Startups

Metaverse: Exploration of Legal Issues

NFTs, DAOs, and now meta … metaverses? Let’s see what it’s about and why lawyers (among others) will soon be studying the laws of imaginary worlds.

NFTs, DAOs, and now meta … metaverses? Let’s see what it’s about and why lawyers (among others) will soon be studying the laws of imaginary worlds.

In case you haven’t heard, metaverse is the new buzzword in the Valley. As soon as Facebook announced its rebranding into Meta and its plans to build a metaverse, similar declarations started popping up all over. It may be a genuine trend and a race for dominion over the virtual world, or, perhaps, in a year’s time something new will come around and replace it.

It’s better to see a metaverse with your own eyes – we recommend Ready Player One for that. In this movie, the virtual world is run by a single corporation. We can only guess how it’s actually going to work in reality, or whether it’ll happen at all, but it’s safe to assume that there will be several interoperable virtual worlds.

The statistics below show that over the past ten years, the amount of time people have been spending behind a screen (screen time) has skyrocketed. We’ve been getting increasingly dependent on our computers and phones and will probably have no problem accepting the new toys – metaverses.

As lawyers dealing with startups and new technologies every day, we often ponder potential implications of new discoveries. We’ll try to do just that in this article.

What’s a Metaverse?

First we’re going to explain briefly what a metaverse is and demonstrate that the concept is neither unfeasible nor previously unheard of. This, in turn, will make it easier to understand what aspects of metaverses should be regulated and how to go about it.

The term “metaverse” is a portmanteau of the Greek prefix μετά- (between, after, through) and the word “universe.” So you could say, a metaverse is a world between worlds. Picture this: tomorrow you may be able to buy a device that could transport you to a different world with its own rules and systems for absolutely everything. Naturally, you’ll be able to return too, bringing along into the real world whatever object you happened to grab on your way back from virtual reality (metaverse).

Sounds like science fiction, doesn’t it? Indeed, such things only exist in movies so far. That’s why today, when we say metaverses, we mean separate systems (let’s call them worlds), with their own user base and way of doing things (rules, economy, digital property, etc.). The key characteristic of such systems is their interoperability.

As absurd as it may sound, scientists have done numerous studies on the reality of our existence – the implication here being that we may all be living in a simulation. This theory has some high-profile proponents, like Elon Musk, who said, “There’s a billion to one chance we’re living in base reality.”

If you’re still hazy on the whole metaverse concept, think of video games. They are often separate worlds, sometimes not much different from our own, with players being able to travel around, earn in-game money, acquire digital goods, and interact with other players. Who’s to say this isn’t a proper world? But of course, while that may be true, this still can’t be called a metaverse.

Metaverses are a lot like games, social networks, or the internet as a whole. That’s why we won’t have to invent regulations from scratch, since there already exists a set of rules for similar things.

In this article, we’ll also cover the differences between metaverses and social networks. In the meantime, let’s take a crack at the observer effect and Young’s interference experiment (double slit experiment). The observer effect occurs when an object’s behavior (characteristics) starts changing once it’s being observed. There are at least two schools of thought on the matter among physicists:

  1. according to the first one, the change is caused by measuring instruments used in the process;
  2. advocates of the second believe that it’s the human mind, that is, the very act of observation, that alters the object’s behavior. In quantum mechanics, this is explained by the fact that prior to being observed, the object is in a superposition of two different states, or in a state of indeterminacy. For instance, it can simultaneously be black and white. Once it is observed, the object’s state becomes fixed – say, it stays black. All of this could also be considered through the prism of multiple universes (multiverse). Following the example above, the object could appear black to the observer only in one of the possible realities.

It all seems awfully complicated and obscure, not to mention that there’s no consensus on this phenomenon to begin with. However, given the number of serious studies on the reality of our universe and various statements on the matter, like the one from Elon Musk, there appears to be a strong correlation between the issue of our world’s reality and the idea of metaverses that humanity is so keen on developing.

The observer effect is very similar to how video games work: parts of the game world are generated (rendered) at the moment of being observed by the player. This is done to save computing resources. It’s akin to what happens to photons in Young’s experiment: when not observed, photons behave like waves, but once observed, their trajectory starts resembling that of paintball pellets.

So does this mean that metaverses are no different from games? Let’s tackle this next.

What’s the Difference between a Metaverse and a Social Network or Video Game?

Terminology-wise, a metaverse has to be a separate world, but linked with other worlds. Let us recall that it’s supposed to be a world between worlds, not a parallel universe.

