Reed Smith Guide to the

Metaverse – 2nd edition

August 2022
Contents

The metaverse and what it means for business .................................. 03

What is the metaverse? ....................................................................... 04
Glossary of terms ................................................................................ 10

Entertainment and media in the metaverse .................................... 19

Advertising ........................................................................................... 20
Games: An NFT-powered revolution? ................................................. 22
Games and metaverse issues ....................................................... 25
Music ................................................................................................... 28
Film and TV ......................................................................................... 36

Legal issues in the metaverse .......................................................... 39

Intellectual property ............................................................................. 40
Investing in the metaverse .................................................................. 48
Artificial intelligence ............................................................................. 52
Data protection and privacy ................................................................ 62
Content exploitation ............................................................................ 70
NFTs: Ownership in the metaverse – the birth of a new concept ....... 76
Is my NFT a security? .......................................................................... 82
The ultimate NFT? ............................................................................... 86
Investing in crypto ............................................................................... 87
Crypto and other digital assets ........................................................... 88
Europe ........................................................................................... 89
United States ................................................................................. 93
UAE ............................................................................................... 95
Deepfakes in the metaverse ................................................................ 98
Managing antitrust and competition risk ........................................... 100
Aviation in the metaverse: Breaking the reality barrier ...................... 104
Insurance issues in the metaverse .................................................... 108
The metaverse and what it
means for business

B
y nature, lawyers are curious creatures, who are always eager to learn and
react to new ways of doing things. The law is mostly precedential, built
on a foundation of prior experience. It is the result of centuries of human
transactions and behavior and the reactions and influence of governments and
lawmakers. The concept of a virtual, alternative world – a metaverse – then, is
naturally seductive to lawyers. It is a new world: an evolving, alternative digital
environment in which change can happen in the blink of an eye. Driven by the
dramatic evolutionary combination of technology, devices, and communication
networks, the metaverse offers human beings the opportunity to collaborate,
transact, perform, argue, and create as has never been seen before. Some would
argue that it enables our alternative selves as humans.
Since the first edition of our Guide to the Metaverse, for growth and creativity. Although the entertainment and
the use cases for the technologies that underpin these media sector is at the cutting edge of this phenomenon,
new online environments have developed significantly the rest of the commercial world is close behind: health
and, similarly, the regulations and body of law governing care, finance, energy, logistics, and even the more
them have evolved. Given the rate of change in this traditional manufacturing industries will soon be affected
area, deciphering the law pertaining to these virtual by what is happening in these new online environments.
environments and being able to guide, advise, and The consumer metaverse currently only affects a relatively
support companies and individuals who operate in small number of people; the enterprise metaverse will
them requires both a strong handle on centuries of affect us all.
legal precedent and minds that are open to adapting
and learning new legal skill sets. Since the first edition, In this updated edition, we cover the key developments
we have been involved in advising on many cutting- that have taken place in web3 in the last year, from the
edge applications of so-called web3 applications, development of new regulations to real-world examples
including disputes and metaverse curiosities, and we of the technologies in practice. We hope that this
have been helping companies develop their own virtual overview will be of use and practical application to those
environments. We have also been interpreting laws who are curious, as we are, about what the metaverse
that are not intended for virtual personalities, creating can become.
contracts pertaining to artificial intelligence applications
that generate art and other products, and working with
avatars that are loved by millions of real people.

Our team at Reed Smith enjoys the benefit of one of the

longest histories of any law firm; we have been leading
advisers in the media sector for more than 100 years.
While we are never arrogant enough to think that we can
enjoy another 100 years at the forefront, we are excited
Gregor Pryor Stephen E. Sessa
to engage with and advise our clients during what is Partner Partner
undoubtedly the biggest industrial revolution the world London Century City
has ever seen. The next advent of the metaverse and [email protected] [email protected]
decentralized features of what is becoming known as
Web 3.0 (or “web3,” depending on whether you are a
fan of Elon Musk or not) offers tremendous opportunities Guide to the Metaverse – 2nd edition Reed Smith 03
What is the
metaverse?
 What is the metaverse?

T
he word itself means “beyond the universe,” but what exactly is the
metaverse? One way to describe it is the increasing permeability of the
borders between different digital environments and the physical world.
The metaverse is a space where you can interact with virtual objects in real
life and with real-time information.

Adopting this literal approach to the metaverse means A less literal but no less relevant approach to
it is a combination of three elements. First, it is a understanding the metaverse is the application of real-
technology that enables digital content to be laid over world characteristics to a purely online environment. In
the real world. This is similar to augmented reality the same way that digital content can be applied to the
(AR). A simple example is the popular smartphone real world, a metaverse environment can apply real-
game, Pokémon Go, although, in the next iteration of a world features to a virtual environment. For example,
metaverse, this technology would be enhanced. Digital players interacting in a virtual gaming environment can
content is combined with the real world. Second, the walk around a virtual London or New York, seeing digital
metaverse applies a hardware device that enables the depictions of real-life streets and buildings. They can visit
real world to be interactive. Digital content is applied a virtual Apple store to browse and buy digital depictions
so that users can control the content displayed virtually of Apple products that can be delivered, in real life,
and interact with it within a real-life space. Third, it is to their actual physical homes. In many respects, this
information about anything and everything in the physical would be only an extension of what we know today as
world (for instance, an area, a shop, or a product) and traditional e-commerce. However, as visual technology
knowledge about the user (such as the user’s schedule, and design capability evolve, brands can create
location, habits, and interests). This information will be metaverse environments that not only replicate a real-life
obtained from the internet and from machines learning experience but improve it. There may be no line outside
about a user’s everyday actions. A simple example of the virtual Manhattan Apple store when a new product is
a device learning based on a user’s everyday activities launched.
is Siri (on iOS) and Alexa (on Amazon). Real-time
information is obtained instantly and virtually through The idea of replicating real-life environments in the virtual
the device into the physical space to optimize a user’s world is not at all new. After all, Second Life still exists.
experience, while in the background, data is collated and However, modern-day gaming environments have moved
applied. the metaverse far beyond the clunky, socially awkward,
and often avatar-limited 3D block worlds prevalent at
the turn of the century into entirely new, ever-evolving
creative online habitats. Virtual platforms like The
Sandbox, Illuvium, or Decentraland, which offer innovative
opportunities to build, create, trade, and explore while
engaging with users from all around the world, have been
at the forefront of the metaverse movement.

