Government Regulators Are Zeroing in on the Metaverse. Digital Art Could Get Caught in the Middle

Every Wednesday, Artnet News brings you The Gray Market. The column decodes important stories from the previous week—and offers unparalleled insight into the inner workings of the art industry in the process.

This week, on new art’s chances of attracting new scrutiny…

REIN MAKERS

In recent generations, the global art market has become infamous for pairing a small set of industry-specific regulations with a startling amount of money changing hands year to year. But as artists, art sellers, and intermediaries explore how they might integrate into the metaverse, the much-hyped next phase of online life, their relative freedom from government scrutiny in this new territory is in far more danger than many art professionals realize. 

Almost a year ago, a variety of lawmakers across continents began quietly circling the metaverse as an area worth regulatory attention. The succeeding months haven’t just seen officials in the U.S. and E.U. go public with their concerns. Regulators have now made formal commitments to shape the metaverse—even as developers and evangelists continue struggling to educate the rest of the world about what the concept means.

E.U. officials have so far been more aggressive on this front than Congress. Members of the European Commission confirmed as far back as February 2022 that they were doing their due diligence on metaverse projects with an eye toward understanding what types of guardrails should be installed around them, and how quickly. Then, in a letter of intent published to coincide with her state of the union speech last September, E.U. president Ursula von der Leyen promised that the European Commission would conduct an “initiative on virtual worlds, such as metaverse [sic]” in 2023. Another high-ranking E.U. official followed up shortly after by publishing what seems to be an initial framework of the Commission’s thinking on how and why it plans to move forward on this front.

U.S. lawmakers have gotten moving, too. In August 2022, the Congressional Research Service published a 26-page report titled “The Metaverse: Concepts and Issues for Congress.” It does an impressive job of reducing key ideas and important tensions in metaverse development into approachable language, identifying some of the tech colossi vying to harness the first-mover advantage on this digital frontier, and pinpointing a handful of metaverse-specific policy issues most worthy of congressional consideration. 

Most surprising of all to me was the report’s appendix. It reveals that congressional representatives had already introduced multiple bills that would have imposed meaningful, well-informed restrictions on metaverse developers by June 2022. Though none of them has been voted into law as of my writing, their pure existence signals that U.S. regulators are further ahead than usual on what could be a major technological shift. 

Together, the steps taken to date by the E.U. and U.S. suggest that some legislators grasp the importance of influencing how immersive, mass-participatory virtual worlds grow and operate before it’s too late. But if those lawmakers succeed, it also means that any artist or art professional participating in a metaverse project could face complications that simply would not exist if they stuck to creating, exhibiting, and selling work on familiar Web2 platforms, let alone completely offline. 

This imbalance could have a pronounced effect on how artwork and the art business evolve if, or when, metaverse activities become as typical a part of daily life for the average European and American as the existing internet is in January 2023. 

Olive Allen, “Welcome to the Metaverse,” Postmasters Gallery, 2022. Photos: Emma Schwartz. Courtesy of Postmasters.

IT’S TIME TO BUILD (GUARDRAILS)

Although developers, artists, critics, enthusiasts, and more have been debating the definition of the metaverse for at least 30 years, federal legislators seem to be refreshingly clear-eyed about the landscape. The Congressional Research Service’s report demarcates a trio of traits that distinguish the metaverse from earlier forms of online life: “an immersive, three-dimensional user experience; real-time, persistent network access; and interoperability across networked platforms.” 

In other words, the metaverse is an embodied experience rather than one that takes place at a remove through typing and tapping; it continuously updates in response to users who are capable of logging in from anywhere, at any time; and it exists as a unified virtual space despite being constructed of components made by many different developers. That’s a pretty damn good summary to me and, I expect, to novices. It also helps clarify the enormous range of ways that the metaverse and its users could be exploited by bad actors in the absence of smart regulations.

Based on the (more or less) official transmissions from Capitol Hill and Brussels to date, U.S. and E.U. lawmakers are gravitating toward at least three shared areas of concern. 

• Content moderation: Basically, how will developers ensure that the metaverse stays free of discrimination, hate speech, explicit content, disinformation, and other problematic elements?
  
• Privacy: How will users’ personal data be protected in an immersive virtual environment that takes in, and reacts to, even more of their preferences and inputs than existing online platforms? (Think: gestures, facial expressions, eye movements, speech patterns, and more.)

• Competition: In contrast to the winners-take-all dynamic of Web2, how can regulations guarantee that small and medium-sized companies will have a fair shot at success in the metaverse in the short, medium, and long term? 

There are already a few places where you can see these themes translated into specifics. On the E.U. side, the bloc’s internal market commissioner, Thierry Breton, augmented von der Leyen’s state of the union speech with a lengthy LinkedIn post (yes, really) expounding on what TechCrunch called “a blended ‘sow and scythe’ package for virtual worlds—offering support initiatives (to encourage development and infrastructure) but also warnings that it will step in actively to steer and shape development.” 

Examples in Breton’s post include the inauguration of a government-backed coalition of stakeholders in the augmented reality (A.R.) and virtual reality (V.R.) sectors, a pledge to upgrade the E.U.’s Big Tech-focused Digital Markets Act and social-media-focused Digital Services Act so that each has teeth in the metaverse, and the pursuit of a digital infrastructure tax that would be levied proportionally on “all market players benefiting from the digital transformation.” 

