On October 24, 2024, FINRA’s Office of Financial Innovation published its metaverse report as “an initial step in beginning an important dialogue with market participants about potential use of the metaverse within the securities industry.” FINRA regulates US broker-dealers and provides various related services within the securities industry. The report gives an overview of how developments related to the metaverse may affect brokers’ business models and processes and explores various related issues.
FINRA’s metaverse report touches on potential use cases of the metaverse across data visualization, virtual trading, payments, training, investor education, solicitation and customer service, and even firms employing “digital twins” (i.e., the digital representation of physical objects) to model office space needs, run test case scenarios, and enhance situational awareness. On the flip side, FINRA identifies potential challenges with firms’ use of the metaverse, including across cybersecurity, privacy, resource allocation, and interoperability. FINRA also reminds its members that its rules are meant to be technology-neutral and continue to apply if members use the metaverse in the course of their businesses. The report includes a broad request for comment, and the public comment file will likely contain some additional insight into how firms are engaging with the metaverse (if any/at all).
The timing of FINRA’s report is peculiar, given that much of the talk of the metaverse that previously captivated consumers and various business sectors all but dried up around spring 2023, replaced by the fascination with and obsession over AI. Questionable timing aside, we are pleased to see that FINRA has continued its consideration of metaverse-related issues for the securities industry. Back in 2022, for example, FINRA announced it was developing Xpand Reality, an AR-based app for investor education.
We, too, were ahead of the curve with a focus on metaverse in 2022 and 2023, including exploring what it would mean for financial services firms to establish what we have referred to as a “metapresence.” You can read our views on how the metaverse could affect the securities, hospitality, healthcare, and insurance sectors, along with related data, privacy, and bankruptcy considerations. Below are the titles, links, and excerpts for the related securities industry materials we published (though please keep in mind that we did so two-plus years ago).
AR/VR and the Metaverse Will (Someday) Change Financial Services Regulation — Here’s How (February 16, 2022)
This is the first in a series of alerts in which we explore the practical reality of the opportunities the metaverse will present for the financial services industry and challenges firms will need to overcome as they establish what we have referred to as a “metapresence.”
Chances are, most reading this have not journeyed into the world of virtual reality (VR) and augmented reality (AR) or taken a virtual step in the metaverse. If you don’t have a metapresence yet, that might change soon. Well-known tech companies are devoting significant resources to plant digital stakes in the metaverse via augmented and virtual experiences and services. One even formally changed its name based on the belief that the metaverse is the next digital frontier, akin to social media’s infancy in the mid-2000s.
But will the financial services industry venture into the metaverse? We think so, especially with rapidly increasing convergence of the means (enhanced technology and infrastructure), motive (increased opportunities for client engagement and business generation), and opportunity (regulators’ open-mindedness to adjacent concepts plus increased uptake/usage by the general public) to utilize this burgeoning technology.
Are the SEC and FINRA Moving to the Metaverse? (August 3, 2022)
Are the SEC and FINRA setting up shop in the metaverse? Not quite yet, but we stress yet! Like private sector businesses, U.S. financial services regulators are increasingly exploring what the metaverse, augmented reality (AR), and virtual reality (VR) mean for their registrants’ businesses and also for the means and methods of regulating them.
Our guess is that it is only a matter of time before regulators utilize elements of AR, VR, and the metaverse to conduct remote exams — but that is likely several years away. What is more likely in the near-term is that many financial industry firms will develop a metapresence in search of increased efficiency and greater engagement with customers and personnel. When this happens, regulatory exams, whether in-person or remote, will encompass firms’ virtual footprints. Regulators will likely apply existing regulatory guidance and frameworks early on, but may eventually develop new rules and expectations over time to align with the advancement of technology.
Firms can and should be “thinking in 3D” (more on that below) early and often so they and their personnel are prepared for that virtual knock on the door.
Texas Securities Sheriff Wrangles Metaverse Gamblers (April 22, 2022)
Securities law enforcement entered the metaverse recently in the form of an emergency cease and desist order issued by the Texas State Securities Board against individuals and a company using NFTs to finance multiple metaverse casinos. Much like Wyatt Earp busting into the O.K. Corral, this one gets interesting.
The order alleges a high-tech fraudulent securities offering in which the respondents sought to raise capital via the offer of more than 12,000 non-fungible tokens or “NFTs” to fund development of multiple virtual casinos across metaverse platforms. These casinos would be spaces a person could enter virtually (in avatar form) to play the types of games often found in brick-and-mortar casinos. In many cases, the virtual land to build the casinos had already been purchased. Respondents were allegedly also developing a web 2.0 casino available online via the plain old internet.
The order alleges securities registration violations, deceit of likeness (the web 2.0 casino was called “Sands Vegas”), and numerous other counts of deceit, fraud, and concealment. These allegations relate to failing to disclose the qualifications of the principals, not disclosing minting royalty amounts, deception as to prior casino experience, and lack of disclosure regarding the developers, among others.
NASAA (State Securities, not Outer Space) Cautions Investors Exploring Opportunities in the Metaverse (September 23, 2022)
The North American Securities Administrators Association (NASAA), an organization of state and provincial securities regulators in the United States, Canada, and Mexico, recently issued an investor advisory warning about the potential risks of investing in the metaverse. The potential for fraudulent securities activity exists “IRL” (in real life) and in virtual worlds, whether through investing directly into a metaverse-focused company or by making an investment while par-digi-pating in the metaverse as an avatar (we may need to workshop that one a bit).
NASAA points out that the difference between investing IRL and investing in the metaverse is increasingly blurry, but “real assets can be put at risk and transferred” in either case. Importantly, the advisory emphasizes that “the rules that apply to investments in the physical world also apply to investments in virtual worlds.” On that point, the SEC and state and provincial securities regulators could not be more clear.
The NASAA advisory notes that the metaverse is “increasingly viewed as the future of the internet” with large, well-known technology companies already deploying resources to develop the space. As growth and advancements in this space continue, so too will regulatory scrutiny.
Issuers, intermediaries, or other service providers considering utilizing the metaverse or other facets of Web3 technologies must conduct themselves with the same care as they would IRL. Firms should pay special attention to the novel ways existing rules may apply in the metaverse, including in the areas of marketing and communication. Concerns around cybersecurity and the protection of personal information, an evergreen regulatory focus, are intensified given the digital landscape of the metaverse.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.
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