Guide to the Metaverse – 2nd edition Reed Smith 05

What is the metaverse?

How does the metaverse work? What are the commercial applications of the
metaverse, and who will benefit from it?
It is usually necessary to use a device to connect a user
to the metaverse. This device might be a pair of goggles, The metaverse will alter the way we act, socialize, work,
a head-mounted apparatus with a camera feature, or and live our lives. Just some of the potential commercial
a new invention we have yet to see. Such devices are applications are discussed here, but there are business
not critical to engaging with the metaverse, but they can opportunities for participants in every sector, from
definitely amplify the experience. “Wearing” a device consumer-driven industries, such as retail and events, to
connects the user to the metaverse by integrating all manufacturing, construction, and beyond.
of the elements and displaying the interactable virtual
objects in real life. The interaction means that the user is The impressive opportunities and capabilities of the new
able to react to the virtual objects; everything is displayed technologies attract both consumers and tech giants,
in real time, in front of them, in the physical world. such as Roblox, Microsoft, and Nvidia. Meta (formerly
Facebook) has also embraced virtual reality (VR) and
While such an advanced reality may be disconcerting, augmented reality (AR) to create its own digital space, the
its fundamental elements are already widely adopted so-called “metaverse,” where people can get together,
through mobile technology. Your smartphone knows learn, work, play games, shop, and even do business in a
you; it knows where you are and when. While the visual virtual environment. Following the pioneering introduction
interfaces may change over time, the underlying capability of its AR glasses nearly a decade ago, Google has
needed to combine the physical and virtual worlds has also been investing heavily in metaverse projects. The
existed for over a decade. investment made by such businesses is no surprise when
it has been estimated by PwC that VR and AR could
In the purely online world, the metaverse works by
deliver a $1.5 trillion boost to the global economy by
offering an escape from reality. However, there has been
2030.
a significant shift in recent years toward the introduction
of real-life elements into this escapist paradigm. Want We have also seen a range of music businesses seeking
to watch a movie within Roblox? Want to buy some to make their mark in the metaverse. Leading the way
sneakers while playing Grand Theft Auto? Want to see in innovation among major labels is Universal Music
the latest live performance by a K-pop band on TikTok? It Group with its web3 label “10:22PM,” which formed the
is this migration of commerce and interaction online and metaverse boyband Kingship, comprised of “Bored Ape
into virtual environments, and the increasing confluence Yacht Club” NFT characters. In a similar vein, Warner
between virtual and physical worlds, that drives the Music Group has partnered with The Sandbox to create
metaverse. a music-themed world, called WMG LAND, within the
gaming platform. And let’s not forget the inimitable FN
Meka, created by Anthony Martini and Factory New. FN
Meka is a virtual rapper and influencer with more than 10
million TikTok followers.

On the consumer side, there is a growing appetite to

shop online while socializing, which may prompt major
retailers to enter the metaverse. In March 2022, we
even saw the first Metaverse Fashion Week, which was
hosted in Decentraland. Avatars will also be an important
element of the metaverse experience, as they will express
users’ identities and represent who they are in the virtual
world.

06 Reed Smith Guide to the Metaverse – 2nd edition

 What is the metaverse?

The increased connectivity provided by the metaverse as Spice DAO, a decentralized autonomous organization
means that goods will be more accessible, and (DAO) that won an auction at $3 million to buy a
businesses will be able to sell their goods worldwide manuscript of Alejandro Jodorowsky’s failed adaptation
regardless of the geographic location of their stores. User of Frank Herbert’s novel “Dune.” The DAO had plans
engagement will also be higher, which is likely to have a to digitize and sell the book as NFTs, as well as other
positive commercial impact if used properly. derivative projects, before being confronted with the
reality that it would need permission to do so from the
Businesses can already sell VR accessories and services rights holders. This explosion of interest in ensuring that
in the metaverse, much as they can in everyday life. real-world laws are effectively translated into the virtual
NFTs and cryptocurrencies have been at the center world will continue to challenge lawyers and lawmakers
of metaverse technology, enabling users to trade and for years to come.
invest. Users are now able to purchase anything from a
digital artwork NFT to a parcel of land or real estate in the
metaverse. Who is building the metaverse?

The metaverse has also had a huge impact on Perhaps one of the biggest business use cases of the
revolutionizing gaming and the way we socialize through metaverse today is found in the gaming industry.
games. For example, fans from across the globe are now Take Roblox as just one example. The gaming company,
able to participate in e-sports and gaming tournaments, which went public in March 2021, set out, in part, in its
like the EA Sports FIFA 22 Champions Cup. prospectus its vision for the company and the adoption
Ultimately, consumers will gain most from the metaverse of the metaverse. The goal for Roblox – as computing
as information, products, entertainment, and social power, high-bandwidth internet connections, and human
experiences are enhanced and more accessible. interface technologies improve – is to create a pervasive
human co-experience platform that allows users to
Hardware technology companies and software connect, learn, play, and work together (and even to build
development companies will dominate the technology an economy based on its own currency, Robux). This is
market. The demand to provide hardware and software arguably the next iteration of Linden Lab (the creators of
for the metaverse will drastically increase. Businesses Second Life), which also created its own currency and
will have the opportunity to create their own place in which at one time had a gross domestic product bigger
the metaverse. Brands and celebrities will have more than that of some small countries. It is no surprise, then,
exposure to wider audiences. The capability to offer that many other big names in the gaming industry are
richer, more targeted commercial promotions and also investing heavily in their metaverse presence.
experiences to consumers will increase.

And finally, how could we forget that there will also be a

need for legal advice due to the uncertainty of the law
and regulations around the metaverse? As we write,
there is huge demand for advice in areas such as data
protection, privacy, and advertising regulations – to
ensure that commercial enterprise intellectual property
assets are protected as the virtual and real worlds
converge. Businesses will be keen to understand both
the opportunities and the risks posed by the metaverse
and to avoid the costly mistakes made by others, such

Guide to the Metaverse – 2nd edition Reed Smith 07

What is the metaverse?

