Regulation In The Metaverse: How Should We Create Laws In A Virtual World?

September 6, 2022 by Mimi Phan

Regulation in the Metaverse. Yep, we know. We managed to take a super sexy, exciting concept like the Metaverse – and then ruin it all with a boring ol’ subject like regulation.

But like it or lump it, regulation is important. In fact, it’s a cornerstone of Web 3.0 that is ripe for development, and will be transformative (read: make or break) for the future of the industry. Because just like the real world, the virtual world needs rules.

But what laws apply in the metaverse? Can the metaverse be regulated? And what does this look like in real life?

Say you want to attend or perform a concert in the Metaverse. With artists like Post Malone, Travis Scott, Ariana Grande, and Justin Bieber all performing in this new virtual entertainment paradigm, it’s a space predicted to grow significantly in the coming years.

But had Ariana or JB used someone else’s music at any point during the show, even these megastars would have had to prepare bespoke agreements that set our how that content would be licensed.

Attention needs to be paid to audio visual regulation, too. Since the metaverse is an AV format – a multi-sensory, cross platform endeavor – innovators in Web 3.0 need to be thinking about how their content might interact with existing broadcast and audiovisual regulation, and what that means for data and AI frameworks, too.

So will all this talk of red tape put people off entering what is already an arena that is seen as risky, or hard to predict? Will companies invest into building a brave new virtual world – only to fall foul of developing regulatory frameworks later down the line?

And who chooses how we regulate the Metaverse? If it’s really a decentralized platform for the people, should we even be looking to government and  existing legal frameworks for the answers?

To dig into this complex topic, we’ve enlisted the help of Gareth Malna – Head of Web3 Regulation at Stephenson Law – to talk us through what the rules and regulations of Web 3.0 might look like.

Thanks so much for chatting to us, Gareth! Let’s jump straight in…

MH: Why do we need regulation in the Metaverse?

Gareth: The obvious answer is to protect consumers. The less obvious answer is to shepherd behaviors by utilizing the carrot-and-stick approach (though regulators are better with sticks than carrots!).

If a regulation gives the regulator power to enforce against bad behaviors, and the punishment has serious consequences (like jail time), then suddenly founders start to take it seriously and start to behave more sensibly.

What are investors and VCs hoping for with Web 3.0 regulation?

Gareth: Investors, VCs, and banks are all telling their investee companies to go out and break all the regulatory rules they can in order to optimize for scale.

Really, they all want regulation to be as loose as possible and to perhaps tighten up once the companies they’ve bet on have reached scale, so there’s a bigger moat preventing other competitors coming into the market.

In my opinion, what they should be looking for in a regulatory framework is as much sensible clarity as possible. If the rules are sensible, and if they’re clear, then everyone can move forward with confidence.

If they’re not clear or sensible, then only firms who already have lots of resources (like Web 2 companies moving into Web 3) can do so with the protection of big slush funds to pay fines – or to hire expensive lawyers.

So how will we police the metaverse?

Gareth: The same way we police chat rooms and Discord and Reddit: with an army of volunteer (or paid) moderators.

There’s some really interesting content profiling moderators who have been doing it for a while and are able to tell the difference between someone who is doing something silly innocently (because they’re trying to get the hang of the controls or because they’ve fallen asleep while holding them) versus someone doing someone maliciously innocuous (like bumping into other avatars repeatedly on purpose).

It will be a long time before AI can differentiate those behaviors with the same speed and skill as people and be able to deal with it in the proportionate way that people can, or without it sounding like you’re dealing with a chatbot or switchboard service.

So the future of tech centers people before AI! Where should we be focusing our energy in regards to Web3 regulation?

Firstly, we need clarity around the categorization of digital assets in law. We need to figure out what to do with DAOs (decentralized autonomous organizations – a type of bottom-up entity structure with no central authority).

There are a lot of misconceptions and inconsistencies, especially when it comes to personal liability or the ability for law enforcement to go after individuals in a DAO, even if they don’t have a nexus to a particular jurisdiction. This is especially true with the US – just see the recent enforcement action against Tornado.

We also need to be regulating cryptocurrencies properly. In my view, that’s not by calling them securities or utility tokens or commodities, but by regulating them as currencies, which perform the proper function of transferring value between people and/or businesses.

We need to improve marketing – stop pushing the notion that crypto is an unregulated Wild West, or that it’s a safe haven for scammers and money launderers.

We have to deal with that side, too, but there’s a ton of regulation that already applies in this space and it’s only going to increase. Web3 projects need to lean into that to help legitimize the space.

Featured image by George Pak on Pexels