Global Governance in the Era of Post-Reality

Managing crises might require new strategies

According to The Economist, governments around the globe are living in a ‘fiscal fantasyland‘ associated with the growing gap between exorbitant obligations and limited opportunities. What is the reason behind the assessment? Not only are there issues with public debt but also with social, budgetary, and environmental problems. “It is far better,” The Economist suggests, “to make a careful exit [from the ‘fantasyland’] now than to wait for the illusion to come crashing down.”

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The respected newspaper predicts that the world economy will face a crisis, and no one could disagree in essence. But will the ‘fantasyland’ only pertain to fiscal matters? What non-financial consequences can accompany an impending crisis?

Certainly, the dynamics of the crisis cannot be predicted as thousands of factors are affecting today’s financial markets. Simultaneously, what aspects of financial life are not adequately addressed? Would it be feasible to prevent the collapse of at least a few of the ‘illusions’?

Virtual Reality — and the “New Man”

The world community is currently experiencing a global economic transition known as the Yin transition. The most successful countries and promising oriental states are generally responsible for the transition. The transition’s political significance has to do with a transformation of global development landmarks and a shift of international capital’s ‘poles of attraction’.

Personalities are preparing for their time to come. The belief that reality is a permanent substance without any influence from a single person has been vanishing irrevocably. The Yin-transition’s era witnesses the power of the word, will, and faith of humans to literally shape the reality. Either someone is entitled to create his or her own virtual reality (VR) or to augment the current one (AR). Those who may be tired of the dullness of the ‘real world’ is also entitled to choose reality in accordance with his or her preferences or interests.

Metaverses are undoubtedly the epicenter of VR developments. The need for adequate regulation of metaverses and virtual reality in general will be one of the challenges that humanity will face. As the current international law is tied to the capabilities of states, metaverses are weakly amenable to state control and require new approaches.

These unprecedented challenges and threats will necessitate extraordinary, yet concrete solutions. For instance, the problem on mental health among metaverse users has already been highlighted by the World Economic Forum experts. No legal solutions have been suggested yet on the international level. However, the issue of mental well-being will persist, and any conventional methods will unlikely be able to solve this problem. In time, humanity will contemplate the formation of a supranational ‘soft’ regulation, merely with no states’ control and ‘inspections’, or global Yin regulation of metaverses.

The absence of the regulation, supplemented by a massive ‘exodus’ of the population from the “real” world to the virtual domain, can significantly transform human relations. Nevertheless, it will only be a portion of the global scene. Financial stability and overall economic security can be directly impacted by the ‘exodus’. The crisis will alter the current understanding of the concept of financial stability.

Sustainable Virtual Worlds — and Businesses

In the event of the crisis predicted by The Economist, the helplessness of governments will affect people worldwide and encourage them to teleport in a different reality, primarily in the virtual one. The situation may be fueled by rampant unemployment. Without the intersection of various fields of knowledge, practical solution of unique cases, and a creative element, the repetitive work of numerous individuals will be replaced by artificial intelligence.

The crisis can accelerate the process of natural diffusion between physical reality and virtual reality as a consequence. In short, the superiority of the “real” world over the virtual world will be subject to questioning.

Due to the crisis, influential global companies that have rights to internationally recognized brands (for example, manufacturers of cars, aircraft, luxury goods, etc.) will consider bringing their business model in line with the time’s requirements. The long-term strategy will be altered, and manufacturing will consequently be reduced. The step will be necessary to gain access to new—and much more promising—virtual markets.

The market for world-famous goods in tokenized forms will become a crucial factor for growth of enterprises that have survived the previous generation. Successful companies—perhaps, even states—will providently reduce these business processes of an ‘epileptoid‘ nature as well as comprehensively transform their corporate governance in an Agile manner.

Will the appropriate landmarks be followed by all companies? The question has a rhetorical tone. These issues have not yet been adequately addressed by international law’s current provisions on capital markets, corporate governance, and ESG compliance.

Despite legal regulation lacking, virtual worlds will keep absorbing ‘souls’ of users and grabbing the attention of the largest companies. These will serve as ‘fuel’ for moving forward. Virtual worlds will become highly developed spaces where people can both relax and work in the future, where businesses can present new products. Later on, there will undoubtedly emerge any kind of a new business elite — and a new power.

Virtual ‘Avalanche’ — and Governments

The development of a virtual financial system that focuses on fundamentally new principles, such as decentralization and denationalization, it is considered a significant step towards transitioning the global economy. In other words, towards the long-term transition to the model of sustainable economic growth and environmentally sound globalization. This process aides in the creation of virtual worlds. The economic transition is a practical reflection of the natural laws of human development, and it will have a lasting effect on world affairs. Certainly, any state’s political future hinges on the successful passage of the transition.