User experience in this context is just one component. Authors

As alluded to above, the word “metaverse” is derived
from the prefix “meta” (meaning beyond) and the stem
“verse” (meaning the universe). For the proposition of the
metaverse to reach its true potential, critics agree that
a number of key attributes must exist, including being
persistent; able to provide live, synchronous experiences; Olga Kacprzak
interoperable; and value-creating. Although it is a point Trainee Solicitor
of debate, this means that the metaverse is unlikely to London
have a single entity building or operating it. Instead, [email protected]
many stakeholders (individuals, commercial enterprises,
governments, etc.) will contribute to its existence – much
like the real world.

This makes sense. The metaverse, as with the present-

day internet, demands and creates opportunities for Arabella Murrison
new technologies, products, service providers, content Trainee Solicitor
creators, standards and protocols, rules and regulations, London
and more, which in turn requires a community of [email protected]
stakeholders to build.

There is no general consensus on how the metaverse

will definitely work in the future, nor who will build it or
who will “own” it (if anyone). But what can generally be
agreed upon is that it will exist and is no longer just a Heather Stweart
science-fiction concept. Watch this space, but don’t hold Trainee Solicitor
your breath for a big bang. As we know from tracking London
developments over the last year, the metaverse will [email protected]
develop iteratively over time as capabilities evolve and
synergies are established. Five years ago, the metaverse
was for geeks only. In five years’ time, it will be for
everyone.

08 Reed Smith Guide to the Metaverse – 2nd edition

Glossary of terms

Advertising technology (AdTech)

An umbrella term describing the tools that brands,
agencies, publishers and platforms use to target,
measure and analyze digital advertising efforts.

Airdrop
A marketing practice involving the unsolicited
transfer of coins or tokens to numerous wallet
addresses.

American Federation of Musicians

(AFofM)
A labor union that represents professional
instrumental musicians in the United States and Avatar
Canada.
An icon or figure representing an individual in a
virtual setting.
Anti-money laundering/combating the
financing of terrorism (AML/CFT) Binance Smart Chain
Measures to prevent criminals and terrorists from
A blockchain network built for running smart,
abusing the financial system.
contract-based applications.

Artificial intelligence (AI)

Machines’ ability to simulate human intelligence
through their programming.

Augmented reality (AR)

Enhancement of the real physical world aided by the
use of technological devices to create an interactive
environment.

Bitcoin (BTC)
A form of digital currency that is recorded on a
blockchain and is transferrable on a decentralized
peer-to-peer network.
10 Reed Smith Guide to the Metaverse – 2nd edition
 Glossary of terms

Blockchain Cryptocurrency
A distributed database or ledger comprised of A digital or virtual currency that is stored on a
“blocks,” which record transactions and are securely blockchain and uses cryptography as a means of
linked using cryptography. security. A key characteristic of cryptocurrency is that
it is not governed by a central authority – examples
Collective bargaining agreements include Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

Agreements between an employer and a union Crypto token

representing employees, such as SAG-AFTRA or
AFofM. A cryptocurrency that runs on top of another
cryptocurrency’s native blockchain. Cryptocurrencies
Consumer protection with their own blockchain are normally referred to
as “crypto coins,” so this term has become a way
The protection of the public from the risks that arise to refer to cryptocurrencies other than Bitcoin or
when purchasing goods and services. Consumer Ethereum.
protection legislation governs the relationships
between individual consumers and businesses and Cyberworld
covers areas such as product liability, privacy rights,
fraud, misrepresentation and other unfair practices. The world of inter-computer communication; a real or
virtual world of information in cyberspace.
Creator/creator economy
Decentralized autonomous organization
A software-facilitated economy that allows creators
(DAO)
to earn revenue from their creations, mainly on
social media platforms. An organization controlled by its members following
rules encoded as a computer program, that is
Crypto-asset characterized as being transparent, with rules that
are not permission based and without influence from
A cryptographically secured digital representation central government.
of value or contractual rights that uses some type
of distributed ledger technology (DLT) and can
Decentralized finance (DeFi)
be transferred, stored or traded electronically.
Cryptocurrencies, utility coins, security tokens and Peer-to-peer financial services based on secure
stablecoins are different types of crypto-assets. distributed ledgers similar to those used by
cryptocurrencies, which work by removing
intermediaries such as exchanges or banks.

Guide to the Metaverse – 2nd edition Reed Smith 11

Glossary of terms

Distributed ledger technology (DLT)

A digital system that enables the registration and
validation of transactions on a decentralized network
in multiple places simultaneously.

Ether (ETH)
The transactional token that facilitates activity on
the Ethereum network and is similar in operation
to cryptocurrencies, such as Bitcoin, but includes
additional functionalities.

Deepfakes
Content resulting from the manipulation or generation
of audio-visual media by AI, often a video or sound
recording that replaces someone’s face or voice with
that of someone else.

Digital assets
Digital representations of various virtual or real-world Ethereum
assets that can be owned and transferred virtually –
examples include cryptocurrencies, stablecoins and A decentralized platform powered by blockchain
NFTs. technology, most commonly known for its native
token, Ether (ETH).
Digital Millennium Copyright Act (DMCA)
EU Financial Supervisory Law
A U.S. copyright law that implements two 1996
treaties of the World Intellectual Property Organization A framework according to which a multilayered
(WIPO). system of EU prudential authorities monitors systemic
risks and aims to ensure consistent and coherent
financial supervision in the EU.

12 Reed Smith Guide to the Metaverse – 2nd edition

 Glossary of terms

EU taxonomy Fair use

A tool to help investors understand whether an Under U.S. copyright law, an exception that permits
economic activity is environmentally sustainable limited use of copyright-protected material without
and meets international standards and policy requiring permission from the rights holder.
commitments.
Fear, uncertainty and doubt (FUD)
A particular mindset within the crypto world that is
pessimistic in nature when it comes to a certain asset
or market.

Financial Action Task Force (FATF)

An intergovernmental organization combating money
laundering and terrorism financing.

