James, Rebecca and Lewis were law student scholars, participating in the WS Society Summer Scholarship programme during July 2022. This article summarises their research and presentation.
Non - Fungible Tokens (NFTs), underpinned by blockchain technology, and the Metaverse represent two technologies for which regulation approaches new frontiers. It is predicted that the metaverse will rival the impact of the internet and the use of NFTs skyrocketed last year in association with the digital art market. This fostered a culture of bragging rights, obscuring both the legal implications and the genuine value of NFTs. Although the ethereal nature of these technologies gives rise to numerous legal issues, serving to make NFTs and the Metaverse the wild west of law and technology, this article will consider the problems of property, privacy, and the environmental impact arising from such new technologies.
The Setting
All three technologies are related; cryptocurrencies and NFTs are the basis of economies and ownership in the Metaverse. The Metaverse is an alternate reality that people can be ‘in’, where everything is connected through a global and virtual network. It is made more immersive through augmented and virtual reality which allows users to feel what their avatar is feeling. Secondly, the blockchain is technology that stores data in a decentralised way. It is an open-source ledger hosted across multiple computers that maintains a record of transactions. NFTs are a line of code on the blockchain attributing ownership of an asset to an individual, acting as a robust proof of ownership on the blockchain. They are essentially virtual receipts on the blockchain and can be used for a multitude of reasons such as ticketing, art, or court document authentication. As per the COO of Crypto.com, ‘[NFTs] will be the tool that represents any digital type of assets in the virtual world going forward. So the applications are tremendous.’
“The absurdity of the prices and the hype surrounding the digital art world have distracted from the good aspects of NFTs and the Metaverse.”
For example, due to its immersive environment, the Metaverse could be used as a tool to help people suffering with PTSD by allowing them to simulate the event causing such stress, while in a safe environment. Furthermore, NFTs allow buyers to financially support artists and in turn provide artists with a wider market and larger potential income.
Thomson Reuters, Glossary, Blockchain
The Brag: Property Rights
“As a legal concept, NFTs present a definitional headache.”
Generally, NFTs do not confer intellectual property rights to the purchaser. What the buyer receives is a right to display the asset but there is no legal decision on whether an NFT counts as proof of title to a digital version of the original asset. Owning an NFT merely grants an individual bragging rights due to their possession of a digital asset and the value is mostly intrinsic due to an asset’s potential cultural significance.
Despite the lack of legal decision on the issue, NFTs are designed to confer proof of title as they purport to represent ownership of another asset. Instead, NFTs have been considered an asset constituting property by the English courts, albeit in obiter dicta. Judges have been careful when defining crypto assests as property, espousing in AA v Persons Unknown, that ‘there is a difficulty in treating Bitcoins and other crypto currencies as a form of property.’ Nevertheless, the court was persuaded that crypto assets (arguably including NFTs following Osbourne v Persons Unknown) are property - in line with Lord Wilberforce’s criteria set out in National Provincial Bank v Ainsworth.
In Osbourne Judge Pelling said that ‘there is at least a realistically arguable case that [NFTs] are to be treated as property as a matter of English law.’ However, he was cautious in his approach, fearing ‘issue[s] at some stage as to whether non-fungible tokens constitute property for the purposes of the law.’
Given that owning an NFT rarely assigns IP rights alone, this hamstrings the pursuit of a Metaverse mirroring the real world. NFTs cannot properly underpin the Metaverses’ ownership system without legal recognition of their ‘proof of title’ function. According to Kasiyanto and Kilinc, ownership in the Metaverse can be divided into licensing and actual ownership. The first, where the platform provider retains ownership and licences out use to users (think cosmetic items in a computer game or virtual land in future Metaverses), severely limits the potential of the Metaverse. Instead, true ownership is the ideal implementation of Metaversal property law.
Currently, NFTs themselves are mainly governed by IP law which alone will not be enough to facilitate their intended function in the Metaverse. Think of jumping into a Metaverse under current rules. You have purchased virtual land, a home, and more but your access to these is at the whim of the platform provider. If the virtual asset is deleted, all you have left is ownership of an NFT. For users this would be contradictory to the reason they purchased the NFT: to own the associated asset. Thus, the deletion should be recognised as property right infringement. Without legal recognition of the proof of title function of NFTs, the Metaverse’s intention of mimicking reality cannot be fulfilled.
“People may brag about owning their NFTs now, and their estate in a future Metaverse, but without virtual property law, that is all they will have the right to do.”
The Brag: Privacy
The release of a fully functioning sophisticated Metaverse is guaranteed to generate unprecedented excitement. However, jumping into the Metaverse conceivably incurs the surrender of an unprecedented amount of personal data to the relevant controller.
To illustrate, take the Metaverse when it reaches its zenith: a virtual reality where you can vividly see, feel, and interact with the world and other users around you. Along with the personal data users are already accustomed to handing over at account creation pages, the Metaverse will realistically require a much deeper and intimate set of personal data to properly achieve this. Along with biometrics, this may include physiological and emotional response data.
This will incur an extreme amount of data analysing, to the point where the platforms will understand users better than themselves. Feeling hungry? An advert for Colonnades at the Signet Library appears. Logically, data protection schemes, such as the GDPR, will be hovering over every line of code and policy used to implement each virtual world. Moreover, the Metaverse likely represents their biggest challenge. Using the GDPR as an example, it will need an upgrade, possibly even a complete overhaul.