You could say, metaverses are of the same nature as social networks, online video games, or the internet as a whole. Indeed, they share certain similarities, most importantly huge communities and interaction between users – like on a social network or in a game. The latter two, however, lack one key aspect – interoperability (compatibility).

In metaverses, elements of one world can be used in other worlds. A basic example would be transferring in-game skins from the Counter Strike metaverse into the Fortnite metaverse. Here’s a more advanced and fantastical scenario: returning to the real world by swallowing the red pill and exiting the Matrix (metaverse).

You won’t find anything like that in games or on social networks today. You can’t transfer a gift from Reddit to Facebook, can you? It’s not even possible to send a simple message from one platform to another.

So, the key feature of metaverses is the existence of a strong link between their structural units – universes – that allows you to use elements of one universe in all the others. This link could take different forms:

  • the metaverse is connected to the real world;
  • the metaverse is connected to other metaverses; or
  • the metaverse is connected to other metaverses and the real world.

No true metaverses exist yet. All we have so far are projects with large audiences, like the Marvel Cinematic Universe, online games (the closest thing we have to metaverses), and metaverse crypto projects (as they present themselves).

Types of Metaverses

We can predict that there will be no metaverses with a narrow focus. Any such project will combine the following functions:

  • entertainment, new brand of gaming – those will probably be the first to take root in our lives and gain popularity, as long as certain legal issues get resolved (more on that below);
  • digital reputation – this one will take longer to get introduced and accepted;
  • remote work (illusion of presence);
  • socializing and communication;
  • economic regulations (there’s also a large number of unresolved legal issues here, especially where cryptocurrency is involved).

We can also expect ancillary metaverses, such as a metaverse for mediating disputes between users from other metaverses. We’ll talk more about this in the section on the legal aspects of metaverses.

GTA Role Play Metaverse

One of the most interesting metaverse-adjacent projects is GTA Role Play (GTA RP). GTA RP is an unofficial mod for the video game Grand Theft Auto (GTA). It features elements of real life, allowing players to play various roles, from a homeless person to a governor.

The mod has existed since GTA San Andreas, when it was known as SA:MP. Mods for GTA V have gotten popular lately as well. The mechanics remain the same, but the functionality has improved significantly.

Interestingly enough, no one considers GTA RP a metaverse, even though it’s as close to one as it gets. Game servers are essentially separate worlds, and each of those has:

  • server administrators who make sure that players play by the rules, in addition to performing other technical functions;
  • unique server economy (players decide at what price to sell property, authorities set the tax rate);
  • public authorities where players work (city council, agencies, military, police, secret and security services, hospitals);
  • law firms;
  • various professions: farmers, taxi drivers, porters, etc.;
  • mafias and gangs.

To some people, this world is as, if not more, important than the real one, because here they can be anything they want. It’s not just about the hunt for wealth and fortune. Players interact with each other, forge friendships, some even get married, and not necessarily in game only.

Now imagine if instead of some baubles, such a game would use crypto tokens as currency (stablecoins in particular) – based, for instance, on Ethereum. Now that would be an actual metaverse. You would be playing in a virtual world, accumulating assets that you could spend both there and in the real world, which is the connection between worlds that we mentioned earlier. Moreover, the players would not be simply farming tokens – they would be actively involved in the life of their virtual world. To expand on this idea, we could introduce various ways to gauge reputation – for instance, through credit history. Your track record in the metaverse could affect your credit checks in the real world, which would be perfectly logical, since your assets (tokens) would be equally valid in both worlds.

However, this brings us to a serious risk – people losing interest in the real world. If we turn GTA RP into a metaverse, like in Ready Player One, we could lose a massive number of people to this make-believe universe as they stop caring about life outside the game. This is of great concern to society and governments and will no doubt result in restrictions on time spent in metaverses.

Metaverses and Cryptocurrencies

In the world of crypto, metaverses are represented in the form of games and various networks and services for metaverses.

Crypto Games

Decentraland – a game where players can purchase land and use it to generate value (e.g. build a casino). The game is run by a DAO.

Star Atlas – a metaverse with three factions (civilizations) that fight for territory, resources, and political supremacy. For helping their factions, players receive rewards, including tokens. The game is being developed using Unreal Engine 5.

Star Atlas is a lot like the space sims Elite Dangerous or Star Citizen, which is still in development. These games feature fully open worlds where each star or planet is an actual in-game object that you can travel to – as long as you have enough fuel. It says as much in the Star Atlas White Paper game guide.

Then there’s illuvium – an open-world RPG and auto battler wrapped in one, with players fighting for tokens.