Financial instruments
eVTOL A real or virtual document that can be created,
modified, purchased, traded or settled for,
Electric vertical takeoff and landing aircraft. representing a legal agreement involving any kind of
monetary value.
Extended reality (XR)
An umbrella term for computer-generated Financial services
environments merging physical and virtual worlds. Professional services involving the investment, lending
and management of money and other assets.
Fair, reasonable and non-
discriminatory (FRAND) terms Fractionalization
A voluntary licensing commitment that standards The ability to divide a blockchain token into smaller
organizations often request from the owner of an fractions, enabling it to be owned by different people.
intellectual property right (usually a patent) that is,
or may become, essential to practice a technical
standard.
GameFi
A game finance platform servicing blockchain games,
investors and traders.

Guide to the Metaverse – 2nd edition Reed Smith 13

Glossary of terms

Gas Influencer
The fee, or pricing value, required to successfully A person with the ability to influence potential buyers
conduct a transaction or execute a contract on the by promoting or recommending products or services
Ethereum platform. on social media.

General Data Protection Regulation Ingestion

(GDPR)
The process of importing data from a source to a
The primary piece of legislation relating to target site for storage and analysis.
data protection and privacy in the EU and also
implemented in the UK. It came into force in May Initial coin offering (ICO)
2018.
An unregulated means to raise money for a venture to
create a new coin, token, app, or service.
German Financial Supervisory Law
A framework according to which the operations of Intellectual property (IP)
banks and financial service providers are supervised
in Germany, and which covers aspects such as Intangible property rights that are a result of intellectual
whether those institutions have adequate capital effort. Intellectual property rights include patents,
and liquidity and whether they have established trademarks, designs and copyrights.
appropriate risk control mechanisms.
Interoperability
Hold on for dear life (HODL)
The ability for different computer software systems to
A mantra among crypto enthusiasts denoting a exchange information, communicate with one another
long-term approach to cryptocurrency investing. and “understand” the information being transferred.

Initial DEX offering (IDO) Layer 1

An alternative to ICO, involving launching a project A base blockchain network, such as Ethereum, and
through a decentralized liquidity exchange. its underlying infrastructure, which can validate and
finalize transactions without the need for another
network.
Initial exchange offering (IEO)
Similar to IDO, except that a project is launched on Layer 2
a centralized exchange.
A secondary framework or protocol that is built on
top of an existing blockchain system, whose main
objective is to solve the transaction speed and scaling
difficulties.

14 Reed Smith Guide to the Metaverse – 2nd edition

 Glossary of terms

Machine learning Permissionless (network)

A branch of AI and computer science that focuses on An open network whereby nobody is denied access
the use of data and algorithms to imitate the way that or the ability to verify the network.
humans learn.
Personal data
Markets in Crypto-assets (MiCA)
Defined in the GDPR and under other international
Regulation
privacy legislation to cover information relating to an
A proposed European regulatory framework, published identified or identifiable living individual – examples
by the European Commission in September 2020, that include: a name, an identification number, location
will apply to providers of crypto-asset services and data, or one or more factors relating to that person’s
issuers of crypto-assets. physical, physiological, genetic, mental, economic,
cultural or social identity.
Mining
Play to earn (P2E)
The process by which new coins are verified and enter
into circulation. “Miners” attempt to solve a puzzle, A class of games and virtual worlds where gamers
known as the PoW, with the successful miner being play for crypto token rewards.
rewarded with an amount of cyptocurrency.
Private sale
Modding
The process of selling an asset or service whereby
The act of making changes to software or hardware in the deal is privately negotiated directly between the
order to create own versions. seller and buyer, without recourse to an auction
process.
Non-fungible token (NFT)
Proof of stake (PoS)
A unit of information recorded on a blockchain about a
good or service that is not interchangeable. A consensus mechanism used to confirm and verify
new transactions on a blockchain. Cryptocurrency
owners can pledge coins and be granted permission
Open (network) to authorize new blocks. It is a more energy-efficient
A network that is constructed on open standard, which alternative to the PoW consensus mechanism
means it can be developed by anyone and everyone and is used by the Cardano and Ethereum 2.0
and accessed by anyone and everyone. blockchains.

Patent
An intellectual property right that permits the inventor to
stop third parties from using an invention.

Guide to the Metaverse – 2nd edition Reed Smith 15

Glossary of terms

Proof of work (PoW) Screen Actors Guild – American

Federation of Television and Radio
The original consensus mechanism used to confirm
and verify new transactions on a blockchain. Artists (SAG-AFTRA)
Originating from Bitcoin, and used by Ethereum A labor union representing actors, journalists,
1.0 among others, the purpose of the PoW is to dancers, DJs, news writers, recording artists and
prevent bad actors from infiltrating the network. It is singers in the United States.
achieved through the process of mining.

Security tokens
Protocol
Tokens deriving their value from other assets, both
A set of rules, or code, that enables data to be physical and digital, that can be traded and are
shared between computers. It is used to govern subject to security regulations like those enforced
how blockchain technology functions – examples by the U.S. Securities and Exchange Commission.
include the Hyperledger, Corda, Quorum and
MultiChain protocols.
Security token offering (STO)
Public sale A type of public offering of a unique digital token
that represents an external asset using blockchain
The process of selling an asset or service whereby technology. STOs are a way of raising funding and
the asset or service is launched in the market and is are regulated like securities.
made available to all customers for purchase.

Shallowfakes
Sats
A method of manipulating media content utilizing
Short for Satoshis, the smallest unit of Bitcoin. simple video editing software rather than AI or
One Satoshi is equal to 0.00000001 Bitcoins (one algorithms.
hundred millionth of a Bitcoin).

Smart contract
Satoshi test
A self-executing contract that exists in a
A method of verification in which “Satoshi,” the blockchain network, with terms written in code.
smallest unit of Bitcoin (0.00000001 BTC), is sent
to the VASP to verify the transaction and wallet
ownership. Stablecoin
A digital currency that minimizes volatility as it
is pegged to another currency, commodity or
financial instrument such as the U.S. dollar or price
of gold.

