1. BACKGROUND

The term “metaverse” first appeared in 1992 as an abstract concept in Neal Stephenson’s dystopian novel Snow Crash. Two decades later, the Metaverse has since evolved from a mere idea to a figment of everyday reality, as it is gradually integrated into all aspects of ‘mainstream’ life. Metaverse is a term used to describe an interconnected, decentralized ecosystem that combines virtual and augmented reality to offer real-time interactions between people. Enabled largely through the development of Web3 technologies, the Metaverse encompasses concepts such as blockchain technology, Virtual Reality (“VR”), Augmented Reality (“AR”), and AI which enables users to fully engross themselves in immersive experiences. Utilization of such technology unlocks the potential of a simulated real-life environment where people can talk, work, play, and conduct business by using specialized hardware. This hardware, more specifically, glasses, headsets, controllers, and related AR/VR devices play an important part in accessing the world of Metaverse. In fact, the next era of the Metaverse will be entirely enabled by these new types of hardware that enable a deeper sense of presence. Because the true potential of the metaverse is limited by the accessibility of such technology, companies like Meta, Sony, HTC and Samsung have directed their focus to improving and producing VR devices, while companies like Apple, Microsoft, Google and Magic Leap work to dominate the production market for AR devices. As CEO of Meta, formerly Facebook, Mark Zuckerberg signified through the company’s rebrand, “Meta,” which means “beyond,” is a sure indication of these technology giants’ “move beyond what’s possible today.”

As the Metaverse emerges as a practical and notable virtual plane to conduct commerce, individuals and businesses have begun to address the investment opportunities arising therein. In due course, this technology is almost definitively predicted to affect numerous areas and industries across the globe. As such, these numbers will only increase as the Metaverse software and hardware develops and attracts further investment. A universe of limitless interaction, centered around creativity, games, social opportunity, esports, theater, and shopping, is highly appealing to most – yet the more complex these worlds become, the more legal issues arise within them. Although the concept itself has existed for some years, in practicality, the Metaverse is hardly in its infancy. Thus, while the Metaverse may seemingly offer infinite new opportunities for businesses and individuals, its rapid evolution and unique organization will also raise many questions for businesses, regulators and the legal industry.

2. REGULATORY LEGAL CONCERNS IN THE METAVERSE

While the Metaverse offers new opportunities for individuals and businesses, the budding technology also carries with it a multitude of risks that will continue to show themselves over time. Given the unknown associated with the Metaverse, it is particularly imperative that clients first understand the risks and rewards of conducting business in this setting. At the core, there remains a question of what legal requirements are necessary in order for the Metaverse structure, consisting of various developers and studios, e-commerce marketplaces, platforms and service providers to all coexist within one virtual world. In addition to this question, however, is how Metaverse can coexist with the current world as is.

Lack of Regulatory Oversight

As it exists today, there currently is no formal regulatory oversight within the Metaverse. Due to this lack of oversight from regulators and law enforcement, the Metaverse is a vacuum where underground marketplaces, criminal communications, and illegal activities may thrive. While it is likely that we will eventually see state, federal, and cross-border regulations, the more likely outcome, in terms of recency, is that some virtual worlds will be internally regulated and others not. Internal regulation carries the potential of enforcing key rules on privacy or the transferability of assets, however, this will not entirely rule out the chances of both fraud and profit.

Fraud and Privacy Concerns

Among the unknown risks also exist more traditional risks like fraud and breach of individual privacy. The structure of the Metaverse certainly amplifies the risk of fraud, making the possibility of market manipulation, cyber breaches and attacks, privacy breaches, money laundering, corporate espionage and identity theft far more likely. Further, the Metaverse is a world made entirely of data, which inherently facilitates personal data collection. However, unlike traditional social media platforms, users have no guarantee that the data they share is only shared with those they choose to share it with in the Metaverse. Thus, user identities can be tracked and revealed, which presents a key security concern. To this end, personal information, such as biometric data, can be collected through the Metaverse and in turn used for marketing purposes. The monetary incentive surrounding the success of such marketing techniques will make the collection and use of data far more prevalent.

