Feb 2022

4 Legal And Regulatory Issues Concerning The Metaverse

VR Metaverse

What Is The “Metaverse”?

The term “metaverse” has caught headlines since Facebook announced its change of its legal corporate name to “Meta” in October 2021[1] and has continued to be a hot topic as we step into 2022. So, what exactly is a “metaverse”? In short, the metaverse is a virtual world where people will use headsets and/or other devices to enter a virtual world to connect to a range of digital environments which could be used from working, buying and selling digital art and virtual parcels of land, or attending virtual-world music festivals with real-world acts, etc. Meta describes the metaverse as “a set of virtual spaces where you can create and explore with other people who aren’t in the same physical space as you”, Mark Zuckerberg describes it as “the Internet that you’re inside of, rather than just looking at”.[2] Whilst the term appeared as a science fiction concept as early as 1992[3], the metaverse has developed at pace in recent years with the evolution of blockchain technologies and the tokenization of digital or physical assets that are stored on a digital blockchain-based ledger can be used to prove and issue ownership of such assets.

The Metaverse Space

Sandbox

The Sandbox (a subsidiary of Hong Kong-headquartered blockchain gaming unicorn Animoca Brands) is the largest metaverse in terms of transaction volumes, with 65,000 transactions in virtual land totalling US$350 million in 2021.[4] In the Sandbox, “land” is a token that represents a digital piece of the platform.[5] Gamers who purchase land can populate it with games and assets, which are tokens issued by players or brands that create or assemble user-generated content. These assets are then traded as NFTs on various marketplaces and are primarily used to enhance one’s experience or as creative elements for the game designers. It was reported in January 2022 that The Sandbox is building Mega City, a new cultural hub in the metaverse, the new hub will bring together the film, music, entertainment, acting, professional services, finance, real estate, and gaming sectors to create Mega City. [6] Adrian Cheng, CEO of New World Development, will acquire one of the largest plots of digital land in The Sandbox to help build the new Mega City.[7] Cheng announced that his virtual world will showcase the business success of startups in the Greater Bay Area. Pricewaterhouse Coopers’ (PWC) Hong Kong also purchased a land site in The Sandbox metaverse.[8] William Gee, a partner at PWC Hong Kong, commented about the land purchase and the metaverse in general that “the metaverse offers new possibilities for organisations to create value through innovative business models, as well as introducing new ways to engage with their customers and communities”.

Decentraland

Decentraland, the second largest metaverse, saw 21,000 real estate transactions worth US$110 million in 2021.[9] Sotheby’s created a digital replica of its New Bond Street headquarters as a virtual gallery in Decentraland to show digital art in June 2021.[10] The government of Barbados plans to open an embassy in Decentraland, which would make the country the first amongst the world to issue and recognize digital sovereign land.[11] Decentraland will also host the first-ever metaverse fashion week in March 2022.[12]

Meta

Meta has ambitions to issue and build a metaverse in collaboration with many different companies.[13] It has changed its legal corporate name from “Facebook” to “Meta” as part of a major rebrand. Meta envisions a virtual world where digital avatars connect through work, travel or entertainment using VR headsets.[14] It is suggested that the metaverse is not a single product that can be built by a one company alone; it will be created by millions of developers each building out their part of it. Meta has announced that it would invest US$50 million over the next two years in programs and external research for the development of the metaverse and expects products to be realised in the next 10-15 years.[15]

Alibaba

It was reported in December 2021 that Alibaba has set up a subsidiary, Yuanjing Shengsheng Beijing Technology, with a registered capital of RMB 10 million which would be dedicated to the metaverse, offering platform-as-a-service capabilities and being the builder and technology promoter of the new infrastructure needed for the metaverse.[16] Alibaba was amongst various tech companies which filed for many metaverse-related trade marks in 2021.[17]

Tencent                      

Tencent said it had plenty of technologies to develop the metaverse. President of Tencent Martin Lau was quoted saying that the company could approach the metaverse through a range of businesses, as the company’s strength includes video game development and social networking.[18] It was reported in January 2022 that Tencent plans to acquire gaming handset maker Black Shark for up to 2.7 billion yuan (HK$3.3 billion), a move that could help the tech giant further its ambitions to develop and issue a metaverse.[19]

Potential Legal and Regulatory Issues Relating To The Metaverse

The revolutionary nature of the metaverse is likely to give rise to a range of complex legal and regulatory issues. We consider some of the key issues below.

