Metaverse: What Regulation? U.S. Laws… Regulation by Speculation
By Jan Mulligan
The word “meta” is Greek for beyond. With historic roots in science fiction, meta was first defined in a 1999 book called Snow Crash by Neal Stephenson as a virtual universe controlled and owned by a “global information monopoly that users can access via personal VR goggles.” Still now in its infancy, there is currently no truly such united place for “the” metaverse to be experienced. Numerous virtual worlds do exist and technology is beginning to bring together virtual content which never before existed and with it, it is creating legal challenges never before imagined.
The goal is for the metaverse to embody the evolution of the Internet into “a single, universal and immersive virtual world that is facilitated by the use of virtual reality (VR) and augmented reality (AR) head sets.”i Interfaces can also include body armor (hapatic feedback suits) and nunchucks which will help one feel totally immersed in the experience.
The metaverse promises to bring the virtual world to life! In a proprietary virtual 3D space, a person will take the form of an avatar and move freely to do much of what one does in the “real” world including shop, take classes, attend meetings and concerts, exercise, compete in sporting events, own assets and make creative and financial investments that the individual can own, control and sell.
Metaverse is big business. Corporations seeks to maximize the monetary transactions for the hugh tech companies. For example, Facebook renamed its parent corporation “Meta” and committed US$180 billion dollars to develop the metaverse. Mark Zuckerberg said it is a “reasonable construct” for the metaverse to be a time, not a place. Some have pondered if the metaverse is a moment when our lives will become more digital than physical. Zuckerberg opined that this will likely happen once the masses need the metaverse to do their jobs.ii Not to be locked out of the market, Microsoft acquired Activision for US$69 billion. According to Satya Nadella, chairman and CEO at Microsoft, the purchase of Activision “provide[s] building blocks for the metaverse….”Gaming… will play a key role in the development of metaverse platforms.”iii
Corporate tech giants are not the only ones staking out turf in the metaverse. A different, decentralized crypto metaverse is also marching towards the future. Companies using this business model include Decentraland and Sandbox. Key features of such systems have the following characteristics: The ownership of the metaverse is shared by its users through the implementation of blockchain technology. Decentralized autonomous organizations (DAOs) put users in control of the game’s future. These metaverses hope to grow into entire societies with economies and democratic leadership. Nonfungible tokens (NFTs) are digital objects on a blockchain. Because every NFT is unique, tokens are coded to prove ownership of user generated content and NFT assets. These tokens have real-world economic value. Holders of crypto tokens, avatar skins, and digital real estate can trade them.iv
With the power grab for this burgeoning new field accelerating, a critical question is who will regulate this unsettled field in the United States? Will it be government regulators, courts, or corporate self-governance rising to the occasion?
Existing U.S. federal laws likely to play a role include intellectual property, tax, securities/banking, gambling/lottery, currency, antitrust, unfair trade practices, cybersecurity, employment, disabilities act and statutes for the protection of children. One of the problems with these existing laws is that they are inadequate for novel issues raised by the metaverse, such as the scope of the right to use content held by an NFT owner.
New laws are needed, but U.S. regulators are too slow, preferring to take a “wait and see” attitude. Additionally, U.S. law often defers to individual state laws, which are fractured and inconsistent. For example, with no existing body of federal privacy laws, California has become the gold standard in the United States, even though such laws have no force or effect outside this state.
While the metaverse industry may be in its infancy, there is already a growing body of litigation, including:
Hérmes“MetaBirkens”: Cease and desist order filed in U. S. Dist. Ct NYC against artist who made NFT version of Birken bag claiming misappropriation of intellectual property rights.v
Kardashian/EMAX Class Action: Sued in California under state consumer protection laws arising from social media endorsement without disclosure that NFT is a volatile investment product. Suit claims “pump and dump” of NFT causing value to plummet.vi
Tarantino/Miramax: Tarantino minted NFTs from Pulp Fiction screenplay. Film studio sued in California for breach of trademark and copyright arising from 1993 contract reserving both parties’ property rights but silent on NFTs.vii
Jay-Z (Roc-A-Fella Records)/Damon Dash: Intellectual property suit filed in federal court in NYC against record company’s co-founder Dash seeking to enjoin him from auctioning a NFT of Jay-Z’s album cover.viii
Coinbase/Dogecoin Sweepstakes California Class Action: Dogecoin And 78 Other Crypto Tokens are allegedly “unlicensed securities”. The lawsuit seeks to distinguish Crypto Tokens from Bitcoin and Ethereum because of the latter’s decentralized nature. The return of all investors’ money is claimed damages.ix
Coinbase/Dogecoin False Advertising California Class Action: Sweepstakes rules must offer a free form of entry. Class representative claims he wouldn’t have paid to enter the contest if Coinbase had clearly disclosed there was a free way to enter the contest.