Can these games be considered metaverses? In the future – perhaps. Now – not so much, if only for the simple fact that some of them haven’t been released yet. These games are connected to the real world through the use of tokens that also have value in our universe, but it’s quite possible that the developers won’t go any further than that. For a game to be called a metaverse, it must have a large community that will actively participate in that game’s life rather than just play to get tokens.

We can already see how many legal issues this will entail. They will no doubt be the subject of countless debates and will present a serious obstacle for the adoption of such game projects and metaverses in general. Let’s consider some of those issues.

Legal Aspects of Metaverses

Regulating Interactions in a Metaverse

At first glance, regulating metaverses shouldn’t be a problem – we have rules/user agreements/terms of use for that. It’s no different than the rules we accept when launching a game for the first time or when registering an account on some website.

Problems will arise once governments take notice of the new phenomenon and decide to investigate how well administrators ensure observance of applicable laws and whether their metaverses serve the public interest.

Can Governments Influence Metaverses?

They sure can – if metaverses (their administrators) are found to act against the public interest: interests of certain groups, life and health of citizens, national defense and security, or environmental protection.

Here’s a simple example: metaverses will have to observe the laws on personal data, otherwise they will be blocked and their administrators will be fined.

Government Restrictions for Metaverses

If metaverses become popular, restrictions will surely follow.

For instance, there may be a limit on the time a person would be allowed to spend in the metaverse. In China, there already exists a limit on gaming time for minors: 1 hour on Fridays, Saturdays, Sundays, and national holidays. The Chinese government introduced these restrictions to combat gaming addiction. For metaverses, this will be even more relevant, since virtual worlds can be way more attractive than reality.

Metaverses may also be subject to labor laws, at the very least in regards to the maximum allowed work hours. For instance, lawmakers could prohibit “working” in a metaverse for more than, say, 40 hours a week.

Another likely restriction will concern authentication in a metaverse. Governments could make it mandatory to use your ID or other credentials for this, or to do it via government websites. Otherwise, interoperability could be restricted.

There are bound to be requirements for metaverse administrators as well.

Who Can Create a Metaverse, and Will You Need a Metaverse Operator’s License for That?

Metaverses will likely be equated to gambling or will fall under similar regulations, such as existing cryptocurrency regulations.

Consequently, there could be “metaverse operators” and special requirements for them, such as the need to get a license.

Do Real-World Laws Apply to a Metaverse?

This question is answered by the so-called “magic circle test”:

“An activity that occurs in a virtual world is subject to real-world law if the user undertaking the activity reasonably understood, or should have reasonably understood, at the time of acting, that the act would have real-world implications.”

B.T. Duranske

Here’s an example. Criminal law prohibits murder and enforces this prohibition using the threat of punishment – and everyone knows that. At the same time, in many games it’s possible to kill other characters, and no one gets punished for it in the real world. This is as it should be, since the victims of in-game killing are imaginary characters, so real-world laws don’t apply.

Here’s another example. To build his character faster, a GTA RP player purchases in-game currency with real money and then buys a house in game. Another player offers to buy that house and promises to pay in a week. The first player agrees and gives the house away but never gets his money. This situation is not as straightforward.

On the one hand, actions in the virtual world do have real-world implications here: the player spent real money to buy the house and ended up with neither.

So how to resolve this? First you’ll need to consult the game rules. There’s probably going to be a clause there that absolves the administration of any responsibility for such incidents and states that it’s up to the players themselves to safeguard their in-game property. Second, there could be mechanisms in the rules for resolving such situations by allowing players to submit complaints to the administration. Finally, if the administration ignores such a complaint, any lawsuit on recovering lost in-game property will be dismissed, since rules related to participation in games are not subject to protection in court.

However, it would be a different story if something like this happened in a game where crypto tokens were the only currency. There, the boundary of that magic circle separating the real from the virtual is barely visible, since players deal with assets that have value in the real world.

Don’t forget the public interest too. We can definitely expect dedicated regulations for metaverses at the legislative level. Furthermore, not every state will just accept crypto: metaverses using tokens (which will be in the majority) will be the first to draw the scrutiny of public authorities.

When Can We Expect the First Laws on Metaverses?

Initially, there will be no dedicated regulations. Metaverses will operate on the basis of existing laws and clarifications that regulatory authorities will be issuing as metaverses continue to develop. Metaverses in general, at least until dedicated regulations are adopted, will likely be considered computer programs – similar to video games.

