Over the course of 2021-2022, we witnessed a veritable explosion of investment in the virtual space, broadly defined as the "Metaverse." Among the world's largest companies that have announced their plans for the creation of the Web 3.0 world are Meta (formerly Facebook), Google, Microsoft, and Nvidia, the most important players in the global computer industry. To further explore this topic, let's consider the purchases of metaverse real estate. Tokens.com, a company specializing in investments in assets such as NFTs, allocated $2.5 million to acquire virtual land in the Decentraland project, one of the most popular metaverse worlds. Meanwhile, Everyrealm (formerly Republic Realm), a company that describes itself as "one of the most active players in the metaverse real estate market," spent a record $4.3 million to purchase a plot of virtual land in The Sandbox. At this point, we should consider what exactly the investor who purchases the aforementioned virtual land receives?
Regardless of the jurisdiction in which a given project occurs, which regulates the principles of a given project's operation through generally accepted legal norms, it's difficult to find regulations protecting real estate and land buyers in the Metaverse, which are common in the real world. A person purchasing a property in a Metaverse created in Poland, for example, won't be protected by law in a similar way to a buyer of an apartment or single-family home created by a construction team. This case is intriguing because, for example, a user of The Sandbox recently paid $450,000 to become a neighbor of Snoop Dogg, who is building a virtual villa on the same platform. While the cost of purchasing property next to DOdoubleG's estate in our mundane world would likely be incomparably higher, over $400,000 is certainly enough to create an interesting residence in many different locations, though not necessarily near the legendary rapper. The new space that is the Metaverse, and in particular its separation from established rules, creates as many opportunities as dangers, and it is the latter that we would like to briefly present.
First, it's important to note that Metaverse properties take the form of Non-Fungible Tokens (NFTs). Acquiring an NFT, although we're theoretically talking about "real estate," due to its virtual nature, will have no connection with the regulations typically associated with acquiring them. The only applicable laws will be the law governing contractual obligations, appropriate to the given situation, as well as the platform's Terms of Service and the terms strictly arising from the agreement, such as those contained in the industry-recognized Simple Agreement for Future Tokens (SAFT). To illustrate the potential risks, it's worth exploring a bit of technical detail. Acquiring a given asset in Metaverse will, in accordance with industry practice, result in the transaction being recorded on the blockchain, a digital ledger that is not subject to external control and prevents the modification of events already recorded. In the above scenario, NFTs are unique bit sequences on a given blockchain, linked to a specific virtual item (virtual land, a house, clothing). The ability to transfer assets between Metaverses is expected to be a key feature of these products in the future. However, in the current environment, each platform links the blockchain record of the NFT to its own virtual assets (computer graphics, programs) with the characteristics assigned by the aforementioned. According to the most common terms of service, it is highly unlikely that the purchased NFT (i.e., unique bit sequence) itself constitutes the complete virtual product we intended to acquire. The assigned NFT and all events related to its existence are actually recorded in a secure cryptographic ledger, while all visual and functional aspects of a given virtual asset are fully controlled by the platform, on its inaccessible private servers. As an investor, we acquire a unique bit sequence, but giving it all the characteristics that motivated us to purchase it depends entirely on the given platform. Given the above, in accordance with common practice, during the purchase, we will be designated as the owner of the NFT associated with the digital purchase, but we will not become the owner of the asset itself, as it will not be recorded on the blockchain (to illustrate, we own the key, but the box and what's inside it don't belong to us). Therefore, it's crucial to properly verify the terms of service of the platform through which we decide to invest in a virtual house, land, or any other asset. If, according to the operating rules of a given Metaverse, an NFT does not constitute a certificate of ownership over the proposed virtual asset, but merely provides unlimited access to our digital wealth, it is very likely that the entity operating the Metaverse remains the sole owner of this asset and may also have reserved the right to freely dispose of it. Returning to Snoop Dogg's online neighbor, let's imagine that The Sandbox, a platform owned by Bacasable Global, a Hong Kong-based limited liability company, announces that it is deleting assets associated with the acquired NFT. The person in question will still own the NFT purchased for $450,000 and will be able to freely dispose of it. However, without the contribution of digital real estate located right next to the California rapper's plot, which remains the exclusive domain of Bacasable Global, this incredibly expensive NFT will remain merely a key to which one can search in vain for a matching lockbox. Of course, for a project the size of The Sandbox, such action would likely be the least profitable in the long run, but it's worth considering the existence of such a risk.
Similar mechanisms, identical in nature, can be found largely in most existing Metaverses. Distributed cryptographic ledger technology alone does not guarantee independence from centralized control imposed by the terms of service adopted by a given platform. Therefore, before investing significant funds in a virtual product, it is worth devoting the utmost attention to understanding the rules related to a given transaction. While in the case of large, established projects like The Sandbox or Decentralized, the risk can be considered at least slightly lower, in the case of newly emerging projects, all aspects surrounding the undertaking should be considered. Among the key elements of any project, it is certainly worth examining the offered terms and imposed service rules, the people responsible for them, and even the jurisdiction in which the platform operates.
This alert is for informational purposes only and does not constitute legal advice.
author:
