Nine Legal Questions You Might Encounter While Doing Business in the Metaverse

The metaverse is brimming with multifaceted, thought-provoking legal issues. We can help you develop and execute strategies to traverse this modern frontier.

Hunton Andrew Kurth LLP’s Metaverse practice benefits from the skills of our lawyers across the firm. Many of our attorneys have been advising on related matters for some time, including blockchain, non-fungible tokens (NFTs), cryptocurrency, artificial intelligence (AI), machine learning (ML), data privacy, cybersecurity, and rights to digital assets. These lawyers have joined forces to seamlessly advise clients who are focused on the metaverse and other emerging technology issues. In this alert, they address some of the questions you may have as your company considers doing business in the metaverse.

1. What is the connection among blockchain, cryptocurrency, NFTs, and the metaverse?

By Mayme Donohue

Building on the decentralized networks created by blockchain and the ability to engage in peer-to-peer digital commerce using cryptocurrencies and NFTs, the metaverse leverages the power of emerging technologies to unlock a new world of possibilities for how we use the internet and interact with each other virtually. Perhaps for most of us, the term “metaverse” still conjures up images from a sci-fi action movie, but international brands and corporations have taken notice that the youngest generation of consumers experiences the metaverse as a primary source of internet use and communication. Playing games and meeting up with friends in a virtual environment is second nature for them, and so is the ability to buy and sell goods in that virtual environment, often in the form of visual or skill enhancements in gameplay.

The hardware that allows users to experience the full potential of immersive metaverse environments, which are being built by a growing list of tech companies, will continue to evolve. As less expensive VR headsets and other haptic devices reach a wider demographic of consumers, the opportunities will become more tangible for a true virtual economy to take shape. Brands are already spending millions of dollars and devoting valuable resources to establish their digital footprint in the metaverse.

Our fintech team has years of experience advising on the countless regulatory regimes that apply as clients develop and deploy projects that involve cryptocurrency and other digital assets. While certain existing legal regimes for traditional financial instruments lend themselves well to the emerging digital economy, we regularly counsel clients through the grey areas in which the law has yet to catch up to technology. Because the digital assets deployed in the metaverse sometimes don’t fit squarely within the legal definition of a traditional financial instrument, it is crucial for companies to seek counsel on the scope of laws and regulations that may apply.

We can help address legal uncertainty when metaverse and digital asset projects are being considered and developed. When our team is engaged early enough in the process, we work with companies to find a way to structure a project within the current murky legal frameworks. We are focused on preparing clients for what’s coming next as digital assets are increasingly deployed in the metaverse, and our experience across practice groups provides companies with a full-service partner as they build virtual consumer experiences in the metaverse.

2. How can I protect my personal information and confidential business data in the metaverse?

By Lisa Sotto and Sam Grogan

Data is the fuel that powers the metaverse, and with those data-driven opportunities come a host of privacy and security issues. Operating in the metaverse will require responsible stewardship of personal information and other confidential business data. Companies doing business in the metaverse need to consider questions such as:

• What privacy laws apply in a borderless virtual world?
• What safeguards should be implemented to minimize the risk of cyber attacks, virtual identity and digital property theft, and other security vulnerabilities?
• How can companies provide notice and choice to users during a seamless experience where data is collected continuously?
• How will existing biometrics laws and other rules regulating sensitive personal information apply in a world where the collection and use of physiological data occurs on an unprecedented scale?
• How do we enable individuals to exercise region-specific data rights in a virtual melting pot of global citizens?
• How should companies address data transfer restrictions and localization requirements in the metaverse?
• Who is accountable when things go wrong in the metaverse?

Hunton Andrews Kurth’s privacy and cybersecurity team assists with privacy and information security governance, risk management and mitigation, and compliance with the myriad data-related issues that arise in the metaverse. Our lawyers help clients navigate the novel data challenges of the metaverse and work to position businesses to take full advantage of the data opportunities presented by this new and innovative area of digital connection.

3. How do I protect my IP in the metaverse?

By Tyler Maddry and Lawrence DeMeo

The metaverse brings with it the opportunity to buy and sell goods, services, and property, and even attend events virtually, which raises questions about intellectual property (IP) rights concerning the provision of goods and services in a “virtual” world. Our IP team helps protect and defend trademarks in the metaverse, including NFTs and related brands in NFT marketplaces, and prosecutes patents related to blockchain, cryptography, AI, ML, and analytics technologies fundamental to the metaverse.