16 Reed Smith Guide to the Metaverse – 2nd edition

 Glossary of terms

Staking Utility coin

The process of “locking up” cryptocurrency. In A token typically providing holders with the ability to
exchange users may earn rewards or passive access, via an encrypted key, a particular blockchain
income. It is used in the “proof of stake” consensus or network for purposes of accessing certain benefits
mechanism to authenticate blockchain transactions. or functionality on that blockchain or platform. Utility
tokens are typically not intended for use as a currency
Trademark or means of payment.

A word, phrase, slogan, design or logo that operates Vertiport

as an indicator of source for goods or services.
A takeoff and landing facility for eVTOL aircraft (similar
Trustless (networks) to an airport but on a much smaller scale).

A network whereby users can trust the information Virtual asset service provider (VASP)
presented to them without the verification by a third
party. This is because there are mechanisms in place A crypto exchange or platform used to transfer
to ensure information is verified by users within the cryptocurrency in the market.
network.

TRON
A blockchain-based operating system with smart
contract functionality.

Unhosted wallet
A type of self-custody wallet that lets users keep their
cryptocurrency balances independent of exchanges
or third parties.

United States Patent and Trademark Virtual reality (VR)

Office (USPTO) The use of computer modeling and simulation to
enable interaction with an artificial, three-dimensional
An agency in the U.S. Department of Commerce that (3-D) visual or other sensory environment.
serves as the national patent office and trademark
registration authority.

Guide to the Metaverse – 2nd edition Reed Smith 17

Glossary of terms

Wallet Whale
A secure location, stored on a blockchain, where a user A term used to refer to the owner (whether an individual
keeps their public or private keys and passwords. The or an entity) of a large amount of cryptocurrency who,
two main types are: hot wallets, which are connected because of this capital, is able to influence markets up
to the internet, and cold wallets, which are kept offline. or down by buying or selling.

Web3 Wrapped Ether (WETH)

A decentralized internet built on distributed The wrapped version of Ether. Wrapped tokens like
technologies like blockchain and decentralized WETH are tokenized versions of cryptocurrencies that
autonomous organizations (DAO) rather than are pegged to the value of the original coin and can be
centralized on servers owned by individuals or unwrapped at any point.
corporations. Why is it called web3? Because it’s
thought that it will be the third major evolution of the Zero knowledge proof
internet, after the World Wide Web (web1) and the
user-generated web (web2, or social media). A cryptographic method used to protect information,
in which the information revealed during a transaction
White paper is limited to that which is necessary to prove that a
statement is true.
A document released by developers that explains the
technology and purpose of the project they are working
on. The document tells prospective investors how
the cryptocurrency was conceived and highlights its
purpose.

18 Reed Smith Guide to the Metaverse – 2nd edition

Entertainment
and media
in the metaverse

Guide to the Metaverse – 2nd edition Reed Smith 19

Advertising

V
irtual worlds – each with their own culture, where consumers can adopt a
different persona with behaviors and purchasing patterns that do not align
with their real-world habits – provide a challenge and an opportunity to
brands looking to engage in the space. The metaverse is providing an additional
touchstone for developing relationships with consumers through advertising
within the metaverse (think virtual billboards) from sponsorship opportunities
for a virtual “bar” during a Super Bowl or virtual fashion weeks, to integrations
within and creation of games (for example, Gucci x Roblox “Gucci Garden”
digital multimedia experience). Done well, these direct-to-avatar (D2A) marketing
opportunities can lead to digital and real-world purchases and brand loyalty.

Over the last year, brands have continued to take steps James has started trademarking a number of names for
into the metaverse and integrate NFTs into their marketing downloadable NFTs to create footwear and athleticwear
strategies. meta merch. Per the trademark filings, LeBron will be
hosting events in the metaverse, connecting users to all
Brand- or celeb-themed artwork, memorabilia, or other things LeBron James, including virtual basketball gyms
assets. Brands have been integrating NFTs into various and recreational facilities.
celebrity collaborations and promotions, including selling
unique brand-themed assets. Brands are also combining the popularity of the
metaverse and NFTs to showcase their fashion and
Brands are buying and acquiring companies that history. Louis Vuitton released new NFTs in its stand-
are already in the metaverse space. For example, In alone mobile app game Louis: The Game, where users
December 2021, Nike acquired the NFT studio RTKFT, can dress up the brand-inspired avatar and learn about
which produces NFT collectibles including digital the brand’s 200-year history.
sneakers. Coca-Cola teamed up with 3D creators at Tafi
to auction off NFT loot boxes, which contained dynamic Charitable giving. Brands are also entering the metaverse
and rare Coke-branded NFTs, a friendship card, a vintage and using NFTs to support good charitable causes.
Coke cooler, and more hidden NFT surprises. The sales Adidas and Prada collaborated with Zach Lieberman,
for this auction exceeded $1 million, with the goal of a digital artist, to create NFTs that feature community-
blending young audiences, brand nostalgia, and cutting- sourced artwork submitted by consumers. The final
edge technology. NFT will be sold at an auction with the majority of the
proceeds going to Slow Factory, a non-profit organization
Celebrities like LeBron James, Paris Hilton, and Snoop that seeks to address climate concerns and social
Dogg all created celebrity-themed NFT artwork. Snoop inequities. Kith and Invisible Friends partnered to create
Dogg released his NFT collection “A Journey with the distinctive Invisible Friends NFT characters dressed in
Dogg,” which showcased his memories over the years. custom Kith clothing, with the proceeds going to Kings
The NFT drop lasted only 48 hours, with the NFTs selling Against Violence Initiative, a Brooklyn nonprofit whose
for hundreds of thousands of dollars. Similarly, Paris mission is to tackle violence against young people in
Hilton has created over 100 NFT pieces in her collection NYC.
and has hosted a metaverse party on Roblox. LeBron

20 Reed Smith Guide to the Metaverse – 2nd edition

 Advertising

Brand collaborations. Brands are collaborating together Authors

to blend each of their audiences in the metaverse. Roblox
and Gucci partnered to create Gucci Garden, a digital
immersive multimedia experience on Roblox. The fashion
installation experience lasted two weeks on the platform.
Similarly, in late 2021, Balenciaga entered the metaverse
by collaborating with Epic Games, allowing Fortnite Stacy Marcus
players to wear limited-edition Balenciaga skins and Partner
outfits for avatars. The items were available to buy via an New York
in-game Fortnite currency. [email protected]

Promotions. There are numerous possibilities for NFTs

and promotional games. Star Atlas and The Sandbox
worked together to create a metaverse contest, which
could allow users to win spaceship NFTs. Further, a
brand could embed an NFT in every product it sells with Jason Gordon
some of them being a surprise and delight NFT, such as Partner
entry into a virtual concert or fashion show. Brands are Chicago
also exploring awarding NFTs as prizes in sweepstakes [email protected]
or other prize promotions. Professional sports teams are
looking at developing NFTs for their season ticket holders.

