Investment, Inheritance & Legacy in the Metaverse
The increasingly popular Metaverse has accelerated the way in which we interact with the virtual world. Armed with new opportunities, we are now able to extend our actions past what was possible in just real life, and inevitably, our finances and future planning needs to catch up.
Introduction
Non-fungible tokens (NFTs) and real estate are some of the big-ticket assets being bought in droves in the Metaverse. According to DappRadar, NFT sales volume increased from $94.9 million in 2020 to $24.9 billion in 2021. Andrew Kiguel, CEO of tokens.com, reported that digital real estate prices increased by 400–500% in the last few months alone, with many plots selling for millions. There are even companies such as investinmetaverse.io or metaverse.properties who provide end to end metaverse virtual estate management services which encompasses property development and renting. Purchasing these estates require a few steps. First download Metamask, a chrome extension which acts as a digital asset wallet. Then, funds must be added to it using Ethereum based cryptocurrencies such as SAND (for Sandbox properties) or MANA (for Decentraland properties). You are then ready to begin purchasing!
These investments serve a purpose, from wealth-building opportunities to pass onto the next generation, to leaving your mark in this alternate reality. However, recent research by The Law Society shows that only 7% of participants they interviewed fully understand what happens to their digital assets after they pass away, and only 19% ‘somewhat’ understand. What is more shocking is that 93% of those who wrote a will did not take into account any of their digital assets or investments.
To better understand the current landscape from a customer perspective, we conducted rapid social media mining using Twitter data. Digital legacy was mentioned in over 100 tweets and there were many posts written by start-ups looking to infiltrate this space. Artist Amy Karle, one of BBC’s 100 most inspiring and influential women joined in the conversation, observing that “we are now faced with a new concept of life after death: the digital imprint of us that lives on after we die, and rights to continue to live or die in this space”. It’s clear from her question “what will your digital legacy be?” that we are on the edge of a wider conversation. We need to think about how customers will pass on their digital investments made in the metaverse, how they’ll be inherited and how they can create a sense of legacy.
So, what factors and trends impact the future of these services, and what must banks do?
The first revolves around the effective application of infrastructure to manage digital assets. Digital currencies, virtual estates and NFTs are just some of types of assets we can expect to be inherited in the metaverse. To currently inherit cryptocurrencies or NFTs, you would need to ensure your beneficiary is able to access your private key (usually stored in a digital wallet) without compromising your security. Otherwise, your assets will be abandoned and inaccessible. The RUFADAA law has been passed in some states in the United States, and enables access to someone’s online accounts after death to individuals in certain positions e.g. a Digital Fiduciary. Whilst we can expect many leaders in this field to include digital asset planning, there are also many startups who have begun the process to test the technological infrastructure required. These will likely be extrapolated for use when transferring digital assets in the metaverse. For example, endowl manages digital assets such as estates, securities, and cryptocurrencies, and stores them securely using decentralised technology, easing inheritance transference. Similarly, Safe Haven is building decentralised financial offerings to include digital asset inheritance, masternode solutions, wallets, and pooling services. 2Heaven is another contender. They have built an NFT inheritance platform enabling users to choose who can access their data after their demise. Even Apple have launched a digital legacy feature so users can transfer access to their icloud account when they die. Tapping into the next generation market, startup Earlybird is working with digital asset platform Gemini to provide custodial accounts opened by parental figures on behalf of a minor, enabling them to develop a digital asset portfolio.
In fact, it’s not just the parents who will have a say when inheritance is concerned. The push for increased youth financial literacy and resilience is strong globally, in part thanks to organisations such as the Organisation for Economic Co-operation and Development (OECD). With around only 8% of the world’s currency manifested as physical cash, according to Invstr, it is hardly surprising that younger generations are not only increasingly technologically savvy but are also becoming financially literate and actively engaged in digital markets. According to a study by financial group Charles Schwab, 51% of young investors in the UK already hold or own digital assets, and 75% of people surveyed in Mastercard’s New Payments Index research said they would use digital assets if they had a better understanding of them. Coupled with demand for increased transparency, we can expect increased multigenerational pressure for financial institutions to make their inheritance offerings competitive and optimised for resilience.
