Metaverse: developing the legal strategy for business – by Landmark’s Payal Manhas

Payal Manhas Group Legal Counsel landmark Group

by Payal Manhas, group legal counsel, Landmark Group

The next successor of Internet is here – don’t be late to this party. Metaverse is where the Internet is headed and towards the convergence of the virtual and real world. Business is fore fronting the digital evolution into the cyberspace by adoption of E-commerce sale and purchase of goods, digital payments, virtual reality, augmented interactions, hyper reality, video conferencing and now Metaverse.

Metaverse is still at an embryonic stage but is promising new market avenues for almost all profit-making industries having a potential to generate a Metaverse Economy. With expansion comes new forms of business opportunities, accompanied risks, compliances, regulations, and contracts which need to be considered in the overall strategy for a business. It will be worthwhile to understand the unique features of Metaverse for developing the strategy towards adopting this new way of doing business

  • Immersive Technology. Users go beyond the interface of smartphones and computer screens now into “immersive reality” with utilizing various means of Blockchain, Artificial Intelligence (AI and Machine Learning (ML), Edge computing, Internet of Things, Augmented Reality and Virtual Reality. On the Metaverse, people will not be “On” the Internet but “In” the Internet providing realistic immersive experience of sense, objects, and environment.
  • A Product of Web 0.3. Web 0.3 will have public and shared database unlike the old Web 02. Web 03 will be open source, designs and protocols will be public and open.
  • Decentralized digitization. In the Metaverse the Users will have “control” over their data and can choose to share data with their choice of sources rather than what is happening in the present day where the online companies (be it e-commerce or social media) are storing, using and controlling the data of the Users. In the Metaverse, the value shall be captured by the “creators and data subjects” rather than the “platforms/websites providing service”.
  • Digital Clone /Avatar– A digital copy of human will inhabit the Metaverse deriving its identity from its human natural person or legal entity controlling it.
  • New market and customer base. Metaverse will revolutionize the marketing and advertising of products and services by creating brand experiences that are more engaging and give the consumer an augmented retail shopping and shopping mall experience.
  • Pseudonymity Use of blockchain in the Metaverse will result in pseudonymity. The identity in the immersive metaverse platforms will be based on avatars, digital assets, and activities rather than physical presence
  • Products in Metaverse will be new kind of products giving way to Decentralized Finance (DeFi), Cryptoassets, tokens and Non-Fungible Tokens.

The legal regulations coincide, and the compliance framework has started to expand to the new requirements which the business will need to look at for selling its goods and services in the Metaverse. Companies using the Metaverse must consider the risk of complying with the different laws and regulations in multiple jurisdictions on the subject.

Protection of Intellectual property Rights Laws (Trademark, Copyrights, Designs, Patents) for the Metaverse

Businesses protect its intangible digital assets and the same will be replicated for its virtual assets on the Metaverse platforms and worlds. As part of the strategy, the products selling under “brands” will need to be protected in the virtual world by registering under Trademark laws in their respective countries. Many brands and businesses have already started to register the brands for use in the Metaverse cyberspace. Here it is imperative for the business to know in which classification of trademark should they file for their brands and sub brands.

Nike filed trademark applications in 2022 with the US Patent and Trademark Office for Nike branded virtual goods in Class 25 with goods description as “Apparel, athletic apparel and Footwear incorporating near filed communication (NFC) technology”.[1]

MCDONALD has filed series of trademark applications for its brand name in international classifiations[2]

Class 41 covering the Entertainment services, namely, providing on-line actual and virtual concerts and other virtual events.

Class 43 for Operating a virtual restaurant featuring actual and virtual goods, operating a virtual restaurant online featuring home delivery

Class 35 for Online retail services featuring virtual goods.

Class 09 for Virtual food and beverage products. Downloadable multimedia files containing artwork, text, audio and video files and non-fungible tokens.

Luxury brands like GUCCI are ahead of the game in protecting their name and brand in the virtual world and filed for multiple classes under the Trademark laws. It has filed for its trademark brand name in categories

Class 09. Downloadable virtual goods, namely, computer programs featuring footwear, clothing, headwear, eyewear, handbags, laptop bags, backpacks, luggage, briefcases, art, toys, jewelry, watches, hair accessories, pet collars, accessories and charms for use in online virtual worlds.[3]

Class 035. Retail store services featuring virtual goods, namely, footwear, clothing, headwear, eyewear, handbags, laptop bags, backpacks, luggage, briefcases, art, toys, jewelry, watches, hair accessories, pet collars, accessories and charms for use in online virtual worlds

Class 041. Entertainment services, namely, providing on-line, non-downloadable virtual footwear, clothing, headwear, eyewear, handbags, laptop bags, backpacks, luggage, briefcases, art, toys, jewelry, watches, hair accessories, pet collars, accessories and charms for use in virtual environments created for entertainment purposes

Walmart, the retail giant has filed patents to register a number of services and offerings related to the metaverse, non-fungible tokens (NFTs) and decentralized digital communication platform system and method in the US.