Virtual experiences. Virtual experiences have become

a mainstay of the metaverse. The first ever Metaverse
Fashion Week occurred in March 2022, which featured Keri Bruce
events from Brands like Tommy Hilfiger, Dolce & Partner
Gabbana, and DKNY. Over 100,000 people attended New York
the virtual event, which allowed consumers to buy digital [email protected]
fashion and receive a physical duplicate of the items
purchased. These virtual experiences work to mimic real
world events, like the Miller Lite Bar that aired a Super
Bowl ad in the metaverse. Miller Lite fans could watch the
Super Bowl ads while enjoying a virtual beer. Attendees
could also earn limited-edition cosmetic items, with Miller Emily R. Faro
Lite branding at the “bar,” all of which sold out in minutes. Associate
New York
Even stores like Lowe’s are working on implementing [email protected]
tools in the metaverse to allow their consumers to
visualize their projects virtually, which are based on real
products Lowe’s sells.

All of these digital world opportunities come with real-

world legal hurdles (discussed in detail below), ranging
from rights of publicity (see the Content exploitation Sara Mohammed
section), to intellectual property (see the Intellectual Associate
New York
property section), to SAG-AFTRA and other union [email protected]
obligations (see the Music and Content exploitation
sections).
Guide to the Metaverse – 2nd edition Reed Smith 21
Games: An NFT-powered revolution?

A
lot of what the metaverse looks like comes from the world of video games.
Second Life, the iconic game from Linden Lab, is arguably one of the
oldest metaverses on the internet. In future, you may enter games through
a headset and feel them through a haptic suit, but at their core, the experience of
entering a metaverse is likely to bear many resemblances to how players today
immerse themselves in Second Life, Roblox, Fortnite, or Minecraft.

On the other hand, web3 adds a far more disruptive The NFT opportunity
element to the picture: the inclusion of decentralized
technology, blockchain, and non-fungible tokens (NFTs). Video game makers are all looking at NFTs, and the topic
The world of crypto games is growing fast and is slowly leaves no one indifferent. Large companies like Ubisoft
spanning another sector altogether. have already taken the first step and are creating their
own proprietary line of NFTs to be used in their game
properties, while others, like Mojang, the studio behind
So, what will change? Minecraft recently decided to ban them from their game,
Web3 games are powered by blockchain technology and arguing that “NFTs can create models of scarcity and
decentralized governance regulated by smart contracts, exclusion that conflict with the Guidelines and the spirit of
allowing players to collect game-specific assets in Minecraft.”
the form of NFTs. Play-to-earn allows players to earn
For game makers, incorporating NFTs into their business
rewards in the form of NFTs, which can be exchanged
models has potential. NFTs can be sold to players in the
for cryptocurrencies that can be converted into fiat
same way other downloadable packs can: as a product
currency. One of the first “play-to-earn” games in the
sold from a store, where the initial sale includes a profit
cryptocurrency market to really gain traction was Axie
for the developer. But these tokens can be coded. And
Infinity. Axies are token-based creatures that players can
it has become a feature of NFT smart contracts to allow
collect, breed, nurture, battle, and trade.
each resale to automatically trigger a payment to the
Axie Infinity is a prominent example of how the business originator of the token – in this case, the game developer.
model behind video games is being re-invented by web3. The model allows game makers to monetize items again
Web2 games used to measure their success based on and again, using the prospect of future player-to-player
player engagement since the more time someone spends sales to generate an ongoing revenue stream.
in the game, the more likely they are to purchase in-
game assets. Web3 play-to-earn games add a financial
incentive to that time. NFT-based games promise to
make the labor of fun into compensated labor, and some
even claim that they are training the workers of the future
- as humanity moves closer to living and working in the
metaverse. In a play-to-earn model, the more players
play, the more money they earn. In Axie Infinity, the basic
cycle of gameplay works like this: completing levels
creates stronger Axies to win matches, which provides
players with tokens that allow Axies to “breed” and thus
create new Axies to be sold or used for play.

22 Reed Smith Guide to the Metaverse – 2nd edition

 Games: An NFT-powered revolution?

Play as labor Protecting and educating players

The lines between play and labor in video games have The incorporation of NFTs into games restricts access
long been blurred. For example, Eve Online, a massively to those players feeling savvy and confident using
popular multiplayer online game, is a 19-year-old complex, not-easy-to-understand, and volatile financial
game that is reliant on player labor to generate new instruments. Players of web3 games are therefore
items in the game and to keep the in-game economy exposed to financial risks. The safeguards, which may
flowing. Players of Eve Online lead and work on various well be needed to protect the most unsophisticated
spaceships, which can be optimized for either mining in- players from being manipulated or hacked (for example,
game resources or building specialized combat vessels. by approving trades they don’t understand), may come
Once enough materials are mined, they can be sold from finance regulation, but clearly call for consumer law
in a marketplace for real-world currency, and the raw regulation, too. The Axie hack earlier this year is indicative
materials can be crafted into new spaceships. of the risks built into the evolving nature of video
game marketplaces, and it demonstrates the need for
In many online games, players have to “do a job” to regulators to implement better monitoring and consumer
advance through the game world. But the “grind” of protection schemes.
doing repetitive or time-consuming in-game tasks
unlocks better characters, new levels, or skins rather than Perhaps in response to these risks, some video game
real-world money. “Playbor” is a term that was coined publishers are putting their own restrictions on the
by researchers to describe the behavior of engaging in ways in which games can incorporate cryptocurrencies.
ordinary play that also generates income, whether virtual Steam, the largest digital storefront for PC games,
or real. Whether players earning money from playing a made a stand by banning all blockchain games from its
game count as employees, contractors, or neither has platform and updating its policy documents to reflect the
created an unregulated space that will undoubtedly brush change, thus placing a huge barrier to wider adoption of
up against employment law in a near future. the technology in games. The co-founder of Valve, the
company behind Steam, cited the high volume of fraud
and scams being perpetrated through crypto-assets
like NFTs as the motivation for the ban. In contrast,
Epic, the publisher of Fortnite, has said it is open to
cryptocurrencies and NFTs in its game stores, but only if
they strictly adhere to reporting and tax laws.

