What is the metaverse, and what are the legal implications for business?

What is the metaverse?

For lawyers it may be useful to think of the metaverse as a reflection of our universe but in an abstract concept. It can more readily be described as a next generation immersive 3D convergence of physical and digital reality. It will present information to users in:

• 3D virtual spaces
• As a complementary enhancement rather than a total replacement to the internet

In practice, businesses may well expect their marketing, sponsorship and e-commerce to shift into this 3D space in a considerable way given likely significant advancements in augmented reality/virtual reality (AR/VR) technology to miniaturise clunky headsets into devices more akin to glasses.

The concept has existed for years, yet in commercial use and legal terms the metaverse is in its infancy. In due course this new technology is predicted to affect numerous areas and industries across the globe. Individuals and businesses have already inhabited virtual spaces within the metaverse, and the numbers can only increase as the software and hardware develops and attracts further investment.

Terminology and key players

For lawyers it is worth investigating a selection of key players and terminology: First the metaverse is the name given to the convergence of technologies which allows those involved to create worlds or universes for example. These can then be given names and populated with items such as land, people (avatars), businesses, homes (virtual buildings) and any other items they wish to use, for example, crypto assets as currency.

A Decentralised Autonomous Organisation (DAO) may be set up. These organisations eschew central leadership and are more like councils or associations, opting for group control and ownership through smart contracts built on blockchain. A DAO can focus on any mission, endeavour or initiative, with members usually having to buy their way in by purchasing governance tokens.

Examples of lands that you may have heard of include:

• Decentraland, a decentralised virtual world launched in 2017 and controlled though a DAO. Here users are able to vote on how the world develops and may use Ethereum-based crypto tokens (MANA) to purchase virtual “real” estate (LAND), which can then be populated with virtual buildings, avatars and their wearables in the form of non-fungible tokens (NFTs)
• The Sandbox is a metaverse world where users can purchase real estate NFTs
• Horizon Worlds is another world that the aptly renamed Meta (formerly Facebook) has created as a platform

Meanwhile Microsoft is developing its own sphere of influence in the metaverse called Mesh, a tool that builds on Microsoft Teams, with various VR headsets facilitating global collaboration.

With the metaverse generally being seen as the next potential money opportunity ($800bn by 2024 by one estimate), it is no surprise that major fintech and finance firms such as Mastercard and Visa have filed their own NFT trademark applications.

JP Morgan has also weighed in by setting up Onyx Lounge offering banking services in Metajuku, Decentraland’s virtual shopping district. Such votes of confidence from so many major companies give the metaverse a sense of inevitability.

Legal implications for businesses

It is hoped that the metaverse will further facilitate people to create user-generated content, and work with or purchase from other end-users or any business in the world. This may be seen as an opportunity to offer a significant commercial advantage to those quick enough to explore it.

The advent of the metaverse also raises both commercial and legal issues in areas including contract, data protection, employment, IP and tax.

Smart contracts

The use of smart contracts and blockchain will be an inherent part of the metaverse.

• Use of blockchain means automated contract hierarchies
• For more see our article link here

Data protection and security

This is a world made entirely of data, which inherently facilitates personal data collection.

• Verification of user identity and data privacy issues are likely to be key security concerns
• Digital avatars - do they constitute personal data?
• AI trackers and sophisticated facial recognition technology in AR/VR headsets may give rise to GDPR considerations if used to build consumer profiles

Employment

Working within the metaverse also generates a potential for employment legal issues which are yet to be fully explored.

• Avatars at work - should there be a dress code for avatars?
• Can and should employers require individuals to design their avatar to look like their real life selves?

Protected characteristics and discrimination claims may be relevant.

IP and brand protection

IP and brand protection will be key in this area.

• Registering a trademark under a different classification from the physical goods trademark
• Effectively monitoring infringement, while locating an IP rights infringer in the metaverse may pose novel challenges
• New patentable technologies geared towards VR will be available
• Sponsorship contracts will require thought as to how they apply to this new environment

Tax

The metaverse raises questions over how DAO’s should be taxed.

• Which jurisdictions are entitled to receive revenue from taxable events in virtual worlds?
• There may be added complexity if different jurisdictions create different tax rules
• Business profits may be significantly impacted depending on how the taxation of DAOs is determined

Next steps

We are just at the beginning of Web 3.0 and have yet to test many of the proposed technologies and concepts. With all the opportunity the metaverse will bring, also come complex legal and regulatory challenges to the way businesses are run. Anticipating these issues and obtaining legal advice will be vital to businesses seeking to gain a foothold in what is expected to be the next big thing.