The Metaverse: a digital blackhole. What should regulators and businesses be considering?

Why should we care about the Metaverse?

Google searches, Facebook (and now Meta) friend requests, twitter storms and trending hashtags are a norm in our daily lives – the question now is whether virtual reality headsets and our avatars’ experience in the Metaverse will become as ubiquitous. The way we use technology and understand the internet is changing, the Metaverse is demanding more and more attention and many of us are realising that it might just change our current world, much like the internet and smart technology did once upon a time.

The Metaverse promises to bring real changes (and potential challenges) to the way we operate and conduct ourselves personally and on a business level. The required regulatory and legal changes in the Metaverse may not resemble patterns followed in the past by legislators and regulators and some (or even complete) reinvention of the legal system might become necessary for effective governance.

As legal professionals, in order to advise on the implications of activities within the Metaverse, it is imperative we understand its technological features, how it functions practically and the associated challenges that may arise.

What is the Metaverse?

The Metaverse is the next generation of the internet and, in our opinion, it has the capacity and potential to grow exponentially as it feeds and expands from the various and quickly evolving enabling technologies including Artificial Intelligence (AI), Virtual and Augmented Reality (VR and AR respectively) related technologies, the Internet of Things (IoT), Blockchain, Big Data, 5G, Quantum Computing, Supercomputers and the numerous offshoots that stem from all of these.

The Metaverse allows people to interact with each other and with virtual objects and environments in real time. It allows us to make our online experience an interactive 3D space. When you rely on VR technology, you are fully immersed in the Metaverse world – you are your avatar. One can also explore the Metaverse through AR; an additional virtual layer on top of our pre-existing 2D online experience. AR allows you to “see” objects in our world at a 1:1 scale via dedicated hardware (i.e. smartphones). The AR mobile game Pokémon Go was among the first to tap into the concept by allowing players to hunt virtual Pokémon in the “real world” using a smartphone app. More recently, IKEA has started using AR through The Place App, allowing shoppers to virtually place furniture in their real-life homes to visualise how it would look in “real-life”.

The word Metaverse is slightly misleading – it is not just one “world” – there are more than 50 different providers of worlds within the Metaverse (and growing), each offering different experiences, to different users in different ways. Horizon Worlds is Meta’s VR world – a digital space allowing users to explore and connect with VR avatars of other Meta users. Similarly, Roblox is one of the fastest growing interactive gaming platforms in the Metaverse whereby users can create their own games and play games created by others.

How does the Metaverse work currently?

Metaverse platforms help users access and experience virtual spaces through the use of digital avatars serving as their conduits. This experience relies on a range of software and hardware technology. AI is a key player as it ensures the stability of the Metaverse infrastructure. AI is integral to all components of the Metaverse, for computer vision and natural language processing, as well as camera calibration and other factors affecting the usability of AR and VR applications. The IoT and 3D reconstruction are also inherent features of the Metaverse. These various components all must work together and companies are, and will continue to, develop and enhance these technologies to improve the Metaverse experience.

Finance in the Metaverse

Arguably, blockchain technology is one of the most important features of the Metaverse. Blockchain technology is a decentralised system that stores data on a digital network, recording all transactions and allowing anyone to share valuable data in a secure way. Blockchain is one fundamental component of the technology that drives cryptocurrencies and the Metaverse alike.  As these technologies continue to evolve, they will likely increasingly depend on each other, thereby distinctly differing the Metaverse from the “real world” by running predominantly on cryptocurrencies.

Non-fungible tokens (NFTs) are another valuable asset within the Metaverse which are non-interchangeable transactions/units of data stored in blockchain that certify certain information (such as its ownership and uniqueness) about a singular piece of virtual art, real estate or other asset. Put simply, it is composed of software code in the form of a smart contract (which is essentially a tool that helps implement an irreversible sale) which contains details of the asset. Smart contracts can be legally enforceable (depending on the jurisdiction) provided they meet the required conditions for binding written contracts.

Are NFTs and cryptocurrency the same thing?

Unlike fungible digital assets such as bitcoin or other cryptocurrencies, NFTs are unique assets that cannot simply be swapped for an identical replacement. NFTs are not cryptocurrencies per se, but they are blockchain-based units which contain digital assets and are transacted using cryptocurrencies. The distinctive attributes of NFTs have made them desirable and highly valued digital assets.

While NFTs are not regulated as financial products in most jurisdictions, they may be subject to financial regulations depending on the use and the applicable laws of the country or jurisdiction within which they are being dealt in. Financial considerations relating to NFTs will become increasingly important in the coming years as they continue to gain widespread popularity.

Key players taking notice of the Metaverse

A 3D world running on blockchain technology has caught the attention of several high-profile stakeholders who are making large strides within the Metaverse space. Accredited sources project the global Metaverse market to record a valuation of USD $700 billion by the end of the decade. Facebook’s recent rebranding to ‘Meta’ is its blatant prediction on where it believes the future lies. To date, the company has invested over $10 billion in creating the Metaverse. Microsoft has also entered the Metaverse frenzy, with their biggest acquisition to date ($69 billion) of Activision Blizzard (publishers of Call of Duty, Candy Crush and World of Warcraft) as a means to enter the gaming Metaverse space. Apple and Google are also investing substantial money in the Metaverse. These types of investments by key players in the tech market is driving competition and evidencing that the Metaverse will likely become the billion-dollar market that current projections suggest.