Ultimately, the metaverse will likely operate on an interoperable basis, meaning users can transport their avatars and other data, including digital assets, between metaverse applications, regardless of whether those metaverses are under common ownership or operation. Thus, users' personal data will be at particular risk of exploitation given the inherent vulnerabilities involved, especially when data is ported from one metaverse to another. These risks include breaches of privacy, fraudulent use of one’s data, identity theft, amongst various other scams. Platform operators and owners will need extensive agreements to govern data transfers, information security standards, and responsibility for compliance. Yet, as the Metaverse remains today, such precautionary measures are lacking at best.

Another consideration is the Metaverse’s use of virtual advertising, particularly in the context of brands using NFTs and virtual items to directly promote their products and services to Metaverse users. In order to adequately promote their product, brands will likely host sponsored events, employ avatar-based influencers to target potential customers, and engage in other Metaverse activities. The success of such opportunities would only be possible so long as the personal data of Metaverse users was collectable, so that brands may target their advertisement and communication toward potential customers. The reality of brands’ potential capitalization within the Metaverse speaks to the need for the implementation of strict and transparent privacy standards to protect consumers’ rights, and more specifically, their privacy. Since it is quite unclear whether such standards currently exist, users should assume that their data is being collected, tracked, and that their information can and will be shared.

Money Laundering

Because the Metaverse allows individuals to act essentially without supervision, standards, regulations, or laws, it may also easily be used as a channel to launder illicit funds from both real-world and crypto-based crime. Funds can be exchanged for metaverse-based assets such as land, NFTs, or metaverse-related crypto assets, thus creating new opportunities for bad actors to convert cash acquired through illegal activities into non-traceable currencies. In this virtual financial services context, where it can be impossible to identify the actual individual involved and the source of the currency being used, the existing rules around Know Your Customer (KYC), Customer Due Diligence (CDD), and wider Anti-Money Laundering (AML) practices, are difficult, if not impossible to apply. This creates a key issue in the context of AML as bad actors can exploit decentralized exchanges, between and within Metaverses, to hide the source of funds, as the normal rules of KYC processes and compliance checks very often do not or cannot apply.

Minimal Traceability in Payment

There is an argument to be made that the use of blockchain technology reduces transaction risks as transactions through blockchain or distributed ledger technologies cannot be falsified, as the transaction data is impossible to alter without recording the changes made on the blockchain. Thus, the record in some sense is ‘public’ in that the data is accessible by everyone involved in the transaction. However, the reality of anonymity in the Metaverse has proven to be at odds with the concept of traceability, as one can purport to be essentially anyone they would like to be while in the world. In fact, anonymity is one of the biggest attractions of the Metaverse, not necessarily as a means of covering up criminal behavior, but rather as a means of protecting privacy, given the above-mentioned concerns. Thus, while payments are technically ‘traceable,’ there still exists the question as to the validity of such payments since it is almost entirely unclear who the payment was rendered to.

Lack of Consumer Protection

The currencies exchanged within the Metaverse are not ‘real money’ in the traditional sense as they are either cryptocurrencies or in-game currencies within a virtual world. These digital-currency assets propose their own problems exclusive to themselves, thus, when use of such currency is normalized and necessary to function within the Metaverse, the problems associated with them become amplified. First, while there may be accounts or wallets to store these assets in, such storage methods are subject to the possibility of loss or security breach. In this context, there is no government-backed protection from loss or fraud. Second, the value of what is bought and sold in the Metaverse is less tangible than in the real world, and subject to extreme volatility. The value of such currency fluctuates by the second, which creates an unprecedented gamble nearly every time a transaction is made. For example, a non-fungible token (NFT) or piece of virtual real estate may appear to have a value, but this is not necessarily the case, nor is there a right to refund or other forms of consumer protection that exist in the real world.

3. THE NEED FOR REGULATION

To be sustainable as a place to maintain some semblance of livelihood and do business, the Metaverse requires real-world controls to protect users from abuse, fraud, and loss. Typically, regulation is retroactively applied in the face of new technological advancements, so it is not necessarily surprising that regulation is currently lacking. To that end, regulation is also difficult to apply globally. Thus, while no centralized regulatory body currently exists, it is more likely that builders of the Metaverse will take proactive steps to create their own ‘metacode’ of conduct before any official regulatory implementation is made.