Data Privacy

The metaverse will enhance companies’ ability to collect personal data as users’ actions, habits and physiological responses could be tracked and recorded, therefore allowing such company to have a much deeper understanding of their customers’ thought processes and behaviours.  Users participating in the metaverse would likely be “logged in” for extensive period of time; this means that the patterns of users’ behaviour will be continuously monitored; seeking consent from users each time they engage in an activity may be impractical.[20]  In the metaverse, it may not be easy to establish who legally bears the responsibility for data processing, as an entire decentralized network may be involved. It would therefore be necessary to evaluate who is responsible legally in the event of lost or stolen data.[21] The privacy notices of different entities that shall be displayed to the users; how consent can be given, especially regarding sensitive data (biometric data) or data collected from minors, must also be evaluated carefully.

Intellectual Property Rights

The metaverse is meant to be a place for users to create new things together. Particularly, when it comes to collaboration to generate intellectual property rights, challenges are likely to arise as joint ownership of intellectual property are proven to be complicated from a legal sense. Due to such circumstances, the European Commission is in the process of considering a reform regarding co-created intellectual property resulting from new technologies.[22]

Competition Law

Competition law issues may arise as a consequence of the conduct of both the developer and the user participant. In order to achieve interoperability in the metaverse, communication and collaboration between businesses is essential. Where the companies are competitors, communications and cooperation between the companies on their metaverse offerings could give rise to legal antitrust issues which would need to be examined with caution.[23]

Financial Markets Law Challenges

NFTs or similar iterations thereof may play a big role in the metaverse, and how consumer’s / investor’s interests could be protected would be relevant. As discussed in our previous article “NFT Legal Update: Hong Kong and PRC”, the crackdowns on cryptocurrencies in the PRC intensified in 2021 as the global crypto-market became more vibrant. Although no NFT-specific regulations have been enacted in PRC as yet, tech giants such as Tencent and Ant seemed eager to distance themselves from any cryptocurrency-related services such as NFTs in light of the tightening of cryptocurrency-related regulations and the PRC’s state-owned publication’s seemingly negative comments on NFT transactions as being a “bubble”. It remains to be seen how issues regarding NFTs (including those featured in the metaverse) would be regulated.

Commentary In China and Hong Kong Regarding the metaverse

In late November 2021, Economic Daily (a political party newspaper directly under the Central Committee of the Chinese Communist Party) commented that there are substantial risks in the metaverse – social, ethical and legal issues may arise when it comes to governing the metaverse; the article concluded by warning readers that the “hotter” the metaverse gets, the more that the public should stay calm.[24]

People’s Daily (an official newspaper of the Central Committee of the Chinese Communist Party) warned about the metaverse in its recent article which targeted the phenomenon of heated real estate in the metaverse. The author advised readers to think twice before investing as real estate investments in the metaverse may be a bubble; when the hype is over, or when there are changes in regulations, investors may suffer serious losses. The article said that real estate investments in the metaverse resembled “product financialization” and carried risks of volatility, fraud, illegal fundraising and money laundering amongst other issues. It particularly pointed out that the laws in relation to NFTs (which is intrinsically intertwined with the metaverse) are not clear. As a concluding remark, the author advised that it is better for the public to be less involved in the metaverse.[25]