How to Create a Metaverse and Avoid Regulation

This is possible with regulatory sandboxes. The idea here is to have special regulations apply to businesses within a certain territory and for a certain period of time. The purpose of these regulations is to make it easier – or possible to begin with – to develop innovative goods and services (involving the use of AI, distributed ledger technology, neurotechnology, quantum technology, etc.).

Will Tort Law Apply to Metaverses?

It’s already possible to sue for insults on social networks. With metaverses, we envision different scenarios:

  • metaverses are equated to video games: in this case, the insult is aimed at a metaverse character, so there is no tort here; or
  • metaverses are considered in conjunction with the real world (interoperability), unless there are exceptions in real-world laws or metaverse rules: here, insulting a person in the metaverse will be a tort, unless stated otherwise by laws or rules (keep in mind that rules can’t contravene the public interest).

There’s also a chance that a new type of torts will emerge – damage inflicted within a metaverse, e.g. damage to digital property, reputation, etc.

Who Will Decide on Metaverse-Related Disputes?

There will be three categories of disputes:

  1. disputes between a player and a metaverse administrator;
  2. disputes between metaverse players; and
  3. disputes between administrators of different metaverses.

The first category (player-admin) is fairly straightforward – first the parties will rely on metaverse rules, and if they still can’t reach an agreement, their dispute will be decided in a real-world court.

The second category (player-player) is more interesting. Once again, there can be several scenarios here:

  1. the dispute passes the magic circle test – that is, it doesn’t encroach on a person’s rights in the real world or on the public interest. Such disputes will be resolved based on metaverse rules. For instance, there could be in-metaverse courts (a new form of arbitration or simply a way to resolve disputes based on the rules, like in any game), which means there will be judges and lawyers too. Incidentally, this already exists – in GTA RP, for example: players there are able to (i) submit a complaint to the administration or (ii) file a lawsuit with a game court;
  2. the dispute fails the magic circle test: expanding on the real-world classification, in-metaverse courts could be designated as lower courts and real-world courts as higher courts.

In the third scenario, (administration-administration), the procedure could be the same as in disputes between players:

  1. examination by a metaverse court with the option to fight its decision in a real-world court (this seems plausible if metaverse courts are recognized at the legislative level, for instance, as a new form of arbitration); or
  2. examination by a real-world court right away.

Metaverse courts could also be based in one metaverse created for this very purpose. It would be a separate, independent world existing for the sole purpose of settling disputes. Players will work there (as judges or someone else) and get paid for it – in money, tokens, or reputation, which will have merit among lawyers in the real world (for instance, it could give points that you could use to get into law school, become a lawyer or judge, etc.).

Who Will Enforce Metaverse-Related Court Decisions?

For disputes considered within a metaverse, it will be up to the administrators to enforce such decisions.

For disputes examined by real-world courts, it’s still going to be the administrators’ job, since they will be the only ones with the technical means to do it.

Administrations will also be able to delegate these tasks to enforcement bodies within their metaverses, which could consist of users or members of the administration.

Uniform Standards for Metaverses

To ensure interoperability, we’re going to need uniform standards for all metaverses, such as the ERC-721 standard for non-fungible tokens. Metaverses with the largest number of interoperability functions (first and foremost with the real world and then with other metaverses) will rise to the top.

As a result, competition among metaverses either will be almost non-existent, or it will take the form of agreements between administrations in regards to adopting common standards to allow the transfer of items – or even characters – from one world to another. This could lead to the emergence of several competing groups of metaverses, with interoperability possible only within each group.

Personal Data in a Metaverse

Personal data of the users is probably the most important thing metaverse administrators will have access to. It would be like having a custodian in the real world that knows everything about you and every single thing that you do.

What are they going to do with this data? What they’ve been doing all along: use it in advertising, sell it to banks and other parties. It’s no accident that Facebook (now Meta) – a big fan of collecting people’s personal data – has chosen the metaverse as the way to go.

That’s why personal data, along with crypto, will be the focus of regulators’ attention.

Metaverses Are a Pipe Dream

It all may sound strange and absurd, and perhaps it is. But who knows? Fantasies of writers and movie directors might just come true one day.

In any case, even if we never see metaverses like in the movies, their basic versions will definitely be a thing (and some already exist or are in development). At first, they will be represented by games with crypto for currency and with the option to transfer in-game items by selling NFTs.

So in a few years, we’ll likely need to revisit everything that we’ve touched on here, only instead of theorizing, we’ll be looking for solutions to concrete problems that metaverse creators will be facing – like being hit with a government ban out of the blue.

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