What Laws Apply to the Virtual "Metaverse"?

Virtual interactions are becoming increasingly important across industries, particularly driven by the Covid pandemic, and the finance industry is, of course, included, especially online brokerage, a business highly reliant on the internet. In particular, much of the interest in virtual interactions is concentrated on the topic of metaverse.

Early on, Fazzaco has gone over what metaverse is in several articles, as well as broad discussions on its possible trends in the next decade, how it will transform financial institutes, and whether it is the future or a bubble to burst. So, no more redundant explanation here in this article, and let us head straight to the point: what laws might be applicable to metaverse? What will financial regulations look like in it?

- Status quo

It remains unknown whether existing laws, regardless of jurisdictions, can be directly applied in a metaverse. Sure, existing legal frameworks may plainly apply in some circumstances. Such as cryptocurrency-related, since a metaverse is likely to be built on web 3.0, involving techniques such as blockchain, crypto and NFTs. Now as more companies embrace crypto as a payment for their products / services, it is inevitable to make purchase with cryptocurrencies in the metaverse commerce.

In other cases though, established laws may be incompatible with modern technology, and courts may be challenged with resolving unique questions of applicability. In other circumstances, current laws may be insufficient to curb undesirable behavior, necessitating the introduction of new legislation.

The breadth of all rules and regulations that may or might be implicated in a metaverse is virtually limitless, resulting in a plethora of legal concerns.

1 Intellectual Properties

We are almost sure that disputes on intellectual properties will be the most prominent among the legal issues in a virtual world even before it becomes real. Back in 2018, several well-known celebrities have filed lawsuits against the developer of Fortnite, saying that the game used their copyrighted dance techniques without their consent.

The invention of NFT itself provides a solution to the ownership issue of virtual artworks, which has been explained in Fazzaco’s last metaverse article.

Every time when a technology comes out, there will always be a wave of disputes on intellectual properties - e.g. the transition from CD/DVD to online streaming). Not to mention that metaverse will only operate itself in a way beyond our imagination, posing unprecedented challenges.

Although it is unclear how intellectual properties will be protected in a metaverse, financial institutes and fintech firms have to take actions to bypass such disputes in a virtual world. Conventional IP laws might have to be reviewed or even revoked in the future.

2 Virtual Assets

Your assets in a virtual world are, undeniably your possessions. It is obvious that we can never simply apply the laws that protect physical private assets in real world to protect your virtual assets. After all, the assets in a virtual world bear way higher risks of elimination than physical assets.

Traditional financial regulatory systems, such as securities, banking, money transfer, and commodities regulations, may apply to virtual assets in the metaverse, such as NFTs. Some blockchain-based assets may be classified as "investment contracts" and so subject to securities regulations due to the way they are generated and marketed.

The legal tender in a future virtual world is undoubtedly going to be cryptocurrency. We can foresee that financial regulators will come up with new legal schemes to include crypto in the scope.

Securities regulations may apply to certain NFT initiatives, according to a SEC commissioner, particularly NFT ventures that provide fractionalization or entitle the holder to a revenue stream. In addition to securities laws, in-world currency issuance, trading, exchange, lending, and other operations may be subject to additional regulatory regimes, such as those governing banking, money transmission, and other financial activities.

3 Taxation

Everybody hates paying taxes. But taxes are there where there are public services, trading and revenues.

The U.S Internal Revenue Service has published guidance explaining that cryptocurrencies are property with taxable profits. U.S citizens are required to clarify if they own cryptocurrency of any type in their Form 1040 while filing federal taxes in recent years. NFTs are thought to be treated in the same way.

So, whether you want to purchase or sell such assets, they could be taxable for various income or sales taxes. At present, IRS has sent out notice to crypto exchanges seeking possible taxation information. It can be thusly seen that, at least in the United States, metaverse will fall into the taxable category.

4 Policing and Conducts in Metaverse

Laws govern the conducts of citizens. What are the legal boundaries for the conducts of users in the virtual world is a thought-provoking question. For instance, when a user's avatar is violently murdered by another user's avatar, will the suspect be accused of vandalism as he or she would be according to existing laws, since nobody has actually died, or maybe there will be a new set of criminal laws defining "the charge of murder" in the metaverse?

In addition, for financial institutes, they are more focused on financial crimes. After all, when there is no need to do it physically with the help of avatars, there is room for financial crimes and money laundering.

Many metaverse projects contain terms of service that ostensibly restrict user behavior contractually, with sanctions like as suspension from the platform and seizure of in-world assets available in the event of a breach. These phrases often cover a wide range of behaviour, from the prohibition of certain actions to platform security measures and dispute resolution techniques.

The enforceability of such contractual obligations may present new challenges, especially in terms of enforceability amongst users and for those who acquire real-world assets outside of the metaverse but have not seen or consented to such terms of service.

5 Privacy Protection

The collection, use and disclosure of private data lead to privacy issues. Users' personal data may be collected by metaverse initiatives in a number of ways, ranging from basic identifying information to information regarding mobility and activities in the metaverse.

Metaverse designers should consider adopting privacy rules and corporate compliance processes to solve these issues. However, applying current privacy regulations to the metaverse raises additional concerns. So, jurisdictions would have to tweak their laws when needed as metaverse evolves.

- Conclusion

In general, metaverse still remains an illusion beyond human’s reach. As we go deeper into it, we believe that more institutes will accept it and move in. As the metaverse develops and expands, legal and regulatory issues will arise simultaneously, but we choose to believe in our wisdom that will ultimately overcome those challenges.