Into the metaverse

Financial services firms are hanging out their shingles in the burgeoning world of virtual societies, hoping to attract a new breed of digitally native customers.

Registered investment adviser Arbor Digital’s new storefront will be designed to look like any other wealth management office, with a newly minted sign hanging from an awning on a piece of finely landscaped real estate.

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

The Anchorage, Alaska-based firm has already set aside roughly $20,000 in cryptocurrency to purchase its virtual plot of land after seeing increased interest from clients in the metaverse, a loosely defined network of online communities where users create small cities and live out virtual lives.

Financial services companies are hanging out their shingles in these burgeoning virtual societies hoping to better understand how users are interacting with each other online and possibly lure in a new breed of digitally native customers. These early adopters are also trying to wrap their heads around the economics of the metaverse — known as metanomics, where consumers buy and sell virtual goods over the blockchain — to find viable ways of bringing in new business.

Arbor Digital said it’s initially concentrating on providing financial education and will focus on setting up online webinars on its virtual land and perhaps even charge an entrance fee. The marketing opportunities are equally open-ended.

“We wanted to explore the different financial activities involved,” said Marc Nichols, product director at Arbor Digital. “Can we stake the land? Can we earn a revenue base from it? Can we rent out space or utilize our storefront to host events?”

A job fair hosted last month in arguably the most well-known community, called Decentraland, was another practical example of real-life firms using virtual environments. The forum was complete with virtual booths sponsored by employers and well-dressed avatars offering information about the openings to prospective job applicants.

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

JPMorgan Chase & Co. expects market opportunities in the metaverse to hit $1 trillion annually in coming years and eventually “infiltrate every sector” of the economy, according to a January report. Warner Music, the entertainment behemoth, is currently building a music-driven theme park to host concerts on a competing platform called Sandbox, which already has hundreds of partnerships with famous brands, like the sports outfitter Adidas and the iconic rapper Snoop Dogg.

The Wall Street investment bank is so bullish on the future of digital worlds that it has set up its own storefront in Decentraland’s Metajuku Mall. The bank’s 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.

VIRTUALLY SETTING UP SHOP

The hype around metanomics may be real. Online avatars will need clothes, proponents say, and fashion designers are already selling limited-edition outfits. There are also galleries featuring virtual rare art collections, many in the form of non-fungible tokens known as NFTs, and avant-garde entrepreneurs are already charging admission.

For Nichols, these digital-native businesses one day could be looking for virtual financial advice.

“If you’re starting an RIA today, you need a website with the services you’re providing,” he said. “There’s a good chance in the future, there will be niche advisers who are crypto natives and only offer financial services online. When they’re building their companies, it’s going to be in the metaverse.”

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

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

There are a handful of companies that are already offering exposure and helping advisers invest in the metaverse on behalf of their clients.

Gemini Trust Co., the massive cryptocurrency platform run by the Winklevoss brothers, is offering the ability to buy Decentraland coins, called Mana, which fuel this burgeoning online economy. Mana lets users buy and sell real estate, which is also a non-fungible crypto token, called Land, that represents ownership. Each parcel of Land is unique, and owners get to choose how to develop it.

The average price of a parcel of land doubled during a six-month window in 2021, jumping from $6,000 in June to $12,000 by December across the four main metaverses, according to the JPMorgan data.

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

For Paul Farella, managing director at Willow Investments, metaverse tokens are a way to diversify digital assets and gain exposure to explosive growth that clients won’t likely find in more mature cryptocurrencies, like Bitcoin or Ethereum.

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

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

The platform offers separately managed account portfolios that can include any of the more than 70 different digital assets, including metaverse tokens.

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

“Metaverse … has potential to be an important part of investment portfolio construction.”

Dave Gedeon, head of Multi-Asset Indices, Bloomberg

Along with crypto, metaverse exchange-traded funds are another popular way for advisers to get exposure for clients, with global assets now pouring into new ETFs that offer exposure to the companies jockeying to create virtual realities.

“Metaverse, like other thematics, has potential to be an important part of investment portfolio construction,” said Dave Gedeon, head of Bloomberg’s Multi-Asset Index business. “Thematics, especially in growth areas like technology, have had growing adoption in the construction of portfolios to provide investors with more specialized exposure.”

ETF assets focused on the metaverse have exploded to about $2.2 billion, according to Bloomberg, which is due in large part to the Facebook name change last year. While these funds offer exposure, they usually include only equities that are associated with the metaverse, rather than the underlying tokens themselves, Eyre said.

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

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

“If you look at what the big money managers are doing right now, they’re way beyond just Bitcoin,” he said. “The hedge funds and private placements are going much further out on the spectrum. We’re actually playing catch-up.”

THE ‘NEW INVESTOR’

Clients, too, are driving the demand for meta, but perhaps not the demographic of clients one might expect. Since cryptocurrency platforms are so widely available, the younger generation of clients has no problem opening do-it-yourself accounts with their favorite provider. These clients represent the group that 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 growth potential, seeking out professional help from a financial adviser is considered the more prudent option.

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

Once clients began to see the price appreciation of some of the smaller coins — like Decentraland’s Mana, which traded around 50 cents per coin in July before jumping to more than $5 per coin in November following the Facebook announcement — they started asking questions. “Clients are asking for exposure beyond just Bitcoin, and they want the metaverse,” he said.

Most meta crypto portfolios are built around the five or six best-known coins, like Bitcoin and Etherum, but add in much smaller allocations to meta coins. The Arbor Digital Compass Portfolio, for example, has four main buckets, including store-of-value coins like Bitcoin, scaling solutions like Ethereum, decentralized finance assets, and so-called application coins that feature the metaverse. Less than 20% of the portfolio is allocated to those types of cryptocurrencies.

“There are all different types of trust assumptions about tokenomic models,” Farella said. Some of the top variables include the issuance rate of the currency, inflation rates, supply dynamics and distribution rates.

While the metanomics of these new communities are still being hashed out, their potential to revolutionize e-commerce is being 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 how consumers spend their time and money online.

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

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