Understanding the metaverse and the key legal challenges 11 min read
The digital world is rapidly transforming. To stay ahead of the curve, businesses need to understand what's ahead, the coming changes and what these mean in practice. Our Digital Horizons series, aimed at keeping you up to date on the fast-changing technology trends shaping the future, will cover everything you need to know.
In this Insight, we break down the metaverse—what it is, the opportunities it presents, its recent trajectory up (and down) the hype cycle, and the key legal challenges facing the brave new (virtual) world.
- What is it? An emerging technology where people can immerse themselves in different virtual worlds and interact in real time. It's made possible by virtual reality (VR) and augmented reality (AR) technology, known together as extended reality (XR).
- Where is it headed? Despite a current retraction, the global metaverse market is expected to surge in coming years, and many key players are already engaging in M&A activity to improve their position. While the near future remains uncertain, core underlying technology to support the metaverse continues to develop.
- How might it affect your business? If you're looking to build or expand into the (or a) metaverse, you'll need to take action to protect your intellectual property, address privacy and data concerns, and manage cybersecurity risks.
- What does the legal landscape look like? In their current form, Australia's legal and regulatory frameworks will struggle to keep up with the new and emerging issues created by the use of AR and VR in the metaverse. The metaverse will make the area ripe for reform.
The concept of the metaverse flooded into public consciousness in late 2021 when tech giant Facebook Inc rebranded to Meta. Mark Zuckerberg called the metaverse the 'future of the internet' and announced large investments into building its metaverse offering. However, after a period of hype, the metaverse movement seems to be losing some steam (particularly in favour of generative AI). Notwithstanding this, the underlying technology and capability to deliver the metaverse continues to develop and improve.
At a high level, the 'metaverse' is a network of socially connected 3D virtual worlds where people can interact in real time, whether to work, socialise, shop or play. In practice, this means we're commonly seeing metaverses centred around a core operating model—like gaming, education, shopping or socialising. Each attracts a unique target market set of customers.
A number of metaverse platforms, including Decentraland and Meta Horizon Worlds, are already under development or operational, with distinct avatars, currencies, marketplaces and access options. As part of this, some metaverses also rely heavily on non-fungible cryptographic tokens (NFTs) as representations of virtual assets (which we explore more in our previous Insight).
In the uptake and implementation of NFTs and other crypto or digital assets, the metaverse intersects with the 'decentralisation' trend (sometimes dubbed the 'Web3' future). This focuses on the design of internet-based infrastructure, systems and protocols (including for the metaverse or metaverses) based on principles of decentralised control, rather than control by centralised entities. This is generally through the implementation of blockchain or distributed ledger technology, and applications and protocols built onto those networks—including smart contracts and decentralised autonomous organisations (or DAOs). In a future Digital Horizons update, we'll explore further how these issues are playing out.
If you're not already familiar with VR and AR, here is your chance to get up to speed. These core technologies are the driving force behind the metaverse, and they offer unique opportunities for businesses looking to explore virtual environments.
Simply put, VR involves a complete immersion in a computer-generated environment, using a VR headset. It's like stepping into a whole new world, with visuals and sounds that transport you far away from the real world. AR, on the other hand, overlays computer-generated imagery onto the real world. It's a more subtle approach, but one that offers its own unique possibilities. From face filters on social media apps, to capturing virtual Pokémon on Pokémon GO, AR can enhance and augment our experiences in exciting new ways. Apple stepped into the AR/VR market with the announcement of the release of its 'Visions Pro' headset, described as a 'spatial computer', which has a see-through headset with AR and VR capability. The involvement of such a major consumer technology goods player (the 'Apple effect') may itself prove a major accelerator for XR adoption.
Where it all started
The first prototypes of a 'metaverse' were created as early as 1994, with Sainsbury's trialling a VR supermarket in the UK. Following Meta's rebrand kicking off the new metaverse race, the tech giant (together with other key players, including Google, Microsoft and Shopify) has invested billions in the development of the metaverse, and ancillary products and services.