In addition, litigation is underway throughout the country that raises IP issues we expect our clients to encounter as the metaverse expands. For example:

• A company may discover that images of its trademarked goods have been minted as NFTs or included in a metaverse environment.
• A company may learn that all or a portion of software code for a particular metaverse is protected by its copyright or patent rights.
• A company may need to enforce a copyright it obtained via a license that was executed before use of the copyrighted material in the metaverse was explicitly contemplated.

We continue to monitor these and other issues as they develop so that we provide clients with current advice and persuasive and effective advocacy as we enforce IP rights related to the metaverse.

4. Are there any constraints on advertising in the metaverse?

By Phyllis Marcus

Already, the Children’s Advertising Review Unit (CARU) of BBB National programs issued a compliance warning reminding industry that the self-regulating body on children’s advertising and privacy intends to enforce its advertising guidelines in the metaverse, just like in real world media. Likewise, the Federal Trade Commission (FTC) is contemplating how to regulate disclosures in digital spaces to take into account children’s cognitive abilities to distinguish advertising from other content. The agency also has raised questions about how its “.com Disclosures: How to Make Effective Disclosures in Digital Advertising” guidance document relates to advertising appearing in virtual reality and the metaverse.

Our advertising team routinely counsels clients on presenting innovative, creative, compliant commercial messaging in metaverse worlds, virtual reality, video games, and other digital spaces.  

5. Are there any AI compliance issues I should be aware of in the metaverse?

By Sarah Pearce

AI compliance issues in the metaverse will closely follow similar issues created by AI regulations already existing for the internet. That said, the metaverse brings new legal, regulatory, and technical issues that may not be addressed or even contemplated in existing legislation. Legislators in many jurisdictions are often playing “catch up” when it comes to regulating new technologies, and the arrival of the metaverse is no exception. 

We believe the forthcoming EU Artificial Intelligence Regulation (EU Regulation) is the most advanced legislation when it comes to regulating the use of AI in the metaverse. The EU Regulation identifies different levels of regulation depending on the perceived risks posed by various forms and uses of AI, including the use of AI technologies for biometric identification, education and training, or employment. With this, the overlap with data privacy requirements is evident. The EU Regulation includes future-proofing provisions and requires operators of AI systems to remain trustworthy even after they have been placed on the market.

The EU Regulation is likely the first of many steps globally. It is critical to monitor the development of such legislation and to design and operate AI systems used in the metaverse in accordance with new legislation.

We recommend all developers and providers of AI technologies operating in the metaverse establish a comprehensive AI risk-management program integrated within their business operations. The program should include an inventory of all AI systems used by the organization, a risk-classification system, risk-mitigation measures, independent audits, data-risk-management processes, and an AI governance structure. We can help you focus on compliance by design and to develop a framework to address relevant issues while remaining flexible to accommodate the differences in global legislation.

6. What should I know about negotiating technology and related services agreements in the metaverse?

By Jeff Harvey

Almost every monetizable aspect of the metaverse is derived from partnerships between technology companies building the virtual infrastructure and consumer brands and other companies using that virtual environment in novel ways to engage with their customers and clients. Our clients are exploring the metaverse for opportunities to use virtual environments to market and sell physical products and generally enhance their consumers’ experience and connection with their brand.

Our knowledge of this emerging technology and industry-leading experience in outsourcing, e-commerce, technology, and commercial contracting is broad. We are equipped to spot potential risks associated with metaverse-related commercial arrangements, draft the agreements and terms mitigating those risks, and assist our clients given those risks. We also work closely with our privacy and cybersecurity team to address risks in metaverse-related commercial contracts.

We generally recommend from the outset that our clients engage their business, marketing/branding, security, privacy, e-commerce, and legal teams to ensure that the client’s metaverse working group is able to present a comprehensive, seamless, and integrated solution that does not interfere with the customer experience. On the back end, the client team will need to ensure that it has appropriate vendor contracts in place to cover hosting, data collection/storage, e-commerce activities, branding, application and software development, and managed services agreements, as well as MaaS agreements to the extent that approach gains widespread acceptability, to ensure that each of these technologies is integrated into a single functioning environment. On the front end, the client team will need to consider terms of use, applicable privacy policies, and similar terms that currently apply to users engaging with companies (and others) online.