To succeed, governments must have the ability not only to withstand the virtual ‘avalanche’ but also to harness the energy for a national development. The appearance of well-drawn virtual spaces and the widespread use of supranational money will not be the only aspects of the virtual ‘avalanche’. Virtual reality will become a more comfortable experience for hundreds of millions of people who will mentally distance themselves from governments. Moreover, issues of financial stability and economic security in general can be directly impacted by the economic crisis.

Squeezed by electoral expectations for the rapid relief of the crisis, governments will face not only the traditional outflow of capital to offshore jurisdictions but also an unexpectedly rapid rise in transactions for exchanging national currency for supranational money. And if the regulated financial sector does not have a competitive supply of these financial services then liquidity would flow into parallel sectors after the surge in exchange transactions. The threat to global financial stability in this case could be unprecedented.

To prevent the “financial anarchy”, governments must thoroughly specify requirements for compliance of financial institutions that want to conduct exchange and investment transactions with ‘crypto’ (at least for the benefit of private individuals and small businesses). And moreover, to encourage bona fide market participants to adhere to best practices.

Meanwhile, the population’s needs will remain unchanged from the ‘exodus’ to the virtual world. Unusual things, latest gadgets, transportation means, and ostentatious luxury are all things people will strive to ‘stand out’ with. Thus, the net expenses of the new generation of "virtual nomads" will be disproportionally higher than their real necessities. Due to the behavioral factor, it is extremely challenging to predict the extent of the mentioned spikes in demand for supranational money. As business strategies will be reoriented, traditional businesses will also increase their demand for promising cryptocurrencies. Ultimately, businesses will require more virtual resources to implement these new strategies.

Furthermore, as per international law, ‘crypto’ is a property of virtual nature. And it has been already integrated into virtual reality (games, metaverses, etc.). Since virtual currencies are both important for the ‘real world’ (as a factor of the economic transition) and virtual reality, they may be a conditional boundary between these two worlds. The following analysis of our near-term prospects would be provided by political scientists from future generations: “Bitcoin, the most promising cryptocurrency, has emerged as the ‘crest’ of a new wave of globalization during the mid-2020s, the culmination of long-overdue changes. Finally, this wave had overpowered the reactionary ‘trough’ of global development.”

‘Code’ Editing — and Global Finance

Without doubt, the international situation and interstate communications are deteriorating. But as it has done for centuries, states are still the focal point of the present world order. Can governments really influence the global anti-crisis agenda? The tone of the question has shifted to a rhetorical tone.

International law currently relies on ‘otherworldly’ illusions from the 1950s and 1960s regarding the unlimited possibilities of states’ power and control. But often slogans and reality do not intersect. The truth is that states are severely limited in their ability to adequately regulate new economic sectors, such as metaverses, artificial intelligence, and crypto-assets. Surprisingly, the problem is more political, legal, and even philosophical than technical.

Meanwhile, the development of new sectors of economy is in contrast to the prevailing ideas about life. The situation is a close resemblance to the artistic image produced by Jacques Attali, French futurist and orchestra conductor, in 1977: the clumsy "noises" begin to take the form of a complete "symphony" embodying a new order in the world [1]. Indeed, the financial stability in crypto, the mental health of humanity, and managing crises in general are all issues that require new solutions even today.

It might be beneficial for the world community to consider changing the legal paradigm and creating global regulators that satisfy the realities of promising sectors of the world economy. And it’s preferable to do this before the crisis rather than after.

Establishing a global regulation for cryptocurrencies could serve as the initial step. Virtual reality relies heavily on cryptocurrencies which is also closely linked to the current state of world economy. Therefore, to adequately address any potential crises, it is crucially important to regulate crypto.

The financial needs of society will undergo a drastic change due to the virtualization of reality and mass consciousness, and it will need to be considered. Thus, to ensure the financial stability in a global scale, it would be necessary for financial institutions to enter the retail market of crypto finance. Editing the ‘genetic code’ of the financial sector would be a prudent decision. The regulated ‘organism’ of the global financial system should be enriched by the inclusion of the decentralized ‘DNA fragment’, or the most promising cryptocurrencies.

The financial system of the future should be inclusive of ‘genetics’. It implies having decentralized principles. Therefore, it will be essential to take a selective approach towards the included cryptocurrencies. For the sustainability of global finance, it might be necessary to establish some kind of planetary consensus. What will be the central idea of the consensus? The ‘DNA fragment’, which is to be included, should be comprised of cryptocurrencies that are genuinely decentralized. Cryptocurrencies, which are not sufficiently decentralized, should be subject to rigorous supervision by national regulators unless they possess adequate technical and legal capabilities. In fact, the US Securities and Exchange Commission (SEC), headed by Gary Gensler, has been conducting this work for more than a year — and conducting it globally.

