply the prism of ESG, concerns such as these clearly show much still needs to be done. To quote an exhaustive Citi report: “All the challenges of the internet could be magnified in the metaverse.”6
These challenges include free speech, privacy and other social considerations. They also encompass a range of technical difficulties, such as interoperability, financial decentralization and the handling of crypto-assets.
They even touch on the environment. Widespread use of cryptocurrencies could entail enormous energy consumption as a consequence of the computational power needed for “mining”7, while Intel says computing capabilities will need to improve by “several orders of magnitude” in order to deliver a “truly persistent and immersive” metaverse experience8.
Encouragingly, ESG investing as a whole offers a valuable lesson – one that further underlines the need for multi-stakeholder collaboration. It is that positive, lasting change is likeliest when all interested parties co-create a shared and symbiotic sense of direction.
Ideally, this would happen on a global scale. Crucially, it would also foster conformity – allowing for the observation and enforcement of rules and standards – without stifling further innovation as the metaverse continues to take shape.
Making waves
Beyond this, of course, we can reduce risk by employing a sound investment process. Our basis for this may be much the same as that for any tech investment: a focus on valuation, fundamental analysis and the long term.
Naturally, the questions we might usefully ask should take account of the risks discussed here. Is growth sustainable? Are there vulnerabilities? Do a company’s products or services really tap into the thematic trends driving the metaverse’s emergence?
In tandem, we should remember that – as noted earlier – risk is the eternal bedfellow of opportunity. With the metaverse, as with any investment, the aim should be to eliminate or minimize the former while embracing and maximizing the latter.
We would point out that this is a multi-faceted area. A technological revolution necessarily leads into uncharted territory. Investors are always confronted with this. This is always accompanied by risks. Investors interested in the metaverse should be aware of these risks.
Dr Henning Stein is Invesco’s Global Head of Thought Leadership and Market Strategy.
Metaverse
Imagine a world where you can be anywhere at anytime – a virtual world that feels remarkably real, and yet, limited only by your imagination. Welcome to the Metaverse, where the physical and virtual worlds collide.
Footnotes
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1See Downes, L: The Laws of Disruption, 2009.
2See, for example, Politico: “Facebook’s Diem on brink of collapse amid sale negotiations”, 27 January 2022; and Citi: Metaverse and Money: Decrypting the Future, March 2022.
3See, for example, Houses of Parliament: “Joint Committee on Draft Online Safety Bill”, 4 November 2021.
4See, for example, Center for Countering Digital Hate: “New research shows metaverse is not safe for kids”, 30 December 2021.
5Ibid.
6See Citi: Metaverse and Money: Decrypting the Future, March 2022.
7See, for example, BBC News: “Tesla will no longer accept Bitcoin over climate concerns, says Musk”, 13 May 2021.
8See, for example, Intel: “Powering the metaverse”, 14 December 2021.
Investment risks
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Data as at June 2022, unless otherwise stated.
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