However, some state media are less skeptical about the metaverse. In late November 2021, the People’s Liberation Army Daily (the official newspaper of the Chinese People’s Liberation Army) said in an article that the metaverse could be an effective and influential type of media; for instance it could be used in news reporting and social media to allow better user experience. As (a slightly odd) concluding remark, the article said if a “battleground metaverse” could be re-created, the audience could experience the harm and trauma brought by wars and it may promote the public’s “desire for peace”.[26]

With regard to Hong Kong, no specific commentary, guidance or regulations have been issued by the Hong Kong government in relation to the metaverse. As aspects of the metaverse materialise, legal and compliance issues that may be unforeseeable may arise. We can expect that stakeholders of the metaverse would certainly need to deal with any issues that apply in any trading and digital context, such as anti-money laundering issues, technology transfer restrictions, financial services regulation and the like.

For more information, please contact our lawyers John McLellan at jpm@haldanes.com and Karen Choi at karen.choi@haldanes.com.

 

Written by: John McLellan, Partner; Karen Choi, Associate; and Kitty Won and Benedict Hui, Trainee Solicitors

 

[1] https://www.bbc.com/news/technology-59083601

[2] https://bernardmarr.com/the-metaverse-explained-with-examples/

[3] https://www.cnbc.com/2021/11/03/how-the-1992-sci-fi-novel-snow-crash-predicted-facebooks-metaverse.html

[4] https://www.forbes.com/sites/ronshevlin/2022/02/04/digital-land-grab-metaverse-real-estate-prices-rose-700-in-2021/?sh=1f1fb64d7cdc

[5] Ibid.

[6] https://www.cdotrends.com/story/16101/hong-kong-has-new-nft-cultural-hub-metaverse?refresh=auto

[7] https://www.forbes.com/sites/zinnialee/2021/12/08/hong-kong-property-tycoon-adrian-cheng-builds-virtual-land-in-the-sandboxs-metaverse/?sh=3be2548545d8

[8] https://news.bitcoin.com/accounting-firm-pwcs-hong-kong-branch-purchases-land-in-the-sandbox-metaverse/

[9] https://www.forbes.com/sites/ronshevlin/2022/02/04/digital-land-grab-metaverse-real-estate-prices-rose-700-in-2021/?sh=1027ba887cdc

[10] https://decentraland.org/blog/announcements/sotheby-s-opens-a-virtual-gallery-in-decentraland/

[11] https://www.bloomberg.com/news/articles/2021-12-14/barbados-tries-digital-diplomacy-with-planned-metaverse-embassy

[12] https://hypebeast.com/2022/2/decentraland-first-metaverse-fashion-week-info

[13] https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview

[14]https://www.usatoday.com/story/tech/2021/11/10/metaverse-what-is-it-explained-facebook-microsoft-meta-vr/6337635001/

[15] https://about.fb.com/news/2021/09/building-the-metaverse-responsibly/

 

[16] https://www.marketing-interactive.com/alibaba-establishes-metaverse-unit-despite-state-media-risk-alert

[17] https://forkast.news/headlines/chinese-companies-register-metaverse-related-trademarks/

[18] Ibid

[19] https://www.thestandard.com.hk/section-news/section/2/237834/Tencent-eyes-handset-firm-in-metaverse-push

[20] https://www.tatlerasia.com/power-purpose/ideas-education/virtual-reality-metaverse-laws-and-the-legal-system

[21] https://www.scl.org/articles/12395-will-the-metaverse-be-a-universal-platform-part-ii-the-legal-issues

[22] https://www.pwc.ch/en/insights/regulation/legal-compliance-metaverse.html

[23] https://www.scl.org/articles/12395-will-the-metaverse-be-a-universal-platform-part-ii-the-legal-issues

[24] https://mp.weixin.qq.com/s/2P0nYcJpaSe1RIjz_W1XaQ

[25] http://www.takungpao.com/house/dichan/2021/1213/665561.html

[26] http://www.mod.gov.cn/education/2021-11/26/content_4899728.htm

Written by:

John McLellan

Partner

Karen Choi

Associate

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