To successfully edit the ‘code’, financial institutions should have a clear set of rules on crypto to comply with. The global community must aim at adopting a comprehensive scope of legal and compliance requirements for financial institutions. Financial institutions should be permitted to conduct exchange and investment operations in the best interest of their principals (at least, private individuals and small businesses). Forming a responsible ‘circle’ of financial institutions at the global level would be the only way to maintain competitiveness in the regulated financial sector and to ensure market integrity. Risks of scam, or fraudulent and generally unfair behavior in the crypto market, would be leveled for financial consumers. Therefore, they would significantly benefit from the scheme.

This suggestion is based on the economic feasibility. In general, the traditional financial system is a classic depiction of a collective monopoly. Non-market considerations (such as public peace) were the only reason states have decided to license financial services providers and to adopt capital requirements. The necessity of this measure cannot be disputed, as it has been a forced measure. At the same time, as it has been pointed out by Milton Friedman and Rose Friedman, influential American economists, monopoly consistently results in an increase in the cost of services for consumers [2]. Banks and other financial institutions must comply with requirements on capital quality, AML/KYC, sanctions, international tax agreements, FATCA, countering insider dealing, ESG, etc. These financial institutions therefore bear high regulatory costs. On the other hand, less regulated virtual asset service providers (VASPs), which today offer currency exchange and investment services, are not subject to such a burden. Millions of users can sign up for these operators because of their unregulated nature, lower commission fees, and ethical neutrality. The risks it could pose to global financial stability might be unprecedented.

The evolution of international law is organically complemented by these economic factors. For instance, the International Monetary Fund (IMF) explains: it is more preferable to regulate crypto in detail than to prohibit it without any regulation.

Furthermore, it appears that initiatives mentioned are intended to enable states to actually—not just ostensibly—comply with the international legal recommendation known as travel rule (cross-border obligation to transfer data on incoming and outgoing transactions with virtual assets). The Blockchain’s transparency would lead to labeling all crypto transactions that are withdrawn from financial institutions’ accounts and setting up a transparent ‘network’ that is comprised of law-abiding users and responsible financial businesses. The network’s global scale will be the common heritage of humanity.

No doubt that financial regulators should unreservedly supervise financial institutions on their capital structure, capital markets operations, and interbank settlements. But to ensure effective supervision, it might be crucial to set up a supranational regulator that is to constantly monitor key macroeconomic indicators of crypto assets. The regulator’s recommendations are to be compiled by the most trusted professionals. The aim of this organization should be in managing of the worldwide supervision and in coordination of the prudential policy at the national level. By gaining a common understanding of vulnerabilities and risks, humanity can initiate a new era of global development that would be characterized by almost complete transparency in financial markets.

What is the significance of having a unified understanding of risk? The integrity of international security’s architecture might be negatively impacted by prohibitions and restrictions on the most promising virtual assets (e.g., Bitcoin) that may be shortsightedly imposed by individual states. The legal prohibition is not equivalent to a restoration of order. But if any state fails to ensure it the entire architecture of international security becomes unstable.

In addition, it might be recommended to set up a supranational self-regulating group that would include administrators of metaverses and VR games. The organization’s meetings will approve ‘soft’ criteria for unacceptable content and recommendations for countering destructive influence (for example, those of terrorists). Thereafter, the organization will probably develop global standards on ethics for the virtual assets’ future generation.

The further transformation of the world economy will be inevitable. The global community will have no other alternative other than comprehensive reforms. It would be wiser to anticipate the crisis phenomena and urgently address the global reform. However, this seems unlikely due to the current configuration of international affairs.

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How long will it take for the indicated trends to progress? What is the anticipated date for the ‘avalanche’? Will there be a single ‘avalanche’ or will it be double, triple, etc.? Regrettably, these questions lack a clear answer. International markets are impacted by thousands of factors, making it impossible to predict how the crisis will unfold. The overall progression of the situation will be contingent upon the size of the ‘fantasyland’, the states’ capacity to adjust to the new reality, and behavioral factors.

Simultaneously, the economic transition will have been fueled by the virtualization of reality which will be also accompanied by an essential transformation of the monetary and financial system. According to the forecast, it will persist until approximately 2035. And the scope of these changes will be comprehensive.

As stated at the beginning of the article, the time when personality would be at its peak has been approaching. Nonetheless, humanity should not forget: these opportunities for self-realization, which have been created due to changes in the economic landscape, have been imposed unprecedented responsibility on individuals. Due to the economic transition’s feminine nature (‘Yin’), the world today is highly sensitive to words and even moods. Thus, the future can be literally deprived if one follows incorrect landmarks or thinks inconsistently with the time’s spirit.

The key would reflect deep responsibility. Regardless of any crises, it will open the doors to the decent future.

1. Attali, Jacques. Noise: The Political Economy of Music. L.: University of Minnesota Press. 1985.

2. Friedman, Milton & Rose. Free to Choose: A Personal Statement. NY: HBJ. 1980.