FINRA Warns Member Firms of Metaverse Adoption Challenges

Firms Must Weigh Challenges in Metaverse Adoption

While the metaverse is said to provide firms with new methods of engaging and educating investors, according to a self-regulatory organization overseeing the U.S. securities industry, several challenges remain that firms must consider before adopting it. In its report on the metaverse and its implications for the securities industry, the Financial Industry Regulatory Authority (FINRA) identifies data privacy and protection as one such challenge that needs to be overcome.

Discussing the issue of user data privacy, the FINRA report notes that while this is a top concern for both consumers and business leaders, firms attempting to establish a strong presence in the metaverse will require significant amounts of data. However, gathering such a large amount of data can only be achieved by collecting an inordinate amount of behavioral data. This may also involve users revealing far more behavioral data leaving them vulnerable to attacks by malicious actors.

The report also identifies cybersecurity risk as another challenge that can potentially offset the advantages of adopting the metaverse. To illustrate, FINRA cites a 2022 KPMG metaverse report that highlighted the increased risks of bad actors impersonating company bosses or work colleagues to execute malicious tasks in a virtual environment. Additional risks for firms considering joining the metaverse can arise from the increased threat vector potentially caused by introducing any new application to an environment.

Firms may encounter challenges stemming from the metaverse platforms they choose, as well as from the limited interoperability between decentralized and centralized metaverse platforms. The technological and personnel upgrades needed to develop and implement a desired metaverse application also count as challenges that firms must consider when choosing a metaverse strategy.

FINRA Warns of Regulatory Risks in Metaverse Adoption

Meanwhile, the FINRA report recommends steps that firms may take to minimize or mitigate some of the identified challenges. For instance, with respect to protecting user data, the report states:

As the metaverse continues to develop, protecting personal information and ensuring ethical use of data may be a significant concern, particularly when virtual environments intersect with real-world personal data. Accordingly, demonstrating sufficient privacy protections, ensuring appropriate recordkeeping, and clearly disclosing personal data that is collected and with whom it is shared may be a key feature in promoting trust within various metaverse environments.

Regarding cybersecurity risks, FINRA advised firms to assess the compatibility of metaverse technology with their internal operational and compliance systems. Firms should also examine their network segmentation and access controls to ensure new devices and applications adhere to cybersecurity policies.

Besides worrying about potential challenges, the self-regulatory body urged firms considering implementing metaverse strategies to be “mindful of the potential implications for their regulatory obligations.” It also implored member firms to consider the information in the report “when developing new or modifying existing practices that are reasonably designed to achieve compliance with relevant regulations.”