Application of Existing Law

In terms of regulatory framework, there are presently no laws that can be directly attached to governance of the Metaverse. Instead, the Metaverse realm presently abides by the general laws that apply to the web in order to bring a sense of uniformity, security, and transparency within largely unfamiliar territory. Interestingly, Metaverse training programs often provide elaborate knowledge on applicable laws within the Metaverse to promote better understanding on the subject, and to avoid violation of the law.

Copyright and Intellectual Property Law

The purpose behind copyright law is to protect and control ownership, use, and distribution of original creative and expressive works. Similarly, Intellectual Property law preserves the right of creators in the context of their inventions, trademarks, or other creations. Thus, in the Metaverse domain, where there has been an increased surge in the popularity of user-generated digital content such as avatars, virtual real estate, and other artwork, the application of these realms of law have become significant and necessary for governance. If an artist creates or duplicates content in the Metaverse that is similar to copyrighted or trademarked content, they can be held liable for infringement. This application of law is particularly prevalent in the realm of Nonfungible tokens (NFTs), unique blockchain-based digital assets that are associated with images, artwork, videos, games, or other creative content In a situation where an NFT, or similar digital asset is wrongfully or impermissibly used or distributed, the Court may assist in prohibiting the use and distribution of the digital content, and the infringing party may be liable to the original creator for punitive damages.

Contract Law

In the Metaverse, users maintain the free will to devise, enter into, and terminate agreements amongst one another. Thus, contract law facilitates the enforcement of such agreements made. Considering the plethora of activities available within the Metaverse, like trading virtual goods and renting virtual land, the application of contract law is imperative to maintain some of the core functions of the Metaverse. The law ensures that both parties follow the terms of such agreements or face the possibility of being sued for breach. For example, if a user agrees to sell a virtual product on the Metaverse and they enter into a contract to do so, then if the purchaser fails to make the payment, the seller can seek assistance from the court for payment for the item, as well as damages. Without this remedy, the Metaverse would exist as even more of a free-for-all than it already is and would inherently promote fraud.

Tort Law

Tort law, which protects against civil wrongs including property damages and personal damages, is also applicable in the Metaverse context. Tort law in the Metaverse governs any harmful activity caused by the users to other participants, including emotional stress, physical assaults, and property damages. For instance, if a user physically causes damage to another user’s property within the Metaverse ecosystem, then the latter can sue the former in tort for it. The accused party will then be forced by the law to pay for the expenses and related damages pertaining to the act. Tort law is also particularly prevalent in this ecosystem in the context of defamation – as a user may have a cause of action against another for user-generated content that is falsely critical or damaging to a brand.

Securities, Banking, and Financial Regulation Laws

Digital assets, such as NFTs, are subject to traditional financial regulations such as commodities, banking, and securities laws. For example, the way in which these digital assets are created and exchanged may render the interchange within the purview of investment contracts, thus subjecting them to regulation by securities laws. Similarly, the issuance, lending, and trading of cryptocurrencies in the Metaverse makes the application of banking, money transfer, and other financial regimes to the system necessary. Lastly, the purchase and sale of virtual goods connotes tax implications involving sales tax and income tax regimes. Virtual assets or cryptocurrency are no stranger to financial regulating authorities, who have already brought such assets under the tax umbrella making the profits taxable for the earners. Thus, the NFTs used in Metaverse also signify the need for similar tax implications.

4. CONCLUSION

Currently, there are more than 160 companies operating within the Metaverse, with hundreds more definitively to follow. Theoretically, even if some regulatory frameworks were to exist to assist in the governance of this new universe, the truth is that any individual operator would have the ability to exist outside of a structured framework. Thus, unless regulation of the Metaverse becomes effectively global in scope, there is currently very little to prevent an offshore based investment medium from running its own corner of the Metaverse that people can access from other worlds. This amplifies the concerns associated with the growth of the Metaverse, as its exponentially rapid growth increasingly hinders the ability for both the law and regulation efforts to effectively catch up.