Financial services companies move into the metaverse

Registered Investment Advisor Arbor Digital’s new storefront will be designed to look like any other wealth management office, with a new sign hanging from a canopy on a finely landscaped lot.

The only difference is that this workplace, slated to open in 2023, won’t be in a downtown brick-and-mortar building — it’s inside the Metaverse.

The Anchorage, Alaska-based company has already set aside around $20,000 in cryptocurrency to buy its virtual land after seeing increased customer interest in the Metaverse, a loosely defined network of online communities. where users create small towns and live virtual lives.

Financial services firms are expanding their shingles into these burgeoning virtual societies in hopes of better understanding how users interact with each other online and possibly attracting a new breed of digital native customers. These early adopters are also trying to understand the economics of the metaverse — known as metanomics, where consumers buy and sell virtual goods on the blockchain — to find viable ways to attract new business.

Arbor Digital said it was initially focused on financial education and would focus on setting up online webinars on its virtual pitch and maybe even charging an entry fee. The marketing opportunities are also limitless.

“We wanted to explore the different financial activities involved,” said Marc Nichols, chief product officer at Arbor Digital. “Can we stake out the land? Can we make a revenue base out of it? Can we rent a space or use our showcase to organize events? »

A job fair held last month in arguably the best-known community called Decentraland was another hands-on example of real-world businesses using virtual environments. The forum was complete with employer-sponsored virtual booths and well-dressed avatars offering information about openings to potential candidates.

While the Metaverse officially hit the mainstream in November after Facebook Inc. announced its official name change to Meta, financial services companies are equally optimistic about its future.

JPMorgan Chase & Co. expects market opportunities in the metaverse to reach $1 trillion a year in the coming years and eventually “infiltrate all sectors” of the economy, according to a January report. Warner Music, the entertainment giant, is building a music-focused theme park to host concerts on a competing platform called Sandbox, which already has hundreds of partnerships with famous brands, like sportswear maker Adidas and the iconic rapper Snoop Dogg.

The Wall Street investment bank is so optimistic about the future of digital worlds that it has set up its own storefront in Decentraland’s Metajuku Mall. The bank lounge features a live tiger, a soaring staircase and of course, a portrait of CEO Jamie Dimon.

JPMorgan declined to comment on its future metaverse plans.

SET UP A STORE VIRTUALLY

The hype around metanomics may be real. Online avatars will need clothes, say supporters, and fashion designers are already selling limited-edition outfits. There are also galleries showcasing virtual rare art collections, many in the form of non-fungible tokens called NFTs, and cutting-edge entrepreneurs are already charging for admission.

For Nichols, these digital-native companies may one day seek virtual financial advice.

“If you’re starting an RIA today, you need a website with the services you provide,” he said. “Chances are that in the future there will be niche advisors who are native to crypto and only offer online financial services. When they build their businesses, it will be in the metaverse .

Some $54 billion is already spent annually on virtual goods, nearly double the amount spent each year on buying music, according to the JPMorgan report.

“It’s like investing in early stage startups,” Nichols said. “Normally only venture capital and private equity have access to it, but now we can get involved much earlier in the process, basically on the ground floor.”

There are a handful of companies that already provide exposure and help advisors invest in the metaverse on behalf of their clients.

Gemini Trust Co., the huge cryptocurrency platform run by the Winklevoss brothers, offers the ability to buy Decentraland coins, called Mana, which fuel this booming online economy. Mana allows users to buy and sell real estate, which is also a non-fungible crypto token, called Land, which represents ownership. Each plot of land is unique and owners can choose how to develop it.

The average price of a plot of land has doubled over a six-month window in 2021, from $6,000 in June to $12,000 in December across the four major metaverses, according to JPMorgan data.

Although custody issues have prevented advisors from directly buying plots of land in the metaverse on behalf of a client, it hasn’t stopped them from buying the underlying cryptocurrencies that run these virtual economies. .

For Paul Farella, managing director of Willow Investments, metaverse tokens are a way to diversify digital assets and expose themselves to explosive growth that clients are unlikely to find in more mature cryptocurrencies, like Bitcoin or Ethereum.