The Metaverse caters to every sector – technology is just one – travel, government, real-estate and retail are all grabbing at opportunities to enter the Metaverse space. The South Korean Government has invested over $177 million to allow citizens to access public services virtually. Similar objectives were shown by the Ministry of Commerce in Dubai that announced at the Dubai Metaverse Assembly its intentions to launch a new address in the Metaverse. Nearly $2 billion has been spent on virtual land in the last 12 months and big fashion brands have also entered the space, albeit in different ways. For example, Nike is focussing on acquiring NFTs whilst Gucci has been utilising Roblox in creating different themed spaces to launch advertising campaigns.

Intellectual Property and Smart Contracts in the Metaverse

In the virtual and physical world, creativity and innovation is protected under intellectual property (IP) rights but there is growing uncertainty as to how IP protection, monitoring and enforcement translates into the Metaverse.

The full spectrum of IP rights face challenges in the Metaverse. How can the proliferation of infringing digital material across a long chain of cross-border transacting nodes be controlled? Enforcement of legal rights within the “real world” comes with a host of challenges but adding in the additional complexities of the Metaverse make enforcement even more difficult for IP right holders

The nature of the Metaverse is testing existing regulation. For example, establishing the identity of creators in the Metaverse may be difficult when the work results from users anonymized behind avatars. Additionally, the Metaverse is a collaborative space; identifying which individual is responsible for creating a particular innovation isn’t clear-cut. This uncertainty is equally applicable to infringement concerns, with the added consideration of jurisdiction: do virtual “enforcement agents”, “Metaverse courts” and “smart judgments” which are auto-executable (similarly to smart contracts) need to be created with a special set of rules, laws and regulations or can infringement, enforcement and execution of judgments be decided in the “real world”? The recent US judgment regarding MetaBirkin NFTs may suggest that in some cases, real world rules might be sufficient, but only time will tell how successful this approach is in protecting IP right holders more widely in the Metaverse.

IP concerns transcend what blockchain technology currently offers. Blockchain technology is very much a work in progress and policing it is an entirely different undertaking. Though the technology itself provides an immutable record, the issue arises where, for example, there are inaccuracies in that record or when identifying the “right-holder” is limited to an anonymous pseudonym or avatar.

NFTs are also not immune from IP concerns, despite an NFT buyer utilising blockchain technology to claim ownership. When an NFT is purchased, the NFT buyer does not automatically purchase the underlying IP rights. The position is similar to purchasing a physical asset, buyers are required to obtain IP rights by having them assigned by the creator.  The NFT buyer may impliedly own some IP rights by way of a non-exclusive license to display their NFT in their token wallet for personal purposes, but the ownership will not transfer unless expressly stated in the smart contract governing the NFT transaction.

How can these legal challenges be addressed in an automated world?

The infrastructure of the Metaverse is dependent on a variety of software and hardware technology, much of which is protected by existing patents, trade secrets and / or copyright. Many companies are accelerating their focus on developing and protecting technology that enhances users’ experiences in the Metaverse and creating tools that may help control or govern it (such as Apple’s patent application to exclude avatars that have abused others within the Metaverse). The collaborative use of specific coding and building blocks within the Metaverse is raising infringement concerns for many patent holders particularly where infringing activity will be difficult to identify, prove and thereafter enforce. Additionally, where new innovations are created in the Metaverse, how and where will such rights be protected, keeping in mind that patent rights have traditionally been territorial in nature?  Should a Metaverse patent (transcending the physical territorial boundaries) be created? These are all questions that legal professionals, regulatory bodies and businesses should be considering carefully.

The Metaverse use for virtual IP Registration Offices

The Metaverse is exciting and it can’t be denied that there is definite potential in blockchain technology as the platform creates a transparent and immutable chain of information when considering IP rights. It has the potential to transform the efficiency and transparency of rights management information by cutting down on some of the standard processes and procedures. By replacing a centralized registration system with decentralized ones, it will be easier to register new IP, update filings, record and transfer ownership and license these out at any time using immutable time-stamped records, which should theoretically make regulatory agencies run more efficiently with fewer resources.

Does this mean that IP right holders might one day see a Metaverse based IP registration office? Only time will tell but if such an office is created, perhaps regulators may also decide that IP rights created in the Metaverse should be enforceable throughout the Metaverse (transcending the conventional territorial boundaries) – how that would look and realistically work is a much more difficult question.

Conclusion

The unprecedented rate of growth of and investment in the Metaverse brings with it many challenges and uncertainties. Public policy makers, governments, regulators and legislators should  be equipped and prepared to pre-empt these changes and start taking steps to cope with the potential complications ahead. International cooperation between nations will become a necessity. The World Trade Organisation and other international organisations will likely be encouraged to take an active role in coordinating the efforts in regulating and managing the Metaverse space to protect IP right holders. This cooperation may even result in a possible standalone, independent and sovereign “virtual jurisdiction”, having its own governance regime and underlying executive, legislative and judicial systems – but only time will tell how and if this can be actualised.

How can we help?

Information on the Metaverse is constantly changing – and we are monitoring these changes closely, particularly with the lens of IP protection and enforcement. If you would like to look towards the future and pre-empt issues that may arise in the Metaverse regarding your company’s IP or would like to protect new innovations relating to the Metaverse, please do get in touch with our 3IP team (details set out below) and we will help pave a sensible path forward.

Our team

Our unique practice at Al Tamimi and Company covers innovation, patents and industrial property (3IP) and aims to connect legal, business, and technical expertise to offer our clients a comprehensive service that combines legal advice with real-world action. Our team is comprised of seasoned IP and commercial lawyers, technology transfer lawyers, patent attorneys, scientists, and technical consultants. Please do get in touch with one of the key contacts listed below if you would like to discuss the Metaverse and what it means for your company.