It’s time for policymakers to get real about the metaverse. Many people are already spending significant time and money in virtual environments on things like gaming, virtual real estate, and non-fungible tokens, or NFTs. As the metaverse becomes a bigger part of people’s lives and livelihoods, financial and other activities will need a solid basis in law and regulation. Such a basis does not yet exist.
Developers and enthusiasts see the metaverse becoming a constellation of realistic and alternative worlds where individuals and institutions can buy and sell all types of goods and services – property, concerts, loans, workplaces –- just as in the physical world. It makes use of innovations in money: transactions are made with digital assets like Bitcoin and some of the goods are packaged as NFTs. Both sectors are growing rapidly, with projections for the size of the metaverse market range as high as $13 trillion.
That astronomical potential highlights the need for debate about the policies and regulations that should govern this activity. In a new paper, “Reckoning with the Metaverse: A Primer on the Metaverse and NFTs,” the Oliver Wyman Forum provides an overview of what the metaverse and NFTs are, who uses them, and how they have been and will be used. The paper also highlights regulatory questions including intellectual property rights in the metaverse, jurisdictional considerations, market risks, and conduct risks affecting both developers and users.
What Is the Metaverse?
The metaverse employs new technology to bridge gaps between the physical and virtual worlds, allowing colleagues to work together, students to learn together, and friends to socialize together in a more realistic, natural way than the existing internet offers. Today’s metaverse contains humanoid avatars meeting in a multitude of virtual reality environments. Gaming is the most significant application with games like Fortnite attracting millions of daily users. Many more uses are likely to develop, driven by easy connections between digital worlds (portability) and the integration of digital and physical worlds through augmented reality (AR), virtual reality (VR), and the internet of things (IoT).
Science fiction writer Neal Stephenson coined the term “metaverse” in his 1992 novel “Snow Crash.” It depicts a dystopian world in which users’ avatars are proxies for their social status and wealth, and some addicted users effectively abandon the physical world for virtual reality. Enthusiasts paint a brighter vision in which virtual worlds connect seamlessly and individuals retain control over their digital selves. These optimists imagine virtual worlds built on top of a new iteration of the internet designated Web3, built on the principles of decentralization, open access, and interconnectivity, and having an embedded payments infrastructure linked with the cryptocurrency ecosystem. That would stand in contrast to today’s advertising-driven Web 2.0 in which a few centralized platforms dominate total value.
Where Do NFTs Fit in?
NFTs are unique tokens on a blockchain – a public, distributed ledger – that confer ownership rights to the individual or organization that possesses it. The item involved could be any number of things such as a piece of digital art, virtual property, or outfits for avatars. As a proof of ownership, NFTs can form the foundation of all property ownership in the metaverse.
The Oliver Wyman Forum’s Global Consumer Sentiment initiative recently published eight behavioral archetypes driving consumer trends. One of these, the “Citizens of the Metaverse” or “Metazens,” represents 13% of the population across the nine surveyed countries. These consumers are notable for their adoption of Web3 and see the metaverse as an opportunity to improve people’s lives through socializing, working, and gaming possibilities. They are significantly more likely than the average person to invest in cryptocurrencies, NFTs, and virtual real estate.
Developers are creating platforms like Decentraland, which touts itself as the “first-ever virtual world owned by its users.” It contains a fixed number of virtual property parcels that can be bought and sold using the platform’s crypto token, MANA. One plot sold for $45,000 in February and was financed with a metaverse mortgage. The platform also offers games, interactive apps, and peer-to-peer communications.
Many other applications are being explored that extend beyond gaming and entertainment. Several companies are building platforms that create virtual working environments in the metaverse. Manufacturers hope to use VR and AR technology to provide factory training or to test customer experience. The metaverse also may improve on today’s remote education technology and enable governments to provide easier access to public services.
Key Legal and Regulatory Issues
Our legal frameworks for determining rights to property such as land, cars, and intellectual property have been developed over hundreds of years, but they didn’t have the metaverse in mind. If a metaverse house is an NFT that someone else designed, should the house be viewed as one person’s real property or another person’s intellectual property? If the latter is the case, does that mean that nobody can copy anyone’s metaverse house design? These issues may require a new foundation for thinking about property rights.
NFT ownership rights tend to be clear in the blockchain where it was originated, but can the owner prevent people on another blockchain from viewing or copying the image? Will the “fair use” doctrine that allows people to use a photograph for educational or research purposes without infringing on the copyright extend to NFTs? Some platforms prohibit NFT owners from modifying them or using them for commercial purposes while a very different regime called Creative Commons Zero champions the free use of any intellectual property in the name of open-sourced innovation. The rights model that emerges will determine whether NFTs can be widely used and built on or simply looked at by others.
These questions underscore the need for a broad debate about the policies and regulations that should govern activity in the metaverse. Knowing why someone would choose to purchase a certain NFT over a different one matters for business leaders strategizing their entry into this space. Regulators need to understand the link between the metaverse and the potential consequences for cryptocurrencies to develop their approach. The decisions that regulators and business leaders take on these issues will shape our lives for years to come. Only with a firm understanding of such elements can policy and business models be adapted to harness the values of Web3 like user choice, privacy, and decentralization.