“If you think crypto is going to take off and the metaverse could overturn current economic models, then here’s a way to get exposed early on,” Farella said.

In January, Gemini acquired Bitria, a five-year-old startup that provides tools for advisors to access and manage holdings of Bitcoin and other tokens.

The platform offers separately managed account wallets that can include any of over 70 different digital assets, including metaverse tokens.

Advisors now see access to the metaverse as an “essential component” to help diversify digital asset portfolios, said Daniel Eyre, head of Gemini Bitria.

“The metaverse…has the potential to be an important part of building the investment portfolio.”

Dave Gedeon, Head of Multi-Asset Indexes, Bloomberg

Besides crypto, exchange-traded funds in the metaverse are another popular way for advisors to gain exposure for clients, with global assets now pouring into new ETFs that offer exposure to companies trying to create realities. virtual.

“The metaverse, like other thematics, has the potential to play an important role in building an investment portfolio,” said Dave Gedeon, head of Bloomberg’s Multi-Asset Index business. “Thematics, particularly in growth areas like technology, have been increasingly adopted in portfolio construction to provide investors with more specialized exposure.”

Metaverse-focused ETF assets have exploded to around $2.2 billion, according to Bloomberg, largely due to Facebook’s renaming last year. While these funds provide exposure, they typically only include stocks associated with the metaverse, rather than the underlying tokens themselves, Eyre said.

“Currently, there are very few options available to advisors who want to provide crypto access to their clients,” he said.

The surge in demand for digital assets is largely driven by advisors looking to find the most attractive investments. These advisors come from all corners of the industry, Farella said, including CFPs and CPAs.

“If you look at what big money managers are doing right now, they’re going way beyond Bitcoin,” he said. “Hedge funds and private placements go much further down the spectrum. In fact, we are playing catch-up.

THE ‘NEW INVESTOR’

Customers are also driving meta demand, but perhaps not the customer demographics one would expect. Since cryptocurrency platforms are so widely available, the younger generation of customers have no problem opening DIY accounts with their preferred provider. These clients represent the group the Financial Industry Regulatory Authority Inc. calls the “new investor,” and they are already rewriting the way Americans invest online.

But for clients in their late 40s and 50s, who have seen the headlines and the potential for growth, seeking professional help from a financial adviser is seen as the more prudent option.

“Clients come in and say, ‘I’m interested in this stuff and I see a lot of potential here, but I don’t have time to figure out what’s what,'” Farella said. fulfilled.”

Once clients started to see price appreciation in some of the smaller coins – like Decentraland’s Mana, which was trading around 50 cents per coin in July before rising to over $5 per coin in November after Facebook’s announcement – ​​they started asking questions. “Clients are asking for exposure beyond Bitcoin, and they want the metaverse,” he said.

Most meta crypto wallets are built around the five or six most well-known coins, like Bitcoin and Etherum, but add much smaller allocations to the meta coins. The Arbor Digital Compass Wallet, for example, has four main compartments, including valuable storage coins like Bitcoin, scaling solutions like Ethereum, decentralized financial assets, and so-called app coins that feature the metaverse. Less than 20% of the portfolio is allocated to these types of cryptocurrencies.

“There are different kinds of confidence assumptions about tokenomic models,” Farella said. Some of the major variables include the rate of issue of money, inflation rates, supply dynamics, and distribution rates.

While the metanomics of these new communities is still being worked out, their potential to revolutionize e-commerce is hotly debated.

Unlike more mainstream digital communities, including traditional social media platforms like Facebook, Twitter or Reddit, the metaverse has the potential to become a new digital city, which could rewrite the way consumers spend their time and money online. .

Farella likened today’s social media platforms to Disney World, where users are simply tourists in a highly organized platform based on advertising dollars. The Metaverse business model, however, will be completely different.

“There are all types of vendors and all types of merchandise in these metaverses, where users now have the power and ability to customize their own shops and stalls and how they choose to develop their space,” Farella said. “It’s more like an open bazaar in a big metropolitan city, where anything is possible.”

Stephen V. Lee