Because we are dedicated technology practitioners, our team is positioned to assist clients with these agreements and associated strategies.

7. Is there insurance coverage for digital assets?

By Syed Ahmad and Kevin Small

Insurance designed specifically for a consumer’s digital assets is currently quite limited. A notable example of this type of coverage is insurance for cryptocurrency. Breach Insurance, a crypto insurtech company, recently introduced two products to protect against the theft of digital wallets that hold cryptocurrency. According to its website, Breach Insurance provides up to $1 million in crypto coverage and covers 20 types of coins.

With that said, traditional insurance policies may provide coverage for some digital assets. In Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041, 2018 Ohio Misc. LEXIS 1953, at 3 (Ct. Com. Pl. Sep. 25, 2018), for example, the Ohio court found that virtual currency was covered property under a traditional property policy. Thus, while specific coverage for digital assets is only beginning to emerge, coverage may already be available under existing policies.    

Our insurance team is here to help you understand your policy; we have advised policyholders about traditional and emerging insurance products across many sectors of the economy, including financial services, technology, e-commerce, and more.

8. What labor and employment related concerns are there in the metaverse?

By Kevin White

Employers have begun using the metaverse, especially for training and collaboration, with all signs suggesting their reliance on the new technology will continue to grow. Use of the metaverse, however, brings with it challenges under typical HR policies and practices, in particular those prohibiting discrimination and harassment. Discriminatory practices and harassing behavior that may occur in the physical workplace can just as easily occur in the virtual one, but most employers will have to consider new policies and procedures for unique issues the metaverse presents. For example:

• What are the implications of an employee presenting themselves in the metaverse as a different race or gender than they do outside of the metaverse?
• What happens if an employee’s avatar inappropriately touches another employee’s avatar?
• What processes are in place for employees with vision, hearing, or mobility impairments to participate in the metaverse?
• What support is needed to ensure older workers who may not be comfortable with the technology are still included in meetings and able to collaborate with colleagues?
• What type of information is collected about employees when they are in the metaverse?

We can help employers considering the metaverse think through these issues and implement policies, procedures, and training to address them. 

9. What kinds of issues are being litigated related to the metaverse and NFTs?

By Torsten Kracht and Daniel Schultz

Metaverse-related litigation spans a wide range of practices, including IP, insurance recovery, and securities fraud. For example, as noted above, trademark disputes resulting from the unauthorized use of names, logos, and other identifiers of merchants in the metaverse are becoming common. Similarly, copyright infringement claims have risen due to the prolific misuse of NFTs and popular characters in AR/VR worlds. Patent infringement litigation among metaverse technologies—including AR/VR headsets, haptic feedback, and immersive tech—will likely increase as parties create and sell metaverse products.

In addition, with cryptocurrency theft and fraud resulting in over $1 billion lost since 2021, insurance litigation has also been frequent. Recovering losses can be confusing and intimidating, and many asset owners don’t even know if their holdings are insured. Insurance policies vary among exchanges: Coinbase provides a recovery policy for platform-wide breaches, but offers no coverage for unauthorized access to personal accounts. Some exchanges have different policies depending on how a consumer chooses to store their cryptocurrency, for example cold storage vs. hot storage.

Further, there are pending class actions against crypto providers and token creators. Securities fraud litigation is fairly common, often addressing fraudulent cryptocurrency companies or fraudulent conversion of a plaintiff’s assets into cryptocurrency.

Less common, but growing, is privacy litigation, with personal information, including facial geometry and other biometric information, being integrated into AR and VR experiences, often without user consent.

Finally, a small but interesting subset of metaverse litigation includes nuisance claims against blockchain miners: mining technology requires a lot of energy, which in turn requires a lot of noisy machines that bother neighbors.

As the metaverse continues to expand, we too are expanding our knowledge and expertise on these topics. For these practice areas and more, we will work with you to resolve your metaverse issues.
 

We hope this is a helpful “starter guide” on the metaverse and related legal issues. If you have additional questions or seek assistance in dealing with these or similar topics, please reach out to any of the authors of this alert or other lawyers in our metaverse practice.