Where it's going
According to some projections, the global metaverse market is expected to soar from US$39.25 billion to nearly US$1 trillion in the period between 2022 and 2030.1 Meanwhile, the XR market is expected to earn US$3.12 billion in 2023, boasting an impressive annual growth rate of 13.72%.2
How it's getting there
To get on top of the trend and shore up their positions, key players are engaging in M&A activity to achieve economies of scale and grow their presence and capabilities.
Major deals in this space over the past couple of years have included:
|June 2021||Meta (then known as Facebook) acquired digital media company BigBox VR, a multiplayer VR game provider.|
|August 2021||Global platform Roblox acquired Guilded, a privately held communication and community management platform designed to connect gaming communities.|
|January 2022||Microsoft announced its intent to acquire Activision Blizzard, a major video game developer, for US$69b. The deal is currently making its way through global regulatory approval processes, but has encountered some (significant) hiccups.|
|March 2022||Universal Music Group acquired Bored Ape NFTs, marking the growth of a metaverse music group through purchasing a cartoon character to lead the band. Think 'The Gorillaz' in web-3 style.|
|June 2022||eBay acquired NFT marketplace KnownOrigin, which enables artists to create, buy and sell NFTs.|
|October 2022||Arogo Capital Acquisition Corporation acquired EON Reality, a key pioneer in AR, VR and the Knowledge Metaverse.|
|February 2023||Meta acquired Within, a VR fitness app developer, for an undisclosed amount.|
|March 2023||The Sandbox, a major metaverse platform owned by web-3 company Animoca Brands, announced a partnership with Ledger Enterprise, a crypto asset security company, to offer security integration for enterprise users of The Sandbox. These include Warner Music Group, Gucci, Ubisoft, Atari and Adidas.|
Metaverse-based gaming is already everywhere. From sport games, to role-playing games, puzzles and shooters, players can enjoy virtual worlds with immersive experiences. With in-game goods being traded as NFTs, players can earn real-world income from their virtual-world gaming sessions.
The industry expects virtual training and treatments to be delivered via the metaverse, revolutionising mental health services and international training collaboration in specialist areas.
Combat units within the Australian Defence Force are already utilising VR technologies to modernise tactical training and improve mission scenarios, without touching a weapon or stepping outside.
The UK Ministry of Defence is also supporting research into the metaverse, with the aim of reducing training costs and enhancing warfare training outcomes.
The metaverse could take 'online shopping' to a whole new level.
Customers will be able to explore shopping centres and shops in VR, using avatars to try on and purchase clothes in the metaverse, with physical items being shipped to customers' homes in the real world.
The arts industry has been a frontrunner in embracing NFTs and the metaverse, with successful virtual events such as Epic Games hosting live virtual concerts by artists including Ariana Grande and Travis Scott.
Real estate sales on the top ten metaverse platforms reached US$1.9 billion in 2022, and the market is expected to grow at a compound annual rate of 31% a year from 2022 to 2028.
3D virtual recreations of physical objects provide numerous opportunities, with a growing market for digital twin services, including to run simulations and testing, including with input from IOT devices in the real world.
Despite the attention it's garnered, rising inflation and interest rates (and competing demands and interest for other emerging technologies like generative AI) have tempered interest and investment in the metaverse and XR technologies.
For example, during Meta's February earnings call, CEO Mark Zuckerberg spoke about making 2023 the 'year of efficiency' for the company. Meta has since announced cuts to its planned metaverse spend, the value of virtual land has noticeably reduced, and regulators are starting to pay close attention to crypto assets which are often interacting with metaverse opportunities. We've also seen other indicators of slow down, such as Microsoft reducing its investment in VR and mixed reality.
Nevertheless, Australian businesses generally maintain a healthy appetite for XR technology —130 VR companies are currently in operation, with the hope of having a share in the $84 billion market anticipated by 2028. Hype cycles are typical in emerging technology areas, and it remains to be seen whether the metaverse is on a permanent decline, a simple slowing of pace or if it will still be the next big thing following a temporary dip. It may also be that, while technology continues to improve, investment and focus may crystallise around a few distinct applications and areas of technology crossover (including with generative AI).