Enforcement of any such state and federal laws are hampered by the lack of borders in the Metaverse. Fortunately, a new U.S. Supreme Court decision will make it easier, at least in the short run, for corporate self-governance. With a 5-4 split decision in Netchoice v. Paxton 595 US __ (2022), the Court stayed a Texas law from going into effect which would have prohibited social media companies from banning users over their viewpoints, even if their rhetoric was offensive or erroneous. The Court also refused to enforce a statutory clause which would have required corporations to explain and disclose reasons for any individual to be banned from the website. Unfortunately, this is only a temporary ruling protecting the status quo until the Court publishes its final ruling on the issue of how the first amendment applies to social media. Absent the U.S. Supreme Court stripping corporations from self-governance over participants’ speech, these companies are in a superior position to use technology to police the metaverse.
For example, while beta-testing a Meta product in virtual reality, a female reported her avatar was verbally and sexually harassed with sexual innuendos and other avatars “touched and groped” her avatar while yet other avatars took selfie photos. With a quick response to this problem, Meta used technology to create a two-foot personal boundary around all avatars by default, thus blocking wayward hands from drawing too close. The forcefield style safety mechanism was then rolled out across all Meta platforms, limiting interactions between avatars to fist bumps and high fives.
Another technological solution to help regulate the metaverse is with the use of “smart contracts”. These are programmed digital codes that run on the blockchain, automate operations and ensure that trading and transactions are done according to predetermined rules. They can be programmed to automatically pay royalties, buy and sell NFTs, make donations and much more. Benefits include speed and efficiency, with no paperwork to process. Smart contracts are also hard to hack and cannot be altered. On the downside, their name is misleading because they are not actually legally binding contracts, but rather a set of rules that control the use of specific NFTs. Subsequent purchasers may also be mislead because a smart contract does not necessarily provide the same benefits to them as it did to the original owner.
Crypto tokens are a novel mechanism for corporate governance. Crypto tokens (such as ERC-20) are built into existing blockchains. Some crypto tokens represent tangible assets such as real estate or art, while others represent intangible assets, including governance voting rights on the platform. In decentralized platforms such as Sandbox, crypto tokens can be used as a method of decision making to guide the future direction of varius blockchain projects. While decentralized governance is still evolving, key processes are being standardized and implemented so that protocols can be equitably enforced.
In an attempt to be afforded “extra” protection under existing intellectual property laws, some companies, including Nike, are filing multiple applications seeking U.S. trademark protection for virtual goods. Such applications are on an intent-to-use-basis, so they won’t be finalized until they are in commercial use.
As we dive deeper into the metaverse, it promises to expand and evolve beyond our wildest dreams, and with it so will the novel legal and regulatory issues. Creative and innovative solutions must be found if the metaverse is to meet its full potential.
i Wikipedia, https://en.wikipedia.org/wiki/Metaverse#cite_note-O’Brian-Chan-1 Citing O’Brian, Matt; Chan, Kelvin (28 October 2021). “EXPLAINER: What is the metaverse and how will it work?”. ABC News. Associated Press..
ii Podcast Mark in the Metaverse Facebook’s CEO on why the social network is becoming a metaverse company” Newton, Casey July 22, 2021. https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview.
iii Microsoft’s metaverse plans are getting clearer with its $68.7 billion Activision acquisition, Huddleston, Tom January 21, 2021 https://www.cnbc.com/2022/01/19/microsoft-activision-what-satya-nadella-has-said-about-the-metaverse.html
iv Cryptopedia, https://www.gemini.com/cryptopedia/what-is-metaverse-crypto-nft-game-blockchain
v Hermes International v. Mason Rothschild, Case no. 1:2022cv00384 US District Court for the Southern District of New York. https://dockets.justia.com/docket/new-york/nysdce/1:2022cv00384/573363
vi Huegerich v. Gentile et. al, et al, Case 2:22-cv-00163, U.S. District Court for the Central District of California https://dockets.justia.com/docket/california/cacdce/2:2022cv00163/840865
vii Miramax, LLC v. Tarantino Case 2:21-cv-08979-FMO-JC U.S. District Court for the Central District of California https://casetext.com/case/miramax-llc-v-tarantino
viii Roc-A-Fella Records, Inc. v. Dash 1:2021cv05411, US District Court for the Southern District of New York, https://dockets.justia.com/docket/new-york/nysdce/1:2021cv05411/562168
ix Suski v. Marden-Kane, Inc., 2022 WL 103541 (U.S. District Court Northern District of California)