Guide to the Metaverse – 2nd edition Reed Smith 23

 Games: An NFT-powered revolution?

Looking into the future It remains to be seen whether play-to-earn really does
become the future of gaming, and whether NFTs will be at
Multiple countries are starting to tax cryptocurrency the centre of it. Clearly, some players are attracted to the
transactions and have imposed due diligence and idea of unlocking “better” property rights for their in-game
know-your-customer rules on crypto exchanges. These assets, but for others, including parents of young players,
regulations are meant to make crypto-assets trade, safety and fun are values that may not be compromised.
including NFTs, “safer,” but as ever, implementing national As of today, web3 games seem far more likely to develop
rules to worldwide endeavors continues to cause major into their own new sub-sector than disrupt a flourishing
headaches to regulators and it may be a few years before and mainstream games industry.
we see the effect of these policies.

24 Reed Smith Guide to the Metaverse – 2nd edition

Games and metaverse issues

The infrastructure prerequisite. For the metaverse to Because video games can be seen as prototypes for
be an alternative to the real world, it’s going to have to the metaverse, it is impossible to escape the inherent
resemble it with almost complete verisimilitude. Luckily, limitations of that model when applied to a vision of
there is no need for governments to pour trillions of interoperability. In some ways, the NFT and related
dollars into this sort of infrastructure. The processor and tokenization issues are relatively more solvable than
graphics technologies have been incentivized by a red- those that relate to the underlying infrastructure of the
hot video games market for years, and today we inch metaverse. Do we have any more reason to believe that
closer and closer to absolute realism. Intellectual property the metaverse will resemble one planet on which all
and licensing issues will increasingly dominate the human life can love, hate, fight, reconcile, exploit, and
conversation as publishers and console manufacturers heal than we believe one gamer account (e.g., its crypto
design and build with those technologies. wallet) can be used across all games and all platforms?
It is the promise. The intellectual property and attendant
license are far more likely to result in multiple metaverses,

“Whether players
earning money from
playing a game
count as employees,
contractors, or
neither has created
an unregulated space
that will undoubtedly
brush up against
employment law in a
near future.”
Guide to the Metaverse – 2nd edition Reed Smith 25
Games and metaverse issues

divided at least by platform configurations if not also by In the UK, the Information Commissioner’s Office (ICO)
content, genres, and publishing rights. The profit incentive Age Appropriate Design Code, which became effective
that has ignited the development of the technology will in September 2021, focuses on the processing of
be the very reason the technology will form walls around personal data of children (up to the age of 18) and
competing worlds. In this sense, the video game model recommends certain default settings for services that are
for the metaverse foretells the limits that are baked into likely to appeal to children, including taking into account
the infrastructure that will form the metaverse. the best interests of children when designing any data
processing in services; providing a child-appropriate
There may be those who envision a metaverse that service to all users by default, with the option of an age
transcends the boundaries of jurisdiction and platform, verification mechanism to enable adults to opt out of
but they will run headlong into the reality of intellectual these safeguards; identifying the ages of children by using
property, antitrust, privacy regulation, and the capitalistic robust age-verification measures; providing all relevant
spirit that has powered the video game industry for privacy information, clearing terms, and community
decades. And, speaking of power, the infrastructure for standards by using age-appropriate design codes and
the metaverse is again going to bring with it questions appropriate content presentations that can be easily read
about the energy usage required to run the processors and understood by children; and prohibiting the use of
and graphics chips. Video games and the infrastructure data that is detrimental to children’s physical or mental
providers who pave the way for the next generation of health and well-being, or goes against industry codes
games and, perhaps, some version of the metaverse and government regulatory provisions.
again provide a useful guide. Energy usage and issues
surrounding sustainability and conservation will become In Germany, the Federal Protection of Young Persons
distinguishing factors for companies competing for Act (Jugendschutzgesetz - JuSchG), effective from May
adoption in games and platforms. With public opinion 2021, is aimed at the protection of children and young
on a global basis appearing to bend toward a joint goal persons against harm resulting from media use and to
of sustaining our planet, those seeking to drive the video ensure that media is only distributed or made available in
game experience toward complete immersion will likely accordance with the applicable age rating. This includes
need to consider how to be ecologically responsible media and other publications with, among other things,
(both in terms of energy usage and use of sustainable immoral and violent content; presentation in detail of acts
construction materials) rather than just create larger and of violence, murder, and massacre for their own purpose;
more voracious appetites for the Earth’s resources. or a recommendation of the “law of the jungle” as the
only proven tool by which to obtain supposed justice.
Human nature and the limits of moderation. Another
lesson from the online world of video games is that In the United States, the Child Protection and Sexual
unchecked, they can devolve into dangerous places. Predator Punishment Act (CPPA) and amendments via
The recent adoption of the Digital Services Act in Europe the Securing Adolescents From Exploitation-Online Act
has been hailed as the biggest change to internet laws in (SAFE) create several duties for online service providers,
a century – placing an onus on all streamers and user- including a duty to report evidence of apparent child
generated-games companies to protect their users, and exploitative activities of which the provider becomes
in particular children, from harassing, bullying and harmful aware. The penalty for knowingly and willfully failing
content. This EU initiative will complement other initiatives to report can result in an initial fine of $150,000 with
taken by other jurisdictions who are likely to be measured subsequent violations carrying a fine of $300,000.
against the new EU standard.

