The new growth frontier: Three ways financial services can prepare for the virtual economy

The virtual economy is now worth more than $100bn, including hundreds of thousands of online jobs and millions of virtual assets suitable for insuring and collateralization

L’Atelier, an independent subsidiary of BNP Paribas Group, has today published its recommendations for how financial services firms – including banks and insurers – can capitalise on the growing revenue opportunities in the ‘virtual economy’; the system of online jobs, virtual assets and exchanges which has emerged across gaming platforms, such as Fallout and Minecraft, and non-gaming virtual worlds, including Decentraland and Second Life.

The virtual economy is already worth over $100bn annually. In addition, it provides real incomes for hundreds of thousands of people totalling at least £52.4bn ($66.2bn) in gross value added (GVA) – equivalent to the total output of Bulgaria.

Following the publication of The Virtual Economy,  L’Atelier’s first-of-its-kind report into the scope and scale of the virtual economy, the foresight business has outlined three steps which banks and financial services firms can take to capitalise on the opportunities presented by the virtual economy and its virtual assets.

Step 1: Insure virtual assets

There is existing and growing demand for virtual assets, which command real value and which are acquired for large sums of money. However, these assets remain uninsured.

The ability to insure virtual assets would lead to more certainty and stability within these growing markets, and open up lucrative new revenue streams for those firms that can successfully develop policies for this currently overlooked asset class.

The most promising asset category is non-fungible tokens (NFTs), which represent unique non-interchangeable virtual items with clear provenances recorded on the blockchain. These assets include virtual real estate like Cryptovoxels, visual art like Josie Bellini, virtual collectibles like CryptoKitties, plus event tickets and social network handles.

 There are historical examples of non-NFT virtual assets being sold for hundreds of thousands of dollars, even when uninsured, including “Club Neverdie” in Entropia Universe, which was sold in separate lots for a total value of $635,000 as early as 2010. The ability to generate unique, transferable interoperable assets should augment the value of similar assets over time.

Step 2: Collateralise virtual assets

Once virtual assets have a definable value, they could also be used to collateralise loans or even construct new securities; just as ‘real’ assets have been for decades.

The creation of non-fungible tokens has made it possible to create unique virtual assets with clear provenance. The emergence of new virtual asset exchanges, such as OpenSea, makes it possible to establish a live market value and historical price data for virtual assets.

Examples of assets which could be collateralised include plots of virtual real estate in Decentraland – where land transactions totalling $50m have taken place since the platform launched in 2017.

Step 3: Invest in understanding the virtual customer

The ability to know and understand your customer is critical when entering any new market, and the virtual economy is no exception.

The emergence of the virtual economy has given rise to new career paths totally unfamiliar to traditional finance. To successfully serve this new environment and audience, financial institutions need to immerse themselves in the virtual worlds and online platforms in which their potential customers make either all or part of their income.

This will likely entail hiring digital natives with first-hand experience and expertise in navigating the virtual economy – for example, modders and virtual asset creators – to advise on and shape virtual strategies. However, financial services leaders must also invest time and resources into understanding the virtual economy for themselves.

Commenting, John Egan, CEO of L’Atelier, said:

“The virtual economy is the next major growth frontier for banking and financial services. It’s a significant economic entity already, home to virtual assets with billions of dollars of real-world value, and it is set to grow rapidly, both in absolute size and in its reach into our daily activities. 

“As the virtual economy matures, we will see the development of financial services products that have been designed specifically for the emerging job roles within the virtual economy and the virtual assets that are created, owned, bought and sold in these online worlds. 

“The financial services firms that invest now in deepening their institutional knowledge of the virtual economy and in developing ways to insure and collateralise virtual assets will be able to tap into lucrative new revenue streams in the next decade and beyond. Virtual assets may exist only in the digital world, but the value they command is real and their numbers are growing.”