Regulating the Metaverse

Former professional basketball player Shaquille O’Neal hosted one of 2022’s biggest New Year’s Eve celebrations, which featured a roller rink, marching band, and performances by rappers Cardi B and Ludacris. But O’Neal’s partygoers were not in Times Square or on the Las Vegas Strip—they were in the metaverse.

The metaverse, a term first coined by science fiction author Neal Stephenson in 1992, refers to an interactive and immersive virtual world where people spend their digital lives. Experts have described the metaverse, which users can access through computers and virtual reality devices, as the next iteration of the internet. There, users can interact with one another and the digital environment through online avatars. Just like in the physical world, avatars in the metaverse can socialize, attend work meetings, play games, and perform many other everyday activities.

Although the metaverse may look and feel like the real world, the digital and physical worlds diverge in one key area: the metaverse is highly unregulated.

Experts have raised concerns over the lack of regulatory oversight because metaverse users can become victims of many real world harms such as fraud. For example, transactions in the metaverse often use cryptocurrencies, which do not have government-backed fraud protection. In addition, assets in the metaverse can be sold as non-fungible tokens (NFTs), which are digital assets with non-tangible values that can be fraudulently manipulated.

The metaverse is in its early developmental phases and is rapidly growing. Big tech companies such as Google and Apple have invested significant capital to build the metaverse, and in 2021, Mark Zuckerberg introduced a new company brand, Meta, focused on “bringing the metaverse to life.” Consequently, many experts are arguing that regulatory action needs to keep pace with metaverse technology to protect users from harm.

In this week’s Saturday Seminar, experts discuss the dangers of an unregulated metaverse and propose regulatory solutions.

• ​​In a recent article in the European Journal of Futures Research, Ljubisa Bojic of The University of Belgrade examines developments in the rule-setting power of the metaverse. Because tech-related law and policies emerge in the wake of a technology’s adoption rather than prior to its rise, he submits, big tech companies often operate with little regulation, giving them the power to shape identity, ideology, and truth for metaverse users. This lack of regulation, Bojic argues, raises serious concerns about ownership and democratization processes in digital spaces, as well as the magnification of social ills like hate speech, racism, and sexism perpetuated through digital echo chambers.
• Money transfer laws govern virtual platforms with the ability to exchange in-world digital assets for government-issued currency or cryptocurrency, explains Jon M. Garon of Nova Southeastern University Shepard Broad College of Law in a recent piece in the Marquette Law Review. Garon contends that this legal oversight subjects in-game banking and investment services to real-world government regulation, and potentially, to the jurisdiction of various U.S. financial regulatory bodies. Because the metaverse will likely become home to many illegal or heavily regulated pastimes like the sale of illicit items and gambling, Garon argues, financial services companies will likely avoid providing support for these activities, making their collaboration with these digital platforms more difficult. Among other risks, he asserts, this could result in corporations segmenting and separating their operations to avoid an “unregulated, virtual wild west,” creating an individual internet world rather than a metaverse.
• In a recent article in the Penn State Law Review, Stephanie L. Tang of Baylor Law School discusses the role of cryptocurrency and NFTs in the metaverse and provides potential approaches to virtual asset valuation and distribution in divorce proceedings. Cryptocurrency and NFTs play a crucial role in the metaverse’s digital economy, Tang explains, as users exchange these currencies to buy and sell monetizable digital assets such as virtual real estate. The metaverse poses a unique hurdle for the division of such virtual assets within divorce proceedings, she argues, as they can be difficult to identify, characterize, valuate, and equitably distribute. To tackle these elusive assets, Tang suggests that courts expand the traditional framework of divorce proceedings by introducing uniform discovery requests for virtual asset identification, retaining forensic experts for virtual asset characterization, and holding separate evidentiary hearings for virtual asset valuation.
• In a paper presented at the 2022 International Conference on Virtual and Augmented Reality Simulations, Louis B. Rosenberg of Unanimous AI provides potential regulatory solutions to prevent the exploitation of users within the metaverse. Although he concedes that virtual reality simulation necessitates a higher level of data tracking, Rosenberg nonetheless proposes that regulators restrict the collection, analysis, and storage of user data. He suggests requiring providers to notify users of when their data is being tracked and how long it is being stored. Invasive emotional and psychological data call for stricter regulation, he argues, as third parties could use this information to fuel manipulative marketing practices. Rosenberg proposes that regulators take further steps to limit such marketing in the metaverse. He explains that providers can manipulate users’ “worlds” by injecting targeted product placements and false user personas to advertise products without ad disclosure. Furthermore, he claims, third parties could weaponize these practices to disseminate controversial political messaging and disinformation.
• In a forthcoming article in the Indiana Law Journal, Zhaoyi Li of the University of Pittsburgh School of Law explains how an information fiduciary duty, or a duty not to mishandle consumer data, is needed for the anticipated expansion of the metaverse and can help protect users’ information. In today’s information age, Li argues, companies are still misusing users’ data. She proposes a model in which such a duty is imposed on Data Protection Officers (DPOs), which are independent experts that companies hire to monitor their data collection practices. The information fiduciary duty should be imposed on DPOs rather than companies, Li contends, because they are less likely to shield company misconduct and can better serve users’ interests. Li argues that this framework will be helpful to prepare for the metaverse’s “new era of digitization.”
• In a forthcoming article in the Arizona Law Journal of Emerging Technologies, Michael D. Murray of the University of Kentucky J. David Rosenberg College of Law analyzes how existing trademark law applies to NFTs. The metaverse uses NFTs in a variety of ways, Murray describes. For example, he discusses, NFTs can be treated as investments, collectibles, or deeds of ownership. NFTs linked to words or images can infringe on existing trademarks, Murray explains, but trademark law has only been applied in lawsuits dealing with NFTs in the cyberspace. NFTs in the metaverse will not change existing trademark law, Murray argues, as the metaverse merely presents a new platform for trademark violations.