The metaverse and Web3 are all the rage, but the law is stuck at Web1

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Legal Technology

The metaverse and Web3 are all the rage, but the law is stuck at Web1

By Laura Lorek

October 1, 2022, 2:10 am CDT

If a thief steals a CEO’s avatar and makes an inflammatory statement while impersonating the executive that tanks the company’s stock, that’s a crime in the metaverse.

Or if a person sexually harasses another avatar in the metaverse, they could open themselves up to criminal or civil liability.

Avatars can be held liable, but cases will be difficult to prosecute with existing laws, says Jesse Lake, an associate at the New York City office of Latham & Watkins.

“Current laws have not been tailored to provide adequate recourse to the many transgressions that can occur in a virtual world,” says Lake, who wrote “Hey, You Stole My Avatar!: Virtual Reality and Its Risks to Identity Protection,” which was published in the Emory Law Journal in 2020.

The metaverse, a colloquial term for a network of immersive 3D virtual worlds; and Web3, a new iteration of the internet that includes virtual reality, augmented reality, mixed reality, cryptocurrencies, non-fungible tokens and more, are evolving to become another Wild West technology frontier where existing laws are hard to apply, legal experts say.

According to Lake, the problem is that the Communications Decency Act of 1996 has not been updated. The law was drafted in the early stages of the internet to help cultivate businesses and give them sweeping immunity from liability for things that happened on their platforms. But nearly three decades later, the law has not been adapted to deal with social media platforms or the metaverse.

“As these companies grew and they became trillion-dollar market cap companies, we didn’t adjust for the liability,” Lake says, adding that current law gives a strong judicial preference toward protecting the anonymity of anonymous online users and sweeping immunity for internet service providers and social media platforms.

The metaverse market is in its early stages, but Lake predicts there will come a time when people spend as much time in the metaverse as they do in the real world.

Early games like Second Life, The Sims and Minecraft already have created virtual worlds that people spend hours in every day. But an increase in computing power that allows for more immersive game play and the invention of new technologies like haptic suits that simulate physical sensations in the virtual world are making the experiences even more real, says Jason Epstein, a partner and co-head of Nelson Mullins’ technology and procurement industry group.

“The law of the metaverse is following a similar pattern of earlier emerging technologies—from the dot-com era to cloud computing, electronic contracting, blockchain and now the metaverse. There will be some new laws created, but it will also be about the application of established law to this new technology,” says Epstein, who is based in Nashville, Tennessee.

Trademark and copyright issues are among the first to have arisen in the metaverse, Epstein says. In a closely watched high-profile case filed in January, French luxury brand Hermès sued artist Mason Rothschild for trademark infringement after Rothschild created and offered NFTs in the metaverse featuring new designs and interpretations of Hermès’ famous Birkin handbags. Additionally, in February, Nike filed a trademark infringement case against sneaker reseller StockX after the latter launched NFTs featuring Nike shoes. Both suits are pending in the U.S. District Court for the Southern District of New York.

Big business, big problems

Some companies are investing billions of dollars in the virtual world. In October 2021, Facebook CEO Mark Zuckerberg announced the company was changing its name to Meta Platforms Inc. to focus on bringing the metaverse to life. Meta’s Horizon Worlds, launched two months later, is a free virtual reality online video game that uses the Oculus VR headsets.

But Meta’s Horizon Worlds will not be the only metaverse. There will be lots of virtual worlds available on a lot of other platforms. The global metaverse market was estimated at almost $39 billion in 2021; it is expected to rise to $47 billion this year and reach nearly $679 billion by 2030, according to a report by Statista, a German research firm.

“The pandemic has accelerated the use of platforms like the metaverse,” Epstein says. “The pandemic has opened people’s eyes as well as tolerance for doing things other than face to face. The early technology winners of the pandemic were Webex, Microsoft Teams and Zoom. What’s driving the metaverse is it’s a new economy and new digital world. And a whole new engagement of people to people.”

That means problems that exist in the real world can be exacerbated in the metaverse. Consumers already complain about having their social media accounts stolen, but virtual reality and interactions in the metaverse take identity theft to a new level, says Rob Holmes, the founder and CEO of MI:33, a Plano, Texas-based private investigation firm.

“It’s happening,” Holmes says. The technology exists to scan a person’s physical attributes and create a digital avatar with their likeness. Some of those avatars of real people are being sold in virtual marketplaces. Celebrities are the main targets, but it can easily happen to anyone, Holmes warns. With avatars, criminals can commit all kinds of frauds, such as stealing credit card numbers, accessing personal information and tricking others into believing they are you.

In May, a researcher from nonprofit advocacy group SumOfUs reported that her avatar was raped by another avatar while using Meta’s Horizon Worlds. In a statement, Meta says it does not allow that behavior in Horizon Worlds.

“Personal Boundary is on by default at almost four feet for nonfriends to make it easier to avoid unwanted interactions, and we don’t recommend turning off safety features for people you do not know,” according to Meta’s statement. “We want everyone using our products to have a good experience and easily find the tools that can help in situations like these so we can investigate and take action.”

So far, there hasn’t been any litigation related to harassment or assault in the metaverse, says Leeza Garber, a consultant and attorney specializing in cybersecurity and privacy law. She is also an internet law lecturer at the University of Pennsylvania’s Wharton School. “This new virtual world poses many potential benefits, but obviously potential sources of harm and litigation as well,” she says.

New laws should be formulated concerning the metaverse, Garber adds. She recently taught an online course for the Practising Law Institute titled “Misconduct in the Metaverse: Can Your Avatar’s Actions Get You Arrested?” The answer is yes, she warns.

“The legal community must address Web3 and the metaverse in order to help build a safe and ethical playing field,” she says.

Not foolproof

The issue of misuse of avatars in the virtual world is of great interest to companies using virtual reality for training and the metaverse for meetings, Garber says. The metaverse has ignited the interest of law firms and corporate counselors, and several law firms and departments have set up practices specializing in the nascent technology while utilizing it for marketing purposes. Meanwhile, the Walt Disney Co., Gucci, Nike and other companies are creating high-level executive positions to focus on the metaverse.

“While some argue that the hype surrounding the metaverse is larger than the actual growth of the space, the legal community is becoming aware of the way in which we will have to translate and apply settled law into a completely new sphere because many companies are staking their claims in this new world,” Garber says.

People also will have a variety of avatars in the metaverse just like they have a variety of email accounts currently, says Neil Elan, senior counsel at Los Angeles-based Stubbs, Alderton & Markiles. In many cases, the avatar looks nothing like the person.

Celebrities including Mark Cuban, Serena Williams, Justin Bieber, Jimmy Fallon and Madonna use NFTs of cartoon apes designed by Bored Ape Yacht Club as their avatars on social media accounts. An NFT avatar is an authenticated record of property recorded on the blockchain and tied to a digital wallet, Elan says. That makes the avatar more secure and difficult to steal. Yuga Labs, the creators of Bored Ape Yacht Club, is also creating a metaverse called Otherside.

But blockchain is proving that the old scams still work on the new technology. Actor Seth Green tweeted in May that four of his NFTs were stolen, including a Bored Yacht Ape Club NFT. Green says he was the victim of a phishing scam.

“For at least a decade, courts are going to struggle. They are going to use the current legal framework,” Elan says. “The next 10 years are going to be really messy. Over time, there is going to be a new set of laws.”

This story was originally published in the October/November 2022 issue of the ABA Journal under the headline: “Welcome to the Metaverse: Virtual worlds and Web3 are all the rage right now—but the law is stuck at Web1.”