The Metaverse will provide us with new opportunities to enjoy the internet. Through the Metaverse society can enjoy the internet in 3D. This brings new ways to interact and is creating new economies. The possibilities of the Metaverse to facilitate social interactions and to create more affordable luxuries are endless. Unfortunately there is also a dark side to the possibilities. Where there are good intentions there are also bad intentions. The Metaverse is already full of them. The combination of anonymous, fast and without the need for third party international payments risks money laundering and the financing of terrorism. This book has discussed the precise risks of MLFT with regard to the Metaverse and the adeptness of the current regulatory framework.

It was first established that within the traditional three phases of placement, layering and integration there are several risks specific to the Metaverse. The first phase of placement describes how illicit funds are entered into the economy. Particular risks in relation to the Metaverse are the wallets and the smart contracts. Especially the wide variety of different wallets available is cause for concern. The wallets are necessary to store virtual currency and can be offered as a single service or as part of a package of services. To define a wallet the law uses the word “entity” this term is broad enough to cover wallets offered both as a package and as a single service. The problem however is that the AMLD5 then divides the wallets into two categories the custodian wallets and the non-custodian wallets. The non-custodian wallets are those that store virtual currencies without saving the keys needed to transact the currency. There is therefore no third party that can monitor the transactions from and into the wallet. It is for this reason that the legislator has decided to exclude this category from supervision. Thus creating a system of wallets that is not supervised. This book has discovered that the law is outdated in its focus on human supervision. Rather this book suggests that wallets perform transactions through software connected to the internet. This software can be equipped with customer identification and an algorithm that detects suspicious transactions. The algorithm can be connected to the national supervisor. Through the use of XAI the algorithm can provide both notice of suspicious transactions and explanatory reports to the national supervisor. This approach reduces the need for human supervision and can thereby include non-custodian wallets. The second risk with regard to the placement phase of the Metaverse is that of smart contracts. Smart contracts can automatically execute an instruction. The use of smart contracts can automate the process of entering small amounts of value into or to a wallet in order to avoid detection. The process of placing small funds into the system to avoid detection is called smurfing or structuring. Smurfing used to entail a labor intensive process. Whilst the process is facilitated by the use of smart contracts these contracts have to be connected to wallets. It is therefore recommendable that smart contracts above a value threshold are reported as suspicious by the monitoring algorithm in the wallet. Technically thresholds can be avoided too by creating more wallets and smart contracts. There is no way to completely avoid this risk, only to mitigate it. By supervising the smart contracts the process of smurfing becomes more difficult and labor intensive. This mitigates and reduces ease of undetected smurfing.

The second phase of MLFT is that of layering. Layering is the process of hiding the criminal origins of the funds. In particular challenges lay with the different types of virtual currency that are available and the different structural characteristics. Unsupervised currencies can be used to transact and create a layer between the criminal origin of the funds and the resulting funds. The definition of a virtual currency excludes all currencies guaranteed or issued by central banks or governments. This part of the definition becomes an issue with regard to cryptocurrencies that are recognized as legal tender. Furthermore the definition of a virtual currency is based upon those currencies that are based upon a blockchain. There are however cases whereby currencies are not based upon blockchains but are centralized. Even if these centralized virtual currencies were to fall under the definition of a virtual currency the legal framework does not cover the role of the issuer. A centralized currency is issued by a private party. This issuer can either manage all facets of the payment technology including wallet and exchange services or allow third-parties to offer such services. In comparison a central bank as an issuer of fiat currency has no specific obligations to monitor their transactions. The commercial banks perform the monitoring functions. Considering the structural differences between the centralized virtual currencies it is recommended that a monitoring framework is agreed upon with the national supervisor. The centralized virtual currencies demonstrate another problem namely that they can be created for specific (gaming)environments.

These gaming environments are left unregulated by the AMLD5 because a currency specific to a single environment carries little risk. The difficulty, however, is that the Metaverse will present an environment whereby the boundaries are difficult to define. This new virtual environment creates risks with regard to the third phase of MLFT; integration. With the disappearance of the traditional boundaries the traditional of the economy changes. What is a game and what is a virtual environment that brings real enjoyment? The enjoyment of virtual assets creates a scenario whereby the exchange of virtual assets into fiat or physical assets is no longer needed. This book therefore argues that instead of focusing on physical assets the definition of the economy should focus on subjective value. If a virtual asset can be enjoyed and transferred it should be considered to have economic value. This virtual economy is left unsupervised. A user who wants to own large quantities of virtual assets can do so without supervision. Therefore virtual assets are attractive to criminals. In order to adapt the legal framework to the virtual economy this book recommends increased monitoring. Specifically virtual reality and avatar providers should be obliged to verify there customers in case of high-level accounts. This type of increased monitoring on online asset ownership creates a formal and informal online economy. The existence of an informal virtual economy is not morally bad perse if it is small enough to avoid criminal activity. A similar issue that the virtual economy will face is the question to what is local? Local currencies are exempted from the legal framework. Local in the physical world is difficult to define, should a city with a million people be considered local? The virtual local, however, can be accessed globally and by millions of users. Nevertheless the currency can be limited to a virtual area. The legislator should therefore provide clear standards to what constitutes as local and increase its focus on the criterion of “very limited network of users”. A threshold may be considered arbitrary but it avoids confusion. The definition of very limited is vague and leaves room for avoiding the supervisory framework.

The adaptation of the regulatory framework to the three traditional phases of MLFT is however not enough. The Metaverse will present new challenges such as Non-Fungible Tokens (NFTs) and the possibility of stateless firms. The NFT is a strange creature as it is not designed to function as a currency. It represents a certificate of ownership and carries the value of owning an item. The item can differ from real-estate to art and anything in between. The NFTs are linked to large scale money laundering and can furthermore carry encrypted information between criminals. It is argued that NFTs should be regulated according to the object they represent. With regard to supervision and MLFT monitoring this theory is difficult. Particularly because the same type of tokens within the same wallet would be regulated differently. The token for art would have a different legal framework than that representing a piece of (virtual) land. Therefore in relation to MLFT this book suggests that NFTs are supervised by the wallet provider. This will provide a single monitoring framework that is clear for all parties involved.

The next specific challenge with regard to the Metaverse is that of stateless firms. Companies carry the legal nationality of the country that provides them with their legal personality. They need this legal personality in order to obtain basic facilities such as a bank account and the lease of machinery. Within the virtual environment a company can exist without needing such facilities. A legal personality is therefore no longer an absolute requirement. Tracing a virtual company to a physical person or location is furthermore difficult. Stateless firms however can be used to avoid tax, human rights or to launder money. Therefore this book suggests introducing a duty for wallets to verify their corporate customers to physical people. Because whilst each company may differ in their structure they will all require a wallet to receive virtual currency.

In conclusion therefore the current legal framework through the introduction of the AMLD5 has increased its scope to cover virtual currencies. Nevertheless it is not yet fully adept in its response to the Metaverse. Some changes in thinking and definitions are required to create a supervisory framework that reduces the risks of MLFT to an acceptable level. If these changes are not made the Metaverse might become a MLFT paradise.