With brands being diligent with their trademark protections in the Metaverse, it will not be surprising to see infringement and other actions against violators. Any Infringement actions could be brought against the digital avatar or its creator, or even the metaverse platform service provider. The theory of vicarious liability on the physical person will be made applicable to the actions of a “digital avatar of a legal person or legal entity under whose control the avatar is functioning on a particular Metaverse cyberspace”.

Copyright protects the exclusive rights given to the originator for a fixed number of years, to print, publish, perform, film, or record literary, artistic, or musical material. Since most of the world legislation on copyright laws do not place any restriction on the protection being granted anywhere – in the physical or online world, its natural extension to Metaverse is plausible. It will embrace the works created by a “digital avatar” in the Meta cyberspace and/or work of the physical person or legal entity in the Metaverse cyberspace.

Patents Company will need to protect its innovations in Metaverse. The Patents can be filed by the inventor and any person natural or legal, would cover creator of the digital avatar or digital asset but not the digital avatar itself which has no identity except for the legal or natural person creating it. It seems that the legal identity of digital avatar will be based as on its Creator and this aspect may evolve with expanding jurisprudence around the Metaverse.

Retail and Consumer Goods Laws

Many major brands have already embraced Metaverse in numerous ways, and their brand engagement and awareness has already yielded meaningful results. Virtual events, virtual storefronts, and digital collectibles are – and will continue to be – just some of the ways that brands and products will reach virtual consumers.

The advent of Non-Fungible Tokens (NFT’s) digital files in which creative works or other subject matter such as a video, artwork, fashion design, music can be embedded, has opened new avenues for business on Metaverse. NFT’s gives ownership of artwork, music, videos, and other online collectibles for commercial exploitation by the owner or creator or author of the NFT.

Some of the famous NFT’s having exclusive rights are NBA Top Shot- The National Basketball Association (NBA) built and manages this NFT marketplace, and they have exclusive rights to NBA video clips. It sells video clips, play highlights and art of great moments in basketball history. Nifty Gateway– is known for hosting expensive and exclusive NFT sales on artwork, especially artwork from celebrities and top artists. In the Middel East region, there has been a recent NFT collaboration between Splash Fashions of Landmark Group and Puma fusing technology and fashion driven art.The Retail brands are waking up to the immense capability of Metaverse poses for them to advertise, market and sale their branded goods and services marking the advent of digital Fashion and digital assets.

The future holds that “Websites” of retailers will turn into “MetaSites” providing the meta experience via logins to the Metaspace built by the Retailers in the Cyberspace.

Regulations for Virtual Assets

The regulatory landscape for the Metaverse has started to emerge in various parts of the world. In Middle East, one of the world’s first only independent regulator for digital properties has come up- the Dubai ‘s Virtual Asset Regulatory Authority (VARA) which regulates and provides guidelines on Marketing, Advertising and Promotions of virtual assets across the emirate of Dubai. Virtual Assets will include a wide range of assets including security tokens, non-fungible tokens (NFTs), and cryptocurrencies. It will be responsible for licensing and regulating the virtual asset sector, organizing the operation of virtual assets’ platforms and portfolios, monitoring transactions, and preventing price manipulation of the virtual assets and ensuring the highest standards of protection for beneficiaries’ personal data.[4].

The Activities around digital assets are being made subject to Permit for establishing Virtual Asset Platform operation and management services. A Person wishing to carry out the Activity must have the headquarters of their business in the Emirate, provided that they take one of the legal forms approved by the competent commercial licensing authority in the Emirate.

Real Estate Laws for Virtual Property

How would real estate look like in a digital form – the answer to that question can be seen with real estate properties being created on the Metaverse. The Property on metaverse is however different from the typical land possession. In the Metaverse, the property is made up of codes that are sub divided into a limited number of plots, similar to longitudes and latitudes on a map. After a plot is sold, the purchaser’s information is recorded in a non-fungible token that is coded onto a public blockchain. This code serves as a unique identifier and provides a secure chain of title, similar to a “title deed” in a typical real estate transaction. The real estate land just like any other property can be bought, sold and leased. Real Estate on Metaverse is an online platform where owners can use open stores, sell their products, market, advertise and promote their business.