While the metaverse offers exciting potential for immersive and engaging experiences, there is no reward without risk and there is no escaping legal challenges—even in a new virtual world. The potentially borderless nature of the metaverse adds to an already novel set of problems to consider. Staying on top of these issues as they emerge will be essential for businesses looking to take advantage of this new digital market. We outline some of the key things to consider below.
As the metaverse continues to gain popularity, intellectual property concerns are a growing issue. Businesses looking to expand their brands into the virtual world will need to take stock of their existing brand rights and consider whether additional protection may be required to accommodate such expansion. Cautionary tales already abound. In June 2021, a group of music publishers sued Roblox through the National Music Publishers’ Association (NMPA) for allegedly encouraging copyright infringement on a 'massive scale'.3 NMPA sought US$200 million and argued Roblox was profiting off copyrighted works without compensating the artists or publishers. Roblox denied the claims. It said it had implemented a filtering system to prevent copyrighted material from being used. The dispute ultimately settled, with the parties claiming the agreement 'sets the foundation for future partnerships with global publishers that will unlock new creative and commercial opportunities on its platform'.4 For more information on brand protection strategies in the metaverse, see our previous Insight.
The emergence of Metaverse, VR and AR applications has led to new forms of personal information being collected. For example, VR headsets can track a huge range of metrics, including eye movements, body motions and other sensitive biometric information. This data has the potential to reveal people's identities, medical conditions and mental states, and to include iris or retina scans, fingerprints and handprints, face geometry and voiceprints. Anonymising this data could prove challenging, and current privacy laws may struggle to address the novel issues created by AR/VR. Reforms are, no doubt, on the horizon.
Despite the glossy exterior (or, in some cases, not so glossy), the metaverse still runs on regular IT systems (particularly where the metaverse is managed by a single entity). That means it's just as susceptible to cyber attacks, and—factoring in the new sensitive information these technologies can collect—it compounds to create a data-breach perfect storm. Cybersecurity will be a key area to watch as the metaverse develops, and it will be essential for anyone entering this space to be aware of their cybersecurity obligations.
As more people spend an unprecedented amount of time in virtual environments for work, education and recreation, online safety risks become magnified. Instances of online harm range from recreations of the 2019 Christchurch mosque shooting being found multiple times on the Roblox platform and aimed at young children, to a Facebook employee being subjected to a racist tirade by an unidentifiable user while playing Rec Room.5 Now, more than ever, there is a growing awareness of the need for greater online safety regulation. The metaverse is no exception. The increasing regulatory interest in online safety in recent years will only continue to grow. Metaverse players will need to keep up.
Having an interoperable metaverse means allowing users to move freely between different virtual worlds without a loss in functionality or identity. Metaverse interoperability allows users to enjoy a more cohesive and connected experience when interacting in different virtual worlds and platforms. However, competing visions for the metaverse could give rise to competing metaverses, ultimately creating a barrier for the construction of a fully interoperable virtual world. This will create challenges of access, as well as competition.
Governments globally are taking concrete steps toward regulating crypto assets, including NFTs, which often underpin metaverse economies. The Australian Government is actively consulting on crypto-specific regulation, the European Union has implemented its comprehensive 'Markets in Crypto Assets' law (known as MiCA), and the US has stepped up enforcement action against a variety of crypto industry players. Metaverse platforms that rely on digital assets, tokenisation and decentralised protocols will need to face an ever-changing patchwork of global regulation.
As we explore the seemingly endless possibilities of virtual (and augmented) worlds, it is important to remember the novel challenges that come with them, and be prepared to grapple with them, in order to succeed. Whether the metaverse is truly the next big thing, or an over-hyped Silicon Valley fever dream, it is clear that the underpinning technology—and the legal issues it presents—are not going away.
Join us through our Digital Horizons series as we keep you updated on the latest emerging technologies to watch and help you stay ahead of the curve in the exciting world of the metaverse.