How Regulation Will Apply To The Metaverse


The barrage of regulation recently seen in crypto happens, looming in the distance is what is going to happen in the metaverse. European policymakers in the EU Commission said they would roll out a new set of standards for the metaverse in May 2023. The rest of the world needs to get on board as well.

The Metaverse is defined as a spatial computing platform that provides digital experiences as an alternative to or a replica of the real world, along with key civilizational aspects like social interactions, currency, trade, economy, and property ownership – founded on a bedrock of blockchain technology. One of the main challenges in regulating the metaverse is the fact that it may not be owned by any single entity.

The World Economic Forum recently posted an article that stressed the importance of regulating digital identity in the metaverse, urging regulators to prepare for the policy challenges required for these hybrid virtual worlds.

Intellectual Property (IP) Laws, Copyrights And Trademarks

The introduction of web3 elements into metaverse games is bound to disrupt the basic IP agreements that have powered industry-leading games like Fortnite, Roblox, and Minecraft. We’ve seen some brands move to protect IP like Hermès USA with the case of unauthorized Birkin bag NFTs, while others have encouraged fans to make brand-inspired (but not affiliated) gaming assets, such as is popular among Gucci fans in Roblox.

Courts are determining how regulations are applied to the metaverse as well. For example, the luxury fashion brand Hermes was awarded damages in its suit against NFT artist Mason Rothschild, founder of the MetaBirkins project. The lawsuit determined the artist was not protected under the United States’ First Amendment in his use of the popular Birkin bag’s likeness.

Presently, closed garden ecosystems like these onboard IP through a single entry, namely, a signed agreement with the developer. These names alone have signed with brands ranging from the NFL, Star Wars, Gucci, and Chipotle, bringing in skinned avatars, fashion accessories, and themed experiences. However, in the metaverse, where on-chain assets can be represented in many games, gaming studios will lose their ability to gatekeep access to virtual products and ideas from the company’s IP. Players with skinned avatars, accessories, weapons, and more, may have the right (written in code) to bring in their assets, but the implications of using them outside those rights are largely unexplored. That’s complicated enough without also going into the issue of counterfeit materials that do claim to be affiliated with the brand, which is already illegal as a fraudulent imitation.

The definitions of theft and illegal use of IP in this space are still forming. For example, Nike sued StockX in 2022, claiming the online fashion reseller was profiting from Nike’s
IP by selling NFTs that featured Nike’s trademarks. Meant as marks of the authenticity of the products for sale, Nike held these NFTs were no longer mere representations of listings but assets with independent value.

As creators of custom IP, NFT project founders have had to protect their own trademarks from other entities too, namely other NFT projects. Yuga Labs, the creators of Bored Ape Yacht Club NFT project, have targeted the conceptual artist Ryder Ripps’ RR/BAYC project, a “satirical commentary” project, according to Ripps. While the case is ongoing, a settlement was reached between Yuga Labs and Thomas Lehman, who built smart contracts and other material for the RR/BAYC project.

When the courts have weighed in, and legislators finally reach the point of passing legislation, lawmakers need to act in the interest of both asset owners (many of whom are unaware of the legality of the use of IP) and original IP owners too.

Consumer Protection

Where consumers stand to benefit from owning their in-metaverse assets, they also may be exposed to unique risks. For instance, the proposed utility of an NFT may be fabricated, and some of the utility of an asset may be out of a seller’s control.

Sellers may market an NFT as compatible with a metaverse, such as Decentraland
, only for Decentraland to remove compatibility of that type of asset. Some sellers claim to build assets with their own bespoke metaverse—but fail to define the extent of their planned virtual worlds. Along those lines, Pixelmon came under fire for unveiling a virtual world lacking the quality of the extensive marketing and art campaign that initially drove its popularity. Presumably existing consumer protection laws such as those enforced by the The Consumer Financial Protection Bureau (CFPB) would apply here, but that remains to be seen.

Projects like Frosties Freeze made off with over $1 million in ETH
in 2022, but soon after became one of the first cases of law enforcement persecuting a rug pull. Fabricated copies of NFTs will not remain listed on major exchanges and marketplaces like OpenSea. On the other hand, the permissionless nature of blockchains makes the pipeline of fake assets nearly endless. While eBay can place limits on a seller’s account and ban them outright, a permissionless exchange is not equipped to ban a seller outright, as the seller could reappear as a limitless number of different wallet addresses.

What’s Next?

The emergence of the metaverse presents a series of complex regulatory challenges. which are constantly evolving. As new technologies and platforms are developed, the rules and regulations that govern the metaverse will need to evolve as well. This means that any regulatory framework will need to be flexible and adaptable. There are already working groups at industry trade organizations and some academics that are drafting some suggestions for policymakers and regulators. While we wait for that, courts will also fill in to establish precedent.

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