Digital assets in the metaverse
With the metaverse, we are seeing the creation of a new virtual economy and new economic order, increasingly empowered by decentralised identity and biometric information.
The metaverse is not a virtual reality game. It is the intersection where our physical, daily interactions and the intangible, digital environment meet, and with real-life consequences. We can spend and invest our money in the metaverse, similar to the way we do it in the physical world. It is anticipated that, by 2026, around 25% of people will spend at least one hour a day in the metaverse for work, shopping, education, social and/or entertainment*, and that, by 2030, businesses’ and consumers’ annual global spending related to the metaverse could reach USD5 trillion**.
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Digital assets in the metaverse
With the metaverse, we are seeing the creation of a new virtual economy and new economic order, increasingly empowered by decentralised identity and biometric information.
The metaverse is not a virtual reality game. It is the intersection where our physical, daily interactions and the intangible, digital environment meet, and with real-life consequences. We can spend and invest our money in the metaverse, similar to the way we do it in the physical world. It is anticipated that, by 2026, around 25% of people will spend at least one hour a day in the metaverse for work, shopping, education, social and/or entertainment*, and that, by 2030, businesses’ and consumers’ annual global spending related to the metaverse could reach USD5 trillion**.
As blockchain technology and the metaverse continue to evolve, we can expect a proliferation of payment methods available for buyers to purchase goods or services in the metaverse from businesses. At this stage, non-government-backed digital currencies are the prevailing payment method for these goods and services. Given these digital currencies are (largely) unregulated, how can we ensure that payment transactions are safe, fair and legitimate? To what extent are existing regulations able to ensure the safety and legitimacy of these transactions?
Furthermore, the metaverse presents a convenient, decentralized platform for tremendous growth in new forms of financial and investment activity. Specifically, by leveraging the inherent features of distributed ledger technology, formerly-illiquid asset classes (e.g. real estate, precious metals, private debt, artwork) may now be fractionalised and tokenised into smaller assets and, which in turn encourage greater liquidity, better price discovery and universal accessibility. Other new forms of financial and investment instruments (e.g. liquidity pools, DAO tokens) have also been created by leveraging certain features within the technology (e.g. smart contracts), and might be unregulated due to the decentralized nature of the technology. How can we ensure that these financial instruments are safe, fair and legitimate? What are the investor protections that are already in place, so that investors are protected from potential fraud or dishonest conduct?
As the metaverse is still very much work-in-progress, the answers to the key questions in the metaverse are similarly very much work-in-progress. The law relating to this area is still trying to catch up with the latest technological advancements in the metaverse and distributed ledger technology generally. However, for businesses (particularly in the financial services space) that intend to enter the metaverse to broaden their service offering, there are a number of key issues which they need to start thinking about.
Key legal risks / issues
Issuance of native digital currency
Issuance of native digital coin in the metaverse is common (e.g. SAND for Sandbox, MANA for Decentraland). Alternatively, a project owner may develop a new coin which can be used in different metaverses. Depending on how the coin is being structured, the coin may be regulated from a securities and commodities regulatory perspective (and may trigger certain specific securities offering requirements under securities laws).
If a user is required to pay fiat currency (e.g. USD) in order to purchase those native coins for use in the metaverse, additional licensing implications relating to “virtual asset service providers” may apply to those who facilitate the currency exchange.
AML / KYC
Given the hashed nature of blockchain technology, a user may unknowingly make payments to a person who is on a sanctioned list. How can organisations ensure that payments made to a third party on the metaverse satisfy the AML / KYC obligations under existing regulations?
Custody of funds
A person which holds custody to client assets (including digital coins) may be required to obtain a custodian license. However, how does this apply in a decentralised environment in the metaverse, where the funds may be locked in a smart contract? Who bears the liability if funds are stolen / lost from the smart contract wallets?
Regulated nature of security tokens
Tokens which represent interest in real property may be highly regulated in certain markets, and may be subject to additional security offering requirements under securities laws.
Questions to consider
Which cryptocurrency will your business receive for goods or services in the metaverse?
From a user perspective, using major cryptocurrencies with high gas fees may disincentivize users from making transactions of large dollar value in the metaverse.
Sanctions
What are the key screening criteria that your business is currently using, to ensure that the business is not dealing with a sanctioned party.
Payment authorisation
To reduce risks of loss or theft, does your business take any additional security measures to authenticate payments (e.g. multi-signature wallets, authenticator codes)?
Insurance
Does the current insurance coverage of your business cover losses that occur on the metaverse?
Regulated products
If your business facilitates sale and purchase of certain regulated products in the metaverse (e.g. age-restricted products, DeFi products), how is your business adopting additional KYC measures to satisfy regulatory requirements?
Contact
Rhys McWhirter
Click on the topics of interest available below to explore the legal issues arising in the metaverse. We will be releasing further reading on a variety of topics periodically.
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