Mitigating risk for brands engaging with NFTs and the metaverse

Marcus Bagnall and India Atkin at Wiggin LLP outline the key legal and regulatory risks that businesses looking to exploit the metaverse need to address

 

Technologists have for decades dreamed of a metaverse, a virtual second life that integrates with and extends reality, a limitless digital world in which people can interact with others, join in immersive experiences and participate in a digital economy of goods and services not yet imagined.

 

Powering the metaverse will be a range of blockchain technologies creating digital assets such as NFTs, communities, user-generated content and a means of exchange greasing the wheels of an all-encompassing, cross-functional and interoperable virtual world.

 

For brands, this means tremendous opportunities to engage with and expand their consumer base with new digital products, services and experiences.

 

Brands are taking advantage of this and increasingly advertising their physical goods and services within these virtual worlds and developing new products and experiences offered exclusively in the metaverse. This trend is set to grow in the coming years with the metaverse projected to be a market opportunity valued at over $1 trillion dollars with participation by brands in virtually every sector.

 

Although the metaverse presents an attractive new frontier for brands, there are key legal and regulatory risks that brands must factor into their metaverse strategy. It is a fast-evolving space and regulators are watching market developments carefully to consider whether current rules are sufficient to provide protections, certainty and promote innovation while avoiding market failure, stranded investment and consumer harms.

 

The metaverse bandwagon – is it right for you?

Before entering the metaverse, brands should consider their overall commercial goal and intent. Nobody wants to give the impression of ‘jumping on the bandwagon’ and equally, brands won’t want to get caught in a dispute over the rights or value attributed to digital assets for lack of proper strategy and consideration.

 

Before engaging with the metaverse, brands must consider the entire ecosystem within which they’re venturing into – which blockchain, wallet providers, minting providers / NFT issuers, storage providers and trading marketplaces will be used?

 

When choosing a platform, ultimate consumer output and intention can play a large role in deciding how to best engage; consumers are more likely to respond to brand interactions containing novel experiences that add something to the space. Nike’s Nikeland on Roblox, for instance, is free to visit, breaking down a key barrier to accessing gaming content and encouraging greater engagement.

 

Equally, your brand’s intended audience should be a sensible fit for the participants in the relevant metaverse. For example, you should think twice about marketing alcohol products in a metaverse with a younger target audience.

 

Due diligence is key

When choosing digital assets to market in the metaverse, brands should conduct an intellectual property rights audit to understand what rights they can enforce and identify any gaps in their portfolios.

 

Key considerations lie in checking what IP rights you have in the digital assets associated with creating the NFT, and ensuring robust trade mark filings cover wider metaverse related goods / services vital for brand protection.  

 

The details, rights and obligations attached to an NFT is contained in the metadata. This includes important information such as token ID, the relevant smart contract address, a description or link to a file (e.g. artwork) and possibly even IP licence terms. Whether you include or link metadata with your NFT could affect the enforceability of the intended rights – while higher fees apply to larger files!

 

When choosing a metaverse, or indeed an NFT market, carefully review the relevant Terms of Service for legal risks, such as hair-trigger termination or deletion rights. You wouldn’t want to find your valuable digital land or asset metadata suddenly deleted because it’s “not compliant”.

 

Drafting strong Terms of Service that are properly incorporated into the user flow and carefully considering the nuances of the platform you’re using can help you ensure your digital assets remain protected. 

 

An evolving regulatory landscape

Lawmakers and regulators are carefully watching metaverse developments to consider whether current rules are sufficient to provide protections, certainty and promote innovation. New laws or regulations addressing activities in the metaverse are yet to be proposed while authorities adopt a ‘wait-and-see’ approach.

 

As such, cryptoassets such as NFTs still largely exist in a regulatory grey area. A patchwork of regulations apply to cryptoassets across different jurisdictions, which principally turn on the nature of the cryptoasset itself and any rights conveyed in them. A straightforward digital artwork NFT offering no particular rights to the token-holder is unlikely to be a regulated digital asset.

 

However, some cryptoassets grant rights that could be caught by financial services regulations, such as where the relevant token is considered a security. Additional obligations may also apply regarding anti-money laundering and know-your-customer obligations, restrictions against offering payment services, investment regulation and financial promotion controls. Financial regulation is a highly complex and rapidly evolving area, particularly in relation to cryptoassets like NFTs.

 

As with non-NFT games, businesses will also need to assess individual game mechanics from a gambling regulation perspective. This is particularly true for any games featuring “breeding” or similar mechanics.

 

Ad regulation in the metaverse

As well as financial regulation, when promoting a virtual experience, such as through metaverse events (e.g. Lil Nas in Roblox - see the video

), metaverse commerce (e.g. Dyson’s virtual hairstyle offering) or virtual influencers (e.g. LilMiquela), brands should be conscious of the blurring of commercial and non-commercial content so as to not conflict with advertising laws and regulation.

 

To mitigate against this risk, brands should be outlining where content in a virtual experience is entertainment, or where it’s an advertisement. The UK’s Committee of Advertising Practice has released a guide on the metaverse (titled “Things can only get Meta”) which touches upon the issues it expects to see for advertising regulation.

 

Brands are investing heavily to develop their presence in a space no longer limited by the physical world. As more and more brands enter the metaverse, the demand for online, virtual value grows, demonstrating that the potential for metaverse and NFT application has a theoretically limitless turnout.

 

While the opportunities and applications for brands in the metaverse are all fun and games, successful implementation lies in the careful consideration of the key legal regulation.

 

The breadth of potential metaverse activities presents challenges and opportunities to regulators seeking to enhance market trust, improve market operation through encouraging innovation, and prevent harm from occurring with new regulatory measures targeting the metaverse.

 

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Marcus Bagnal is a Partner at Wiggin LLP specialising in telecoms and technology. India Atkin is an Associate in the Interactive Entertainment Team

 

Main image courtesy of iStockPhoto.com