Alongside keeping up with customer demands, banks would need to adapt to meet incoming compliance changes. Whilst there are many upcoming regulatory and tax structure changes surrounding inheritance in the real world, such as the recent changes to UK’s Inheritance Tax where Rishi Sunak announced current thresholds are to be frozen atleast until 2025/26, we are yet to see how it will be translated for assets in the metaverse. David Lingerfelt, senior at Avalara, believes a delay would be partly due to lack of knowledge amongst government and tax officials about how assets such as NFTs actually work, and so structures to tax have yet to be outlined. Sales tax for many original digital assets seem inevitable as it could be done under current statutes. However, issues arise when attempting to tax an asset which is a copy like an NFT. Since some NFT creators are incorporating virtual and physical goods into their offerings, it’s unclear which transactions would come under sales and use tax. Geographic locations will also impact regulatory decisions as sales of digital assets can be done remotely and so may go undeclared. Identification could be another hurdle. How can you tax someone if they have covered up their identity in the metaverse or are not traceable? On the flipside, the presence of blockchain could induce a tax compliance reformation, as it could reduce touchpoints for the auditing process. This presents an opportunity for larger firms to streamline their customer touch points whilst simultaneously adapting their processes and technologies to be compliant.
This could result in a more diverse range of inheritance product offerings than traditionally seen before. One of the many conversations are around DeFi (decentralised finance) exchanges such as bitcoin or gold, and CeFi (centralised finance) exchanges such as Binance or Coinbase. To stay competitive in the metaverse, where many assets such as NFTs are converging into DeFi networks, traditional financial institutions would need to rethink their current processes and potentially develop hybrid models to succeed. Due to the breadth of new product and service opportunities facilitated by the metaverse, cross-product selling and cross-domain collaboration may be more prevalent and in some cases, necessary, especially when evaluating insurance options alongside wealth and asset management.
All of this could not be possible without a technology rehaul. Technologies such as blockchain, data automation and predictive modelling are crucial for any financial institution to provide the secure, infrastructural backbone and the seamless, personalised service required from customers. The unpredictable resilience of digital assets can be better understood using real time machine learning modelling techniques, ultimately empowering wealth managers to deliver novel advice. Furthermore, previously frustrating touchpoints such as Know Your Customer (KYC) can be mitigated through automated processes due to centralised, transparent, and secure sharing of customer information. It is anticipated that the metaverse will operate in an augmented reality (AR) environment, so inheritance user journeys for both customer and managers must adapt their technologies to operate flawlessly between virtual and real environments and ensure touchpoints are optimised for each type of reality.
Alongside inheritance, comes legacy.
For private banks, this provides an opportunity to add a bespoke layer to their customer-manager relationships. The metaverse provides endless methods in which customers can leave their mark. With the growing interest in sustainable investing and Environmental and Social Governance (ESG), customer legacy and growth could be manifested as virtual forests where a new tree is planted for every milestone. Required transparency due to blockchain implementation could be leveraged for situations where digital signatures are a public brand. Case by case exploratory research would need to be undertaken to design bespoke legacy systems that last in virtual environment.
Summary
The widespread adoption of the metaverse will facilitate new options for inheritance investment and transferring, with regulatory bodies needing to work fast to standardise processes and establish compliance requirements. We can expect to see decentralised digital wallets, hybrid platforms and new cross products for a wide variety of assets, with many people able to access various assets. Current wills, revocable trusts, beneficiary designations and pay-on-death accounts could be extended to include assets such as real estates in the metaverse. Aided by increased youth financial literacy, multigenerational customers will come to demand streamlined touchpoints and hyper-personalised relationships with their Wealth Managers.
Financial institutions will be required to catch up to the standard of technology-integrated customer service other industries are adopting. KYC and transferring processes would ideally be fully automated, freeing up manager time for more personal connections. The adoption of AR will see a blurred line between real life services and digital tools, which could pave the way for integrated dashboard views for the performance of both virtual and tangible assets. Machine Learning will be used to aid advisory services, helping them optimise wealth investment, ensure market resilience for upcoming years and suggest an action plan to minimise inheritance tax payments. Increasing interest in ESG will see creative ways for customers to leave a resilient legacy in a mixed reality environment.
To prepare, financial institutions must invest in primary research, human centred design capabilities and need to transform their technology capabilities to reflect regulatory changes and evolving customer expectations.
References:
1. https://trustandwill.com/learn/digital-inheritance
2. https://www.laptopmag.com/uk/how-to/how-to-buy-real-estate-in-the-metaverse
3. https://invstr.com/only-8-of-the-worlds-currency-is-physical-cash/
7. https://blockworks.co/parents-can-now-buy-crypto-for-kids/
9. https://gitcoin.co/grants/2074/crypto-inheritance-by-endowl
10. https://www.fidelity.co.uk/markets-insights/personal-finance/inheritance-legacy/?p=0&c=10
11. https://www.avalara.com/blog/en/north-america/2022/01/taxing-the-metaverse-the-basics.html