Banks and financial services institutions have opportunities to manage digital identities in the metaverse, potentially tapping modern cryptography to do so. They should, however, ensure they are prepared to manage the risks that come with adopting any new technology.
There had yet to emerge an effective way to implement general-purpose digital identity and without which, the metaverse could not function. This currently was the missing ingredient in the equation, said advisor on digital financial services David G.W. Birch, who was speaking at Huawei's Intelligent Finance Summit 2022 held this week in Singapore.
Citing The Financial Times' definition, Birch said the metaverse was a collection of shared virtual worlds in which people could navigate via their digital assets and digital identity--or" economic avatars", as coined by virtual reality specialist Jaron Lanier.
While physical things could be repurposed--via tokens--and exist in virtual worlds, there needed to be an effective way to manage social identities and credentials.
Birch noted the lack of a global digital identity that was recognised regardless of where the individual was. Pointing to banks as potential players that could lead in this space, he said these financial services institutions already were experienced in Know Your Customer (KYC) processes. These are adopted by banks worldwide to verify a customer's identity and transactions as well as assess risks of unlawful practices, such as money laundering,
With their expertise in KYC, financial services institutions then could apply modern cryptography to plug the digital identity gap, he said. Based in the UK, Birch also is a venture parter at 1414 Ventures, a US-based fund that invests in early-stage startups in the digital identity market.
He added that a winning strategy in the metaverse would further comprise digital wallets, which he said were central to three key components in the metaverse--virtual worlds, Web 3.0, and digital identity.
With wallets now containing mostly data related to identity and credentials, these had to transition into the virtual space to support the metaverse. Being part of the digital wallet ecosystem, hence, would be a critical strategy for banks, he said.
He noted that financial services institutions, backed by an established reputation in the physical realm, would have the differentiating trait to facilitate this.
Digitalisation carries with it multiple risks
The involvement of any new technology, though, came with potential challenges that banks would have to manage.
Speaking at the summit, Vincent Loy, assistant managing director of technology at Monetary Authority of Singapore (MAS), said the adoption of emerging technology came with some amount of uncertainty and chance it would not work as expected.
Financial services institutions needed time to understand the technology and ensure they could handle the risks that came with it, said Loy, noting that this was amongst key risks he was concerned about as an industry regulator.
Early adopters typically were the first to confront design flaws and other unforeseen implementation challenges, he said. While this did not mean banks should not be innovative and leverage new technology, he underscored the need to be able to mitigate potential risks.
He also pointed to legacy systems as another area that posed serious risks to the sector. These systems supported critical workloads but were costly to maintain, he said, adding that they also lacked documentation and carried unknown vulnerabilities. In addition, they were reliant on employees who might not be with the organisation in the future.
Cybersecurity also continued to be a key challenge for the sector due to an increasing attack surface, Roy said.
Third-party attacks, in particular, were concerning as financial services institutions' use of open source software and open standards increased, he said, noting that it was neither economically viable nor realistic for these organisations to use only in-house products and services.
Along with the benefits it offered, the adoption of cloud services also came with potential risks that needed to be managed, he added.
He urged financial services institutions to be mindful about managing the technological risks that came with digitalisation, as they navigated a complex and fast-moving external environment,
He also underscored the need for organisations in both the financial services and technology sectors to engage with regulators to better understand the various challenges and ideate potential solutions.
At the summit, Huawei urged the financial sector to "rebuild its core competitiveness" as global markets underwent digital transformation and focused on sustainable development.
To do so, the Chinese tech giant identified key challenges the industry would need to address, including the ability to process massive volumes of data in real-time, deliver "end-to-end" user experience, and manage complex networks and multi-cloud environments.
Huawei's global digital finance CEO Jason Cao said the vendor looked to facilitate this by enabling its customers in the sector build "smarter and greener finance based on better connections, stronger intelligence, and more scenarios". These encompassed providing converged data platforms, customer engagement applications, and hybrid- and multi-cloud architectures to ease cross-cloud management and deliver more agility, Cao said.