Introduction
Digital worlds are transforming traditional social relationships by enabling users to live a “second life” in virtual reality, providing an escape from the real world. This shift from Web 2.0 social networks to Web 3.0 empowers users to create content actively, generating profit for businesses and platforms.
The Metaverse is an immersive 3D virtual world where users interact through avatars to create, buy, and trade digital property on decentralised platforms, blending their physical and virtual lives.
Non-Fungible Tokens (NFTs) are key to the concept of property in the Metaverse, enabling the trade of digital assets and emphasising the need for thoughtful regulation to address their market potential and related risks. Nevertheless, their rise also brings challenges in terms of intellectual property rights (IPRs), as the ownership and use of digital assets must be carefully managed to protect creators and prevent unauthorised replication.
This Insight explores how the intersection of virtual and real worlds raises complex legal issues around intellectual property (IP), focusing on how the replication and misuse of digital assets impact real-world IP rights.
The NFT Revolution in the Expanding Metaverse
NFTs are non-fungible crypto assets represented by cryptographic tokens. They can be defined as “a unit of data stored on a blockchain that certifies a digital asset to be unique and therefore not interchangeable, while offering a unique digital certificate of ownership for the NFT”.
They are unique and indivisible by nature, representing a wide range of assets, from digital certificates, artworks, and tickets to virtual real estate. Their uniqueness and authenticity are secured by the blockchain’s decentralised structure and peer-to-peer certification system, which ensures that each NFT is distinct and traceable.
This ability to tokenise and verify assets on the blockchain blurs the lines of traditional ownership, allowing both tangible and intangible items to be represented as digital assets. The conventional distinction between movable and immovable assets existing in the physical world is not applicable in the Metaverse; all assets exist digitally, enabling their seamless registration, transfer, and ownership within the virtual space. This effectively embeds a certificate of ownership and authenticity directly into the NFT’s code, allowing anyone to verify who created the asset and who currently “owns” the token.
NFTs’ value derives from their provable ownership and ability to be traded. This has transformed traditional property ownership by enabling users to acquire assets in the Metaverse. While NFTs have revolutionised ownership paradigms, they also present legal challenges that call for a balance between innovation and legal safeguards.
Metaverse Ownership Dynamics
I. Trading in the virtual realm revolves around regulating these exchanges, which brings up questions about ownership rights. The Metaverse’s unique challenges require adaptability and a rethinking of the legal framework. Traded goods are digital, requiring market adjustments. IPRs are used in this case because they create digital scarcity and verifiable ownership, establishing value and tradability from an economic perspective. Since these assets are not physical or tangible, the underlying question here is: what exactly do we own in the Metaverse?
NFTs play a huge role in the trading of goods in the Metaverse, providing certificates of ownership. The owner of an NFT essentially holds a licence to the intangible asset purchased, i.e., the exclusive right to control/possess that asset.
IP laws govern the ownership and use of intangible creations in both the physical world and the Metaverse. They distinguish between owning an item and holding the rights to its content. For example, purchasing a photograph gives you the physical copy, not the rights to reproduce it. Similarly, buying an NFT provides ownership of a digital asset, but not of the underlying IPR. NFTs do not constitute assets in themselves but are rather unique digital representations of those assets, mirroring how ownership and rights work in the real world as well as in the Metaverse.Additionally, this regime provides limited, non-exclusive control over intangible assets, unlike the full, exclusive control of traditional property rights.
Protection under IPR is time-bound, often relying on licensing for shared use rather than transferring full ownership. Enforcement is complex, particularly in copyright and trademark law, as rights holders act like “watchdogs”, constantly monitoring and addressing potential infringements. This task is especially challenging in the Metaverse given its decentralised and ever-changing environment.
II. To gain access to a Metaverse platform, the user must agree to the platform’s terms of service. This foundational agreement sets the framework for the user’s engagement within the virtual realm, establishing the rules and responsibilities that govern their interactions and activities within the Metaverse environment.
The contract entered into between the user and the company operating the Metaverse platform includes the recognition of the limited right to license the use of tokenised assets in the virtual world. In this sense, the company acts as the “sole legislator and judge”, within the limits of legal boundaries, establishing rules and terms for all users.
Challenges
I. In this discussion, we will focus on NFTs that represent digital assets. Not all NFTs are automatically protected by IP laws; the type of protection depends on the nature of the digital asset represented.
The Metaverse and NFTs have transformed the concept of property ownership, creating digital assets that exist in virtual worlds but have real-world legal implications. IPR plays a key role in this space, governing ownership of intangible elements like virtual assets. Cases such as Mango v. VEGAP and Hermès v. Rothschild highlight disputes over displaying copyrighted works and trademarks in the Metaverse.
The replication within the Metaverse of real-world objects protected by IP poses significant challenges. In Hermès v. Rothschild, the use of trademarked designs in NFTs raised questions on infringement and artistic expression. Similarly, Mango v. VEGAP demonstrated the need for clear boundaries on how copyrighted works can be digitised. These cases underscore the urgent need for regulations that address how IP rights are enforced in virtual spaces, ensuring that creators’ rights are protected while adapting to the unique nature of the Metaverse.
Furthermore, NFT transactions in the Metaverse transcend borders, allowing global interaction. However, this raises issues with determining applicable jurisdiction in the event of conflicts, complicating legal resolution.
II. Issues linked to investments in the virtual world itself can also arise. Since an NFT’s transaction history and ownership are stored in the blockchain, with the actual digital asset stored on other servers, users rely on its operability and security, but there is always the risk that these platforms will be subject to hacking or fraudulent practices.
The decentralised blockchain can be seen as both a blessing and a curse – it ensures secure property records, reducing fraud risk, but poses challenges for users who lose NFT wallet access, making it hard to prove ownership after phishing scams.
As for security problems, a solution can be found in the use of dynamic NFTs, a type of token that can change its metadata if unique smart contract requirements are met, thus combating the static nature of traditional NFTs that, once lost through fraud, become exceptionally hard to recuperate. Hence, with dynamic NFTs, platforms can safeguard users’ property from hacking and fraudulent practices.
III. Common concerns about NFTs in the Metaverse stem from unclear regulations. Jurisdictions must address this through judicial decisions and comprehensive legislation, collaborating with businesses to standardise transactions and ownership rights. This ex-ante regulation would enhance NFT usability by providing legal remedies, reducing Metaverse fragmentation, and ensuring uniform rules across platforms.
Conclusion
The rise of the Metaverse and NFTs has fundamentally transformed our understanding of digital ownership, introducing innovative ways to create, trade, and possess virtual assets. As users navigate this immersive landscape, they encounter both opportunities and significant legal challenges, particularly concerning IPR, jurisdictional complexities, and security issues.
The interplay between traditional ownership models and the unique characteristics of digital assets necessitates a robust regulatory framework that can adapt to the evolving nature of virtual interactions. Clear guidelines and comprehensive legislation are essential to protect creators’ rights while fostering a dynamic digital economy. As we continue to explore the potential of the Metaverse, it is imperative that stakeholders – including users, platforms, and lawmakers – collaborate to establish standards that enhance the usability and security of NFTs, ultimately ensuring a balanced ecosystem where innovation can thrive without compromising legal protections. The journey ahead will require ongoing dialogue and adaptation to harness the full market potential of this digital frontier.
