By Sonja Dragomir, Trainee solicitor, Macfarlanes LLP
While opinions are divided — its development has been both glorified and reviled, along with everything in between — there appears to be broad consensus on the fact that, whatever its implications, there is money to be made in the metaverse.
Critically, those who participate in it (and, as discussed below, even those who elect not to) need to understand the risks involved. The challenge is that some of those risks are known, or can at least be anticipated, while others are not and will only become clearer as the metaverse develops.
What is the metaverse?
Put simply, the metaverse exists where the virtual and the real worlds converge. It is the space where augmented reality (AR) and virtual reality (VR) meets physical existence (often through haptic interfaces and spatial computing), where our experience of the world is not simply mediated by, but experienced through and within, immersive technologies. It can be a playground, a meeting room, a workplace, a game, a concert venue, a catwalk, a shopping centre. Indeed, the evolving limits of the metaverse seem predominantly dictated by those of technology, our own ingenuity, and developing business models. In effect, the advent of the metaverse represents our latest efforts to inhabit a new digital realm, beyond such mundane considerations as geographical distance or physics: welcome to the beyond.
Unlike the world wide web — both in its initial iteration and Web2 — the metaverse is sometimes said to operate in the Web3 universe. For some, this simply means it will be built and run on blockchain technology, emphasising decentralisation and token-based transactions. Others frame the contrast between Web3 with Web2 in more explicitly ideological terms: as they see it, in Web2 Big Tech retains central control of data and content, whereas in the Web3 world, decentralisation and token-based transactions will be the norm, and decentralised finance (DeFi), and decentralised autonomous organisations (DAOs) will prevail. That remains to be seen, not least because Big Tech players like Meta and Microsoft have already begun to create their own versions of the metaverse.
The metaverse platform can also be distinguished from the internet as we currently know it by the simple fact that it is a digital environment with distinct spatial aspects, rather than discrete web pages. Individuals can curate, present themselves, and transact as personalised avatars (i.e. virtual representations of our physical, or even inner, selves) which move through the digital world.
The metaverse as an unmapped province thereby taps into some of humanity’s most deep-rooted desires: to explore selfhood and identity afresh, to interact with others, to discover and build out new worlds, to experience, conquer, consume, and display. For companies and brands, it therefore presents a rich new space in which to develop new business models, as well as monetisation techniques. Already, in addition to Big Tech, metaverse “native” platforms like Decentraland, Sandbox and Next Earth are developing this area.
The key point here is that, currently, there is no one single coherent understanding of the metaverse. And that is simply because it is too nascent to define in any concrete terms.
How can brands realise their full potential within the metaverse?
For many, the metaverse may be synonymous with the social media, entertainment, and gaming industries. However, it appears poised to become an increasingly important feature of the fashion, banking, and education industries. For example, the world’s first Metaverse Fashion Week took place this past March, accompanied by claims that “2022 will be a transformative year for the fashion world”; individual global brands such as Gucci and Balenciaga are also dipping their well-heeled toes into this space through collaborations with Roblox and Fortnite, respectively. In relation to banking and finance, participation in the metaverse has been an accelerating trend within the past few months: shortly after JP Morgan entered the market in February 2022 by acquiring a plot of real estate on the native platform Decentraland, HSBC followed suit and launched a private investment fund for opportunities in the metaverse. Finally, the coronavirus pandemic has amplified the utility and importance of “edtech” (i.e. education technology), a rapidly-expanding market which has clear synergies with the metaverse.
In fact, one of the metaverse’s most appealing qualities is the sheer multitude of applications it can accommodate, provided the right technology is in place. Improbable, a company specialising in complex virtual world-building, has developed both interactive multiplayer games as well as military-grade “synthetic environments” for the US and UK’s defence operations. High-tech simulated experiences could usher in new gold-standards for training in, for example, the healthcare sector as well. This breadth of utility means that future story of the metaverse may well be that of several different, yet potentially interconnected, environments.
Overall, the buzz of activity seems to indicate that the time is ripe for companies across different sectors to consider whether their business strategy should involve establishing an early foothold in this rapidly commercialising arena to exploit new revenue-enhancing opportunities emerging from virtual commerce.
Those who succeed will have a good understanding of the key junctures in the consumer “journey” — across the real-virtual boundary and within the metaverse proper — where businesses can stimulate sales or make a memorable marketing impact on individuals. In relation to commerce, transactions can occur in the “real world” using “real money” but have virtual effects. This is already a familiar concept: think of in-game purchases which allow users to kit out their avatars. The metaverse increases the scope for such business. It also goes one step further, by opening up the possibility of transactions in the virtual world which have as their object the acquisition of “real” goods: for example, imagine purchasing a ready-to-wear garment you see on a virtual runway show during the Metaverse Fashion Week — perhaps via an NFT which you can exchange for the actual piece of clothing.
