Digital Economy

Virtual reality – the legal issues surrounding the metaverse

Many companies around the world are exploring the potential of the metaverse and the opportunities Web3 unlocks. Businesses are opening flagship stores and branch offices in the metaverse, establishing gaming environments or marketing products using non-fungible tokens (NFTs) – blockchain-based tokens that refer to a unique digital item and cannot be reproduced. The list of applications is long and constantly growing. Although still in its infancy, there is much to suggest that – in the medium term – our interaction with others on metaverse platforms will replace at least parts of the internet as we know it today. This is an exciting development from a legal perspective – and will see much new legal ground broken.

Gleiss Lutz has been advising clients on metaverse issues for some time, and is now also the first leading business law firm in Germany to have an office in the metaverse. With more and more companies contemplating moving parts of their business to the metaverse, we have compiled a brief overview of the main legal considerations. Our expert Digital Economy group is happy to help assess specific plans, discuss individual aspects in depth or answer any questions you may have.


1. What is the metaverse?

The metaverse is a virtual, three-dimensional environment accessible via the internet. In this virtual world, users can actively engage in economic, social and cultural activities with the help of customisable avatars.

There are already a broad range of virtual assets and services being traded in significant volumes around the world on metaverse platforms such as Decentraland and Sandbox. The structure and organisation of metaverse platforms depends heavily on whether they are centralised or decentralised. Centralised platforms are owned by a single legal entity whereas decentralised ones are run by a decentralised autonomous organisation (DAO). DAO-based structures themselves can present legal challenges, as they do not fit into standard legal categories or forms, but instead use smart contracts stored in the blockchain. This gives all members of a DAO joint and equal control over fundamental aspects such as governance policies and voting, meaning there is no single decision maker in the traditional sense.


2. Applicable law

The question of which law applies is often not easy to answer in the context of metaverse platforms. There is no uniform regulatory regime as yet, and some even claim the metaverse exists in a legal vacuum. However, in Germany at least, this is likely incompatible with the German state’s far-reaching right to claim application of German law – which is why the law that applies in any given case must be determined individually under the principles of private international law.

Platforms’ terms of use – where they contain jurisdiction and choice-of-law clauses – may help elucidate this. However, the other contributing factors based on the provisions of private international law must also be considered. What will also be decisive is whether the legal relationship is between a user and the operator of a metaverse platform or between users.

At EU level, the Digital Markets Act and Digital Services Act are the first steps towards regulating the online market and providing consumer protection. There is still no regulation of the metaverse specifically.


3. Areas of law to consider

It’s impossible to provide an exhaustive list of the relevant fields of law here. Nevertheless, we’d like to draw attention to the following particularly important areas to keep an eye on if you’re operating on metaverse platforms:

  • Commercial: The trade in digital items such as clothing for avatars, digital real estate, and advertising space raises fundamental legal issues around the ownership of cryptoassets, the liability risk associated with the use of Web3 applications, and the structure of smart contracts.
  • Corporate/M&A: Given the significant role that DAOs play in the metaverse and in Web3, there are a number of legal challenges associated with their establishment and management. For example, these decentralised organisations need governance structures and token-based incentive systems. Investing in metaverse and Web3 companies – usually via cryptocurrencies and tokens – also requires navigating new legal complexities.
  • Tax: Tax law is a key consideration when trading digital assets, and special attention needs to be paid to the issue of when and on what basis taxes are levied on their sale and lease. Cryptocurrency taxation and accounting obligations are crucial issues for businesses – especially DAOs.
  • Data protection/privacy: The new technical possibilities mean new data protection requirements. For example, using a VR headset to access the digital environment makes it possible to more accurately collect a wider range of personal data – including facial expressions, gestures, eye movements, and other non-verbal communication. The question of who the data controller is also arises, particularly when using the metaverse through a DAO.
  • Competition/antitrust: Even metaverse platforms cannot do without a regulatory framework for market behaviour. While these platforms have not yet been specifically regulated, the EU Digital Markets Act takes a first step towards regulating platform-like metaverse and Web3 applications. Antitrust issues such as the exchange of competitively sensitive information and collusion between competitors also pose challenges for companies.
  • Intellectual property: The countless ways to interact with digital assets mean that copyright, trademark and patent law have an even greater role to play than previously. The greater freedom that the metaverse affords therefore presents companies with new challenges when it comes to the use of trademarks and cross-border access to copyrighted works.
  • Criminal law: Prosecuting online criminal offences is already difficult enough – this will present even more challenges in the metaverse given the three-dimensional environment and the use of avatars leading to new twists on traditional crimes that can go beyond the verbal level (for example through comments or tweets).


4. Mechanisms for resolving potential disputes

In the event of a dispute, the parties generally have access to the known dispute resolution mechanisms such as arbitral tribunals or national courts. Nevertheless, it is often not easy in practice to determine which tribunal or court has jurisdiction. Automated forms of dispute resolution are also conceivable, but their outcomes may be difficult to enforce.


5. Conclusion

Moving into the metaverse is no longer a thing of the future – and many have already made the leap. But to minimise compliance and liability risks and avoid uncertainty, you’ll need to consider the legal aspects from the very beginning. Obtaining external legal advice on how to approach your expansion into the metaverse is therefore crucial. We’d be happy to assist you with this important step and lend you our expertise and experience.