“Blockchain technology inflates the challenges in an era where personal privacy is already surrendered to digital convenience.”
As mentioned earlier, the various existing blockchains are mainly open source. This means that they are accessible without restriction to the public, each containing vast amounts of metadata, which can be used to identify users. This presents immediately apparent issues surrounding data protection.
Blockchain design philosophy of unlimited public access conflicts with the basic principles of data protection and runs afoul of the various statutory instruments used to enforce them. Currently the UK complies with the GDPR and has the Data Protection Act 2018 to implement these regulations in national law. The current usage of blockchain largely falls afoul of the GDPR, and we have taken articles 15, 16, and 17 to illustrate some of the issues arising.
Article 15 provides various rights including the right to complain to a supervisory body, which in the context of a decentralised open-source database is not possible. Article 16, the right to rectification, cannot be facilitated on an indelible and unalterable ledger. Finally, Article 17, colloquially known as the right to be forgotten, is also impossible for the same technological reasons.
These issues need to be addressed by regulation or new legislative regimes, as the law that exists today is not fit for data protection purposes when it collides with blockchain. Open-source blockchain which NFTs exist within might become an unstoppable force against the immovable object of the GDPR.
Regulation
In its own efforts to explore potential regulation of the technology, the European Parliament has concurred with the above conclusions surrounding regulation of blockchain technology and the Metaverse. In short, they are at a loss.
As part of the research conducted to produce this article, a potential (and admittedly ambitious) regulatory scheme that could be implemented to regulate Metaverse technology is outlined below. The scheme is divided into three concurrent stages based on design responsibility, reasonable foreseeability, and the duties of co-operation and non-repetition.
Design responsibility attributes the duty to ensure that Metaverse technology is only released to market so long as it avoids infringing certain rights and criteria based on a robust set of enshrined rights such as the ECHR. Corporations can develop anything they want but must ensure compliance before public release. Of course, this may stifle innovation, however,
“the impact of these technologies requires a balance between innovation and potential collateral damage.”
Following this, platforms must exercise reasonable foreseeability to prevent harms incurred within, or facilitated by, the Metaverse. However, where harms are not reasonably foreseeable, the duty would not be infringed. Rather, they would be subject to the third and final duties outlined below.
The final stage would establish the duties of co-operation and non-repetition. Metaverse providers have the duty to co-operate with authorities in eliminating any harm and criminal actions that arise due to their technology. Moreover, a duty arises to ensure that the same harm is not repeated in the same fashion. For example, any bugs or loop-holes that are uncovered in the code that facilitate harm (and any related sophisticated work arounds) should be rectified.
The Ugly - Environmental Impact
Finally, there are some environmental concerns that need to be addressed. Technologies such as blockchain, which is underpinned by countless numbers of computers performing an inconceivable number of micro-calculations, have a substantial environmental impact. The Ethereum blockchain alone consumed the same amount of annual terra-watt hours as the state of Israel. With the sheer server power needed to prop up the Metaverse, the technology is guaranteed to be unsustainable. Not to mention the similar or even more shocking amount of stress other technologies already cause the planet, for example, YouTube alone consumes 2.5% of global energy annually.
The environmental impact of blockchain needs to be considered in line with the Paris Agreement which requires signatories to reduce their economy-wide greenhouse gas emissions by at least 68% by 2030 compared to levels in 1990. To have any chance of positively impacting the reduction of emissions, the use and development of technology needs to change.
Thankfully, the creator of Ethereum and influential developers within the Ethereum community want to move to the proof of stake consensus algorithm, away from the energy intensive proof of work model. Although this change has not been fully implemented, it is an ongoing transition across the decentralised network. The project (Ethereum 2.0) is expected to be completed by the middle of next year. This will reduce Ethereum's energy usage by 99.95% while increasing its security and scalability.
The unfortunate reality is that not every blockchain will necessarily make this change of consensus algorithm in order to become more sustainable, and as the wider economy begins to adapt and utilise this technology there needs to be a guiding hand in shaping its development. Several measures could be undertaken by various regulatory authorities in order to ensure that various industries use the technology sustainably, with the most attractive being some form of licensing.
Blockchain technology will become a feature of most businesses in the coming years, and as a result many will feel the need to set up internal, proprietary blockchains to conduct their operations. This article proposes the creation of a licencing board to regulate commercial blockchain usage, with the licence fee scaling dependent on the energy consumption of the blockchain. The only exception being that if a business can run its blockchain on only renewable energy, disconnected from the national grid, then they will be exempt from paying a licence fee. This is to incentivise more sustainable use of the technology and any licence fees would be used by the state to offset the damage done by blockchain via investing in renewable energy infrastructure.
Conclusion
NFTs and the Metaverse represent two technologies with immense potential but to eke out the positive rewards they first need to be regulated. Consumer protection and environmental conservation need to be at the forefront of regulators' minds so that consumers are clear on the rights they receive with NFTs, users’ rights are protected in the metaverse, and natural resources are conserved for future generations. It is only through further technological development and regulation that NFTs and the Metaverse will have a viable future.