In appreciation of the rising importance of personalisation in boosting revenue, top brands will also be proactively leveraging (internal or outsourced) marketing technology and consumer analytics in order to create bespoke experiences for shoppers within the metaverse.
One increasingly important feature is that virtual “land” is becoming a critical commodity in the metaverse: multitudes of companies (along with individuals, and even governments) are investing in virtual real estate, and the value of such plots has been soaring with prices rising into the millions. Presumably, as with any parcel of land, these can be turned into commercial storefronts, private residences, or even country clubs or embassy houses. Potential entrants into the metaverse will need to consider whether to join the fray and invest in this particular asset class.
From a defensive branding standpoint, all companies — even those outside the metaverse — will need to consider how intellectual property (IP) registration, enforcement, and policing processes will need to adapt to stay abreast of developments in this new channel. For example, IP licencing agreements going forward should ideally be clear as to whether licensed rights apply to usage in the metaverse, and companies should review existing agreements to determine whether ambiguities in this respect exist. Furthermore, given the relative ease with which non-fungible tokens (NFTs) can be minted and sold through virtual channels, IP rights-holders will also need to budget for the additional costs of, and complexities in, protecting such rights.
Will the metaverse be regulated? If so, when and how? Are there, and will there be, legal rules governing it?
It seems inevitable that, as the metaverse develops in its various forms, existing regulation, legal concepts and legal rules will be applied to it. The challenge for all participants in the metaverse will be knowing when and how these rules will apply to them.
At least in part, that is because case law may take a while to develop and relies on litigants willing to test the application of existing legal concepts and rules to new technology. There are, however, promising signs that the courts are responding relatively quickly and positively: for example, in April 2022 the High Court in Lavinia Deborah Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc Trading as Opensea recognized NFTs as legal property (in this instance, capable of being the subject of an interim freezing injunction).
In time, new and specific regulation and legal rules will almost certainly be developed to govern aspects of the metaverse. Taking the European Union’s General Data Protection Regulation (GDPR) and its proposed Artificial Intelligence Act (AIA) as models, it is highly probable that the first metaverse-specific regulations and legal rules will emerge from the EU. Whether and to what extent other countries or blocs will follow suit remains to be seen.
Another related strand of complexity concerns the identification of relevant authorities. In relation to traditional authority structures, we can expect the metaverse to throw up significant jurisdictional issues which will almost certainly impact upon any attendant regulatory or legal frameworks. While at present questions of jurisdiction appear largely academic (no one regulator or forum has explicitly staked a jurisdictional claim for the metaverse) it will be interesting to how existing authorities wrestle with this new, virtual — and inherently decentralised — territory. We may expect there to be at least some friction between traditional policymakers and Big Tech or the various platforms noted above. What is clear at present is that, for a universe that many view as aspiring toward self-regulation, there appears to be rather little in the way of (public) rule books, codes of practice, or protocols governing on- and off-chain transactions.
One line of thought in this area considers the ethics of actions in the metaverse, along with whether and how the law should be used to protect virtual bodies, possessions, rights, and interests — the violations of which can have real-world implications. Already, for example, there have been reports of sexual harassment and racism within the metaverse. We needn’t stretch far to imagine other harms, economic or otherwise, being translated into the metaverse, such as theft, anti-competitive cartels, data breaches, and so forth — though the exact shapes these future harms will take in the metaverse is difficult to tell. If we accept that (legal or natural) persons participating in the metaverse do so as moral agents (i.e. as individuals with the capacity to make choices who should properly be held accountable for any harm resulting from those choices), then we might consider where the line between individual liberties and the community good should be drawn, where the balance between commercial interests and human rights should be struck, how “harm” in the metaverse should be defined, and how law should actually “work” if transgressions are indeed to be met with retributive justice (e.g. will legal punishments be limited to the virtual plane or have “real world” effects? For how long into the future will this distinction even be possible?). The metaverse thereby intersects with — and invites us to re-explore normative questions around — physical and tangible property and related ownership and use rights, intangible property and associated rights, intellectual property protection, individual privacy and data protection, cyber security, protection from harassment, consumer safety, employment law, advertising law, competition and other sector regulation (e.g. financial services and betting and gaming regulation), tax treatment, and so on.
Overall, the metaverse’s relative complexity and uncharted nature, as well as the pace of change we can expect as it matures, means that those wishing to operate within the space would be well-advised to seek legal advice first.
Humanity has long used technology to enable us to go beyond the mundane limits of our existence, opening up new ways of engaging with our environments and with each other. While the internet has augmented our capabilities, for example by allowing us to communicate near-instantaneously with individuals across the globe, many view the metaverse as offering up the promise of an altogether different type of experience — that of virtual embodiment.
Whatever reservations one may have about the metaverse — and indeed there will be serious and thoughtful questions to be asked around its ethical, environmental, social, economic, legal and regulatory ramifications — it remains a rich vein to mine for new revenue streams, as well as new perspectives on normative legal questions.
The original article appeared here.