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Legal & Compliance in the Metaverse

You might have come across the term “metaverse” recently when Mark Zuckerberg announced the change of Facebook’s name to Meta, which created some headlines. As we are a Legal and Compliance team of digital and gaming aficionados, the concept of metaverse is not new to us. The term already appeared in 1992 in the science fiction novel “Snow Crash” written by Neal Stephenson. Especially in the gaming world, the concept of metaverse has been known for years. Video games such as Fortnite, Minecraft or Roblox have provided us early versions of metaverses. The metaverse allows people to interact in a virtual world with each other and expands our “real-life” reality by a digitally augmented one.

Author

David Bundi

Director, Head of Compliance, RegTech & LegalTech, Legal, PwC Switzerland

+41 79 625 58 20

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The development of the metaverse can partly be attributed to the rise of blockchain technologies, digital assets and cryptocurrencies. The latter, being based on blockchain technology as an immutable database, have enabled the payment of services, like ordinary fiat currencies, but in the virtual world. Through the tokenization of assets anything physical or digital can be stored on a digital blockchain-based ledger, and consequently be used to prove ownership of a certain item. Art, games, music, sports collectibles, properties, and fashion items have already been tokenized and can be purchased digitally on platforms such as OpenSea, NBA Topshots, and SuperWorld. Non-fungible tokens (NFTs) are virtual assets, enabling to transfer asset ownership to an NFT on blockchains. This means that almost everything can be bought in the virtual world, which also supports the progression of the metaverse. The value of the NFT derives from the uniqueness and traceability of the authenticity of the NFT itself. This implies that one NFT cannot be replaced by another. Once an NFT representing a work is recorded on the blockchain, it can make an asset tradable. The work, however, not being stored on the blockchain itself, is not protected against unwanted duplication.

Data privacy challenges

The use of the metaverse involves a comprehensive collection of various types of personal data. Clearly, the current knowledge about individuals gained through the collection of personal data via various channels will be greatly enhanced by the metaverse. It will empower institutions to obtain new kinds of information about individuals, such as their movements, actions or habits and thus gain a deeper insight for example into their consumer behavior. Due to the fact, that individuals will dedicate a significant amount of time to their virtual life, more of their personal data may be collected and their behavior as such tracked.

In this regard, various data protection law issues arise. Under Swiss and EU regulation, compliance with data protection law is the responsibility of the party that determines the purpose and means of processing personal data. In the metaverse, it will not be easy to establish who bears the responsibility for data processing, as an entire decentralized network may be involved. It will therefore be necessary to evaluate who is responsible in the event of lost or stolen data. In this context, it also needs to be determined how privacy notices of different entities are being displayed to the users. Likewise, it must be evaluated how consent can be given, especially regarding sensitive data (biometric data) and for example data collected from minors. These are only a few issues that will arise regarding data protection law.

Intellectual property rights

The metaverse is also meant to be a place to create new things together. Particularly, when it comes to collaboration to generate intellectual property rights, challenges arise as joint ownership proves to be complicated. Who owns the created rights in these cases? Due to such circumstances, the European Commission is in the process of considering a reform regarding co-created intellectual property resulting from new technologies. Another challenge facing creators and businesses is how to protect and enforce a brand in a virtual environment.

Competition law

To make the metaverse experience seamless and offer a wide range of services to participants, it is essential for businesses to communicate, collaborate and ensure that the platforms are interoperable. This may lead to anti-trust challenges. Whereas interoperability will be considered as pro-competitive, as multiple platforms will be used, the sharing of sensitive information such as pricing or the agreement to entrust the development of certain areas to one participant or a group of participants could imply serious competition violations. It will therefore be essential that metaverse businesses establish policies and procedures, training programs as well as control mechanisms on this matter to prevent such issues from arising.

NFTs and financial markets laws

For a while, there has been quite a hype around NFTs and in our view, they definitely provide many new opportunities for individuals and organisations. In principle, almost anything can be represented as an NFT such as images, videos, texts, or even digital objects such as houses or entire cities, regions, or worlds. Since NFT will have a great impact in the metaverse, it is crucial to determine the nature of NFTs. It must be determined whether they are a means of access/proof of ownership (utility tokens) or rather be considered as securities (security tokens). Consequently, the purpose of the creation of the NFT and the purpose of its sale needs to be established. This distinction will be decisive for the regulatory authority. A further question that needs to be examined is how consumers will be protected. Therefore, it is crucial that detailed considerations be given to these issues in advance.

What is next?

With the deployment of metaverse in our daily lives, there will be new opportunities for people and firms to extend their activities. At the same time, these activities touch various legal and compliance aspects, with the applicable jurisdiction being one of the challenges. The overall comprehensive implications of the metaverse are still difficult to gauge. Hence, it is essential to take precautions to prevent some of the above mentioned issues.

Contact legal and compliance advisors early on, to help you to understand and assess the regulatory context of your business activities to act in a compliant and sustainable way.

We are looking forward to help you ensuring compliance and enabling business (also) in the metaverse.

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Contact us

David Bundi

David Bundi

Director, Head of Compliance, RegTech & LegalTech, Legal, PwC Switzerland

Tel: +41 79 625 58 20

Valérie Bourgaux

Valérie Bourgaux

Compliance, RegTech & LegalTech, PwC Switzerland

Tel: +41 58 792 47 66

Cedric Ming

Cedric Ming

Compliance, RegTech & LegalTech, Legal, PwC Switzerland

Tel: +41 58 792 18 55