Carrefour, the French retail giant has acquired area in the Metaverse equivalent to 30 supermarkets as part of its digital transformation strategy. Another Retail giant Nike has made a Metaverse store called “Nikeland.

There are real estate companies inhabiting the Metaverse and such platforms feature space for websites, applications, and forums for users to create and connect. The Metaverse Platforms offering space to users are laying down some unique legal terms for the real estate owners[1] and users on their platforms, which the Business need to be aware and wary of beforehand to assess the risks and protect their rights.

Limitation of Liability Users may acquire high value virtual assets on the Metaverse, but users need to be conscious of the fact that the Metaverse platforms may in their Terms of Use restrict their liability for any claims or restricted access to only the amount paid by user to the platform in 12-month period preceding the date of claim.

Disclaimers When Users purchase the property, land parcels and wearables on Metaverse, and they will rely on the ownership record in the blockchain or decentralized ledger. Most of the Metaverse platforms disclaim their liability and make no guarantee in respect of the ownership record or smart contracts or breach of security unless it is due to gross negligence.

Waiver of Class Actions The Metaverse platform terms expressly state that the Users agree to bring claims only in their individual capacity only and not as a class action or other representative action for seeking any relief against the platform or another violating user. This is a substantial right waiver asked from users and effect the user’s legal rights.

Termination and suspension of Account The Metaverse Platforms are reserving the right to terminate or suspend all or part of the site and tools and Users access to the site “without prior notice or liability”. Users may not receive any refund if they cancel their account or if otherwise terminated.

Claims of Copyright Infringement In case of intellectual property infringement on the Metaverse Platforms the Users are asked to register their grievance. Some platforms are not providing any remedy or action other than blocking the infringing content or infringing user’s account.

Violations or Frauds In the event of breach of Metaverse platform terms or any suspected fraudulent, abusive or illegal activity, the platform may without limitation suspend a violating account, block any infringing content and adopt any other action deemed necessary to prevent future breaches, in addition to any other remedies the platform or any user may have at law or in equity.

Data Protection Laws

A secure eco system in the cyberspace is a prerequisite for the Metaverse economy to thrive Metaverse will generate huge amounts of data owned by the digital users, digital avatars, creator of digital avatar and digital service providers. The definition of personal data includes any data relating to an identified natural person, or one who can be identified directly or indirectly by way of linking data, using identifiers such as name, voice, picture, identification number, online identifier, geographic location, or one or more special features that express the physical, psychological, economic, cultural or social identity of such person. It also includes Sensitive Personal Data and Biometric Data. Definition of “Personal data”, will as a next step,  encompass the data of digital avatar or of the owner of digital avatar which may be require to login into the virtual cyberspace. Business will need to watch out for whether the requirement of consent from data subjects prior to processing of data will be applicable to the Metaverse where the data is owned and controlled by the creators themselves.

The “Metasites” will need to have privacy policies to protect the data of the users of the Metaverse platforms. If there is a biometric data required to enter Metaverse or to transact in Metaverse, it will be “sensitive data” and need to be protected accordingly by the Metaverse platforms business.

Financial Banking Laws /FinTech

Banks have moved from traditional relationship-based banking model to a technology intensive provision of financial services (FinTech).

The Central banks world over are now regulating and preparing to tax the income from virtual digital assets (VDA) which have been defined as to include any information or code or number or token generated through cryptograph means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration , with the promise or representation of having inherent value or functions as a store of value including but not limited investment schemes or financial transactions and can be transferred, stored or traded electronically.

There is a wave of global regulations aimed at preventing financial crime and increasing transparency and as a result for the Metaverse, there will be most likely reporting duties towards the financial intelligence units of the governments for any payments comprising virtual assets or where the source of such funds is derived from a virtual asset. For carrying out transactions there will be requirements to submit and record identification documents for transparency. The Metaverse banking transactions could become subject to anti money laundering laws of countries. Cryptocurrency is still contending for legality in some jurisdictions and many aspects for its taxation and usage are evolving. The users need to be protected against scams and government will keep a watch on money laundering possibilities in the virtual world.

Metaverse Crimes

Criminal activities by digital avatars, or the physical legal person or legal entities on the Metaverse platform will also be regulated. The Penal codes and electronic laws will be extended to cybercrimes on Metaverse. The crimes could range from harassment, obscenity, Identity theft to white collar crimes of bank fraud, money fraud, money laundering, infringement of brand on the Metaverse.

[1] https://www.uspto.gov/

[2] https://www.uspto.gov/

[3] https://www.uspto.gov/

[4] https://u.ae/en/about-the-uae/digital-uae/regulation-of-digital-properties