Amid the ongoing crypto meltdown sparked by FTX’s spectacular bankruptcy and the attendant allegations of fraud, coupled with the ongoing “crypto winter” that has devastated crypto asset prices for close to a year, Facebook is trying to convince lawmakers to give crypto one more shot and regulate the metaverse with a light touch.
As a reminder, Facebook is fresh off losing nearly a trillion in market capitalization after its advertising revenue fell, user growth appeared to stall, and profit margins narrowed. Antitrust scrutiny, wider concerns about the economy, and the threat of a longstanding adtech bubble burst are part of the picture here, but investors were particularly skittish about Facebook’s metaverse gamble.
Chief executive Mark Zuckerberg has insisted that the company would spend $100 billion to $150 billion over a decade on building the metaverse and creating a viable revenue stream outside of advertising for the company. In one shareholder’s open letter, an investor warned “An estimated $100B investment in an unknown future is super-sized and terrifying, even by Silicon Valley standards.”
A lingering question has been what the “metaverse” really encompasses. Is it remote working software? Second Life redux? Judging by a report released by Meta this month called “Economic Opportunities in the Metaverse: A Policy Approach,” the company’s vision for the metaverse will include crypto and NFTs, and the company—which has been lobbying Congress on blockchain topics—is asking lawmakers to go easy on it.
“At present, a perspective informed principally by skepticism of cryptocurrencies hangs over blockchain’s non-financial applications and risks stymying innovation in the sector,” Meta’s report laments.
Facebook’s groaning comes in the midst of revelations about how FTX reportedly used billions of dollars of customer funds to prop up its sister company, hedge fund Alameda Research before suddenly collapsing in November. Five civil lawsuits and countless federal probes and investigations have been launched against FTX, not to mention growing scrutiny over widespread fraud, theft, and risk inherent in goods and services connected to crypto. It’s for these and other reasons that lawmakers such as Maxime Waters, Brad Sherman, and Alexandria Ocasio-Cortez have been calling for cryptocurrencies and digital assets to be closely regulated.
Ignoring all this, the report makes a series of alarming and eye-popping claims about a digital landscape that, by all accounts, is hardly used by anyone. Chief among them is that by 2031, the metaverse will contribute $3 trillion to global GDP. This claim points to a study by the Analysis Group which relies heavily on superficial comparisons to mobile technology—not unlike investment fund a16z’s State of Crypto report which tried to insist “web3” technologies would see huge increases in adoption and profits.
“Importantly, the two key components for making the metaverse an economic success—interoperability and portability—will be powered by the further adoption of web3 technologies,” Meta’s report reads. “Understandably, policymakers are giving considerable attention to the application of blockchain technology in financial services, whether in the form of stablecoins, cryptocurrencies or crypto exchanges, but it is important to recognize that blockchain also has extensive non-financial applications that can be foundational to the metaverse economy.” Here, Facebook points to NFTs, which it claims “are well positioned to establish ownership of digital objects in the metaverse and enable people to navigate experiences and worlds in a way that platforms do not currently allow.”
Meta’s report attempts to convince lawmakers not to treat the metaverse’s web3 components like they did its attempt to launch Libra, a global digital currency that was to catalyze Facebook’s entry into the financial services industry. Facebook claims it seeks to create a “technology-neutral approach” alongside a recognition that “decentralized systems have a role to play” in generating economic growth and that “greater collaboration between the public sector and industry” is integral to the future of the metaverse (and Facebook).
The “technology-neutral” approach is one of the more interesting prongs here. With it, Zuckerberg is seeking a few things. The first is a framework that doesn’t regulate all digital assets the same because, the report insists, there are different use cases and different risks present across the host of digital assets offered today. At the moment, however, Facebook is worried that this advice will be ignored because of skepticism of crypto.
It’s understandable why many are skeptical of so-called web3, however. Its financial applications end up inviting dangerous speculation and creating moral hazards that lead to, for example, compromising entire carbon credit markets linked to the Amazon River’s rainforest.
With NFTs in particular, it’s hard to see how they might be strictly non-financial instruments while still meeting the definition of tokens on a blockchain. Resellability on an open market is one of the key aspects of the technology and the main reason that boosters claim they will redefine digital ownership. Even when Ubisoft gave away NFTs of in-game items for free, ostensibly stripping them of any resale value, people tried to make a buck by selling them in the secondary market. If Meta’s NFTs are not resellable blockchain tokens, one has to wonder why it needs a blockchain at all, rather than simply selling digital items like video game companies have been doing for decades.
Facebook also wants regulators to make a bold assumption as part of this technology-neutral approach: that “when a web3 activity resembles an activity in the physical world, it should be treated in a similar way.” This might seem a bit silly, but the company is serious. The example given here is that physical art and NFT-based digital art are the same and should be treated similarly—or that NFT concert tickets and trading cards are analogous to their real world equivalent. But, as explained above, they’re not. The digital-based assets are inherently financialized and often generated with the explicit purpose of speculation in mind.
Some people buy tickets or trading cards to flip them, but for most this is a secondary or even tertiary concern. The main interest is to attend the concert or collect the card (or play it in a game). With digital assets, where adoption has been driven with messaging that promises people wealth—or by reports eager to point to economic opportunities in the trillions—the message is clear: get this thing to sell it for more money.
It’s important to emphasize this because much of Meta’s work in the metaverse is, ultimately, concerned with monetization tools that can help creators on its platform—by its own admission. They’re hoping to bring these tools to Instagram, to offer digital collectibles in partnership with influencers, bring people onto its virtual reality platform Horizon Worlds, and to generate interest in its Avatars Store, among other projects. The non-financial aspects of these use-cases typically don’t rise above the inherent value of NFTs as being hopefully resellable for excessive returns.
“Broadly, we believe the continued development of a thriving creator economy depends on regulatory treatment that does not discriminate based on the technology at use and does not impose undue requirements on individual creators who choose to register ownership of digital goods using blockchain because of the portability and interoperability it can provide,” the report states.
Another way to understand that is Facebook would like regulators to adopt a framework that does not foreclose the possibility of a non-advertiser revenue stream, especially given that Facebook intends to spend at least $100 billion on creating the infrastructure and technology necessary for its metaverse revenue stream to start pouring in. That means creating tools to synthesize and access digital assets and markets, interact with digital influencers and communities, consume digital products and services, and likely give Facebook a healthy cut of each transaction once digital assets are integrated into every facet of the metaverse it hopes to build.