The Congressional Research Service’s report confirms that U.S. lawmakers are wielding a similar combination of carrots and sticks. Three of the five existing bills captured in its appendix prioritize funding or study of technologies critical to making a 3D, always-on, interoperable metaverse a reality. The other two, however, fixate on preventing bad behavior. The first would require the Federal Trade Commission to produce content-moderation guidelines for any A.R. or V.R. platform; the second, the Kids Internet Design and Safety (KIDS) Act, “would regulate acts and practices on online platforms targeting individuals under the age of 16, which include those that offer A.R. and V.R. experiences.”

The European Commissioner for the Internal Market, Thierry Breton, appears after his meeting with the First Vice-President and Minister for Economic Affairs and Digital Transformation, at the headquarters of the Ministry, on January 9, 2023, in Madrid, Spain. (Photo By Eduardo Parra/Europa Press via Getty Images)

EXPANDING AND CONTRACTING

It’s more likely than not that the themes above are just a starting point for domestic and international legislators, too. Wagner James Au, a longtime metaverse consultant and author of the forthcoming book Making a Metaverse That Matters, highlighted a few more probable areas of regulatory concern in an email to me this week:  

“We haven’t reached this point yet, but I expect regulators to eventually look at copyright and trademark infringement in metaverse platforms, which is pretty rampant—lots of user-made knock offs of Marvel I.P., etc.—at the behest of the major copyright holders.” 

Au is doubly worth our attention when it comes to metaverse regulations. Aside from being among the earliest and most dedicated writers to engage with mass-participatory virtual worlds, government officials from multiple countries have solicited his counsel on the subject since early 2022. 

Another potential area of concern that Au mentioned is the “growing scrutiny of NFT-based art and the regulatory implications around it,” especially concerning what ownership of metaverse assets actually means in a legal context. In many cases, for example, buying an NFT does not entitle a collector to the underlying asset that the token points to, a wrinkle that is still not necessarily widely understood by buyers or clearly signposted by all market-makers. (Au rightly noted that NFTs are “not the metaverse as such,” but they do cross over in plenty of cases, such as Yuga Labs’s promised gamified platform Otherside.)

So there’s plenty of room for regulators left to run in early 2023. But I should emphasize that this is true in part because most of their progress to date is still theoretical. 

At bottom, von der Leyen and Breton have largely only produced a statement of purpose for the European Commission’s year ahead. Again, the Congressional bills I mentioned earlier are just bills, and the new U.S. House of Representatives is all but guaranteed to go down in infamy as the most dysfunctional, least productive legislature in the history of the republic. I’m not optimistic that a majority of its members will advance the work that has already been done on sensibly regulating the next generation of the internet when fulfilling even the most basic functions of government on time will be an Olympian challenge.

Still, European and American regulators are devoting far more energy to metaverse platforms than to the traditional art market at this point. The newest guardrails on E.U. art sellers went into effect in January 2020, when the art market was added to the economic sectors required to observe select compliance measures for some transactions of €10,000 or more per the Fifth Anti-Money-Laundering Directive. Yet each member nation is responsible for drawing up and enforcing its own set of policies to actualize the directive’s overarching guidelines. This has resulted in a confusing patchwork of differing regulations across E.U. borders, with little apparent momentum to unify, improve, or augment the law in the time since.  

The U.S. art market is even more of a free-for-all as of my writing. After a few years of Congressional interest (and a fair amount of art-industry lobbying), a report from the U.S. Treasury in January 2022 concluded that the art market needed no urgent, industry-specific regulatory changes. It’s anyone’s guess when, or whether, American officials will deem our niche industry a high enough priority to devote considerable resources to it again.

Cao Fei, RMB City – A Second Life City Planning (2007).
Photo: Courtesy of MoMA PS 1.

DIVISION PROBLEM

So what does this mean? That the next major dose of regulatory action to land on the art market could do so specifically because government officials don’t see the art market as being a big enough deal to warrant carving it out of the larger legislative framework they are building around the metaverse. 

At this point, it looks like anyone involved in creating, selling, or exhibiting digital artwork in an immersive virtual world-to-come may have to play by stricter rules than their less digitally advanced counterparts. Metaverse privacy requirements could be more aggressive. Metaverse copyright law could be more complex to navigate. Metaverse content-moderation policies could lead to de facto censorship that would be out of the question in a physical environment. 

Au is already wary of this imbalance outcome. On the subject of copyright law in the metaverse, he said, “I’m concerned that any regulation that does go into effect will be draconian, not taking into account fair use principles.”

Or maybe not. It’s still unclear how, exactly, the E.U. and U.S.’s stated interest in regulating an immersive, always-on, interoperable online world would impact visual art’s relationship to that space once it exists as envisioned. But it’s obvious that the impact could be significant, and the high level of uncertainty around it means that anyone in the art industry with an eye toward metaverse participation has many more contingencies to consider than their more conservative peers. 

The flip side, however, is that regulations are protections. If the sell side has to observe tougher (but wiser) guidelines in an immersive virtual world than anywhere else, the buy side could benefit. The increased consumer confidence might even lift the market for metaverse artwork far higher than it would otherwise go, creating a virtuous cycle. It’s just difficult to say given how much is up in the air at this stage.

For his part, Au has a few pointers on how artists should navigate this hazy stretch between potential and actual metaverse regulation: 

“Try to make your artwork as platform-agnostic as possible, so that it’s not completely tied to any one metaverse platform. Related to that, copyright and register your I.P. with your local government! And whatever you do, don’t ever depend on the blockchain to ‘protect’ your artwork. That will only end in tears.”

It’s too early to know whether the same will be true for all metaverse creators. For now, all that we can be sure of is that the eyes of the state are wide open and looking hard in their direction. 

[New World Notes / TechCrunch / Congressional Research Service]

That’s all for this week. ‘Til next time, remember: the devil you know isn’t always better than the devil you don’t, but it is easier to understand.

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