AR/VR and the Metaverse Will (Someday) Change Financial Services Regulation — Here’s How | Goodwin

This is the first in a series of alerts in which we will 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 a metapresence. Stay tuned for follow up alerts as we build on these ideas.

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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.

WHAT DOES THE METAVERSE HAVE TO DO WITH FINANCIAL REGULATION?

It doesn’t take much to envision how broker-dealers, exchanges, investment advisers, banks, underwriters, funds, public and private companies, and others in the financial markets might utilize the metaverse to promote and grow their businesses. Virtual client meetings, branch office inspections and regulatory exams, interactions with colleagues, road shows, board meetings, and investor days are all real possibilities, along with a couple dozen others. The pandemic has accelerated broad adoption of remote-work environments and a movement away from in-person engagement. Proceeding with a metapresence is a logical next step for many businesses to consider (even if it’s likely off in the distance from a timing perspective).

Financial institutions operate within a highly regulated construct of complex and often less-than-clear statutes, regulations, rules, regulatory guidance, and common law. A foray into the metaverse by any of these market participants will be met with scrutiny by a multitude of regulators. Regulatory compliance will need to be top of mind for everyone in this space. Examples include requirements related to recordkeeping, communication standards, KYC/customer identification, supervision of personnel, and cybersecurity concerns (especially in light of stepped-up SEC expectations and scrutiny), just to name a handful.

CAN (SHOULD) WE DO THIS? THINK IN 3D!

Many firms will ask whether establishing a metapresence is possible and, even if that’s a yes, whether they should. What are the pros and cons? What are competitors doing? Is this an opportunity to differentiate from the rest of the pack? Or is this a colossal snake pit of risk and liability into which they’re stepping? Firms will need to closely examine existing regulatory requirements and should proceed with caution and the understanding that guidance from regulators will likely only come after they become aware of a development or practice that makes them uncomfortable or that they think is inconsistent with existing rules.

For those that do proceed, thinking in 3D will be critical. What we mean by that is:

1. Design. Map your firm’s strategy for staking a metapresence. Identify the key considerations, risks, challenges, and opportunities for your firm. Plan for unknowns. Include key stakeholders within your organization and your contacts at regulators (keeping them in the dark probably hurts you here). Integrate your systems, processes, and controls. Strive to ensure that messaging to clients and the market is crystal clear. Then hit repeat on all this to catch what you might have previously missed.
2. Deployment. Rolling out your metapresence strategy should be done carefully and purposefully. Ensure that your personnel are well-trained. The various components of your real-life business must be speaking to and working with the virtual components. Your messaging to the market must be on point. Stay in close communication with your regulators, not only on successes but especially if hiccups occur (and before they grow into actual problems).
3. Dedication. It will take commitment to ensure that a metapresence is working for your firm’s business and this will be a very subjective set of inputs and outputs for each firm in the space. Regular and repeated reviews of progress and status and opportunities for adjustments are critical. Seek input from your clients and your personnel on what’s working/not working. Consistently look for regulatory and compliance gaps and plug them immediately.

LOOKING AHEAD

As FinReg lawyers, it’s incredibly interesting (and yes, very nerdy) to think about how regulators and the courts will apply existing law and policy to activity in the metaverse. Will the SEC or other regulators be out in front of this movement or create new rules? Unlikely. Financial institutions will need to tread lightly as they establish a metapresence. This is not dissimilar to the early days of online-brokerage, robo-advice, or even use of social media by firms. If done in a rule-focused and compliance-minded way, early-adopters may get a leg up on their competition by appearing more attractive to younger investors. And on top of potentially enhancing engagement with clients, staking a metapresence could actually be fun — let’s not forget about that!