26 Reed Smith Guide to the Metaverse – 2nd edition

 Games and metaverse issues

The law provides a limitation of both civil and criminal Authors

liability for providers performing reporting or preservation
responsibilities under the statute. Beyond this specific
law that focuses on sexual predators who might be
engaged in criminal acts in a context such as a virtual
world, the U.S. Congress appears to have an appetite to
revisit section 230 of the Communications Decency Act. Sohie Goossens
Possible changes to section 230 could include incentives Partner
for online platforms to address illicit content and create London
exemptions for immunity in the areas of child abuse, [email protected]
terrorism, and cyber stalking.

The world of video games is increasingly being subjected

to governmental oversight to address online harms – at
least in the context of children and teens. We have also
seen signs in some countries that suggest a willingness Nick Breen
to push more liability onto platforms if their programmatic Partner
moderation mechanisms fail to moderate content that is London
deemed to be offensive or unlawful. The fact that dangers [email protected]
can present themselves in various interactive media
contexts, including interactive video games, and that
regulators in many countries have taken affirmative steps
to address them suggests that the metaverse would be
subject to similar considerations.
John Feldman
Yet, in the metaverse, it is unclear whether governments Partner
could reasonably seek to regulate or promote the sort Washington, D.C.
of moderation that they currently do in the context of [email protected]
video games. If the concept of “platform” becomes fully
decentralized, what liability could attach to a foreign
developer who does not impose anti-online harm
moderation? Would national regulators need to engage
in the virtual world, almost like Agent Smith in “The
Matrix?” The limitations of moderation in a decentralized
metaverse conception pose interesting questions about
the governance of the world we are building for our
children.

Guide to the Metaverse – 2nd edition Reed Smith 27

Music

A
s one of the first of the content industries to be heavily disrupted and
changed beyond recognition in the early days of the internet, in many
respects, the music industry has, since the turn of the century, been
one of the first to adopt change and new business models online.

When the possibility of performing and delivering live There have been many fantastic examples of this
music performances to large crowds disappeared almost innovative musical art form in recent years, but perhaps
overnight with the advent of the COVID-19 pandemic, the most striking and commercially successful was the
the music industry and, particularly, performing artists Travis Scott performance in the Fortnite video game. The
were forced to innovate and find new ways to reach traction and audience for this event were phenomenal,
their fans. Naturally, they started performing online. It is with Scott himself commenting: “It was an opportunity
worth noting at the outset of this discussion that online to go to the max, to create a world that permits won’t
livestreaming is not a new thing – the Rolling Stones were let you do, fire marshals won’t let you do, building codes
doing it in 1995, and many companies were delivering won’t let you do.” Little did he know that these comments
livestreams of musicians, including internet pioneers such would gain prescience after a tragedy at one of his
as AOL and Yahoo!, long before musicians started using concerts involving people in real life. Where Scott started,
platforms provided by modern players like Twitch and others followed; Future, Zara Larsson, Ariana Grande,
Facebook. and other superstars have pursued performances in
virtual environments.
Several defining characteristics distinguish this new form
of music consumption in the metaverse from traditional Aside from virtual events and NFTs (covered elsewhere
“vanilla” livestreaming or even subscription streaming: in this guide), another metaverse phenomenon affecting
the music sector has been the emergence of virtual
• A walled-garden platform environment “artists.” While the idea of engaging with a virtual artist,
created by artificial intelligence and not having a human
• The ability to build, style, and control, or just perform
personality, may be anathema to many true music fans,
in, a virtual venue
there is no denying that such artists are gaining huge
• The possibility of using an avatar or other visual traction among digital natives. We’ve already discussed
representation of the artist, sometimes comingled with FN Meka, described as a “robot rapper who is known for
a true video representation of the artist his extravagant style and Hypebeast aesthetics. He has
the appearance of a cyborg with green hair and eyes,
• New production capabilities, including manipulating lots of tattoos, and a hand made of gold.” While this may
the virtual environment and combining digital visual all seem to be a bit of harmless, somewhat futuristic fun,
production with the artist’s own musical production it has a foundation of serious commercial potential, as
FN Meka’s fanbase shows. As a means of comparison,
• The ability to interact with the audience in real time at the time of this guide, Chance the Rapper – often
• In some instances, the combination of more than one spotlighted as one of the new breed of superstar rappers
artist performing from a different location or virtual – has only two million TikTok followers compared to FN
venue Meka’s 10 million.

28 Reed Smith Guide to the Metaverse – 2nd edition

 Music

Is the metaverse an opportunity or a threat What are the legal issues for music in the
to music? metaverse?
As the prominent examples above demonstrate, the As always in music, the primary consideration when
metaverse can be an opportunity and a threat to music is created, performed, streamed, and exploited
the music industry. Certainly, as the production and online is rights clearances. Mostly, the traditional legal
experiential capabilities of technology continue to push and licensing rules applicable to online exploitation apply
boundaries and create new consumer experiences, equally in the metaverse. However, the proliferation of
artists who rely on old-style production techniques music, performance, and exploitation within new, closed,
and traditional channels to reach their audiences risk or even open online environments adds yet another
getting left behind. Some of the more one-dimensional potential layer of complexity to an already complex chain
approaches to the music industry – such as purely of rights in the music licensing process.
owning rights and monetizing through subscription
streaming channels – will quickly become commoditized To take an example, a digital music service provider (for
and mechanized to the extent that they don’t yield the instance, Spotify) could promote and host a live-streamed
profit margin to make them worthwhile. concert on a global games console platform (let’s say,
Sony PlayStation) during the interval of an eSports
Meanwhile, the commercial promise available to those tournament being held and promoted by a leading games
who are prepared to push the boundaries and use all of publisher (perhaps, Electronic Arts) working alongside
the available technology to engage and create is galactic. a famous brand (maybe, Nike). To attend the concert,
Even the biggest arena tours cannot accommodate a consumer would need to be a user of the gaming
anything close to the instant, one-time global platform and have purchased ticketed access to the
audiences that can be attracted to an online metaverse eSports tournament. However, the live-streamed concert
performance. The COVID-19 pandemic, which forced would only be available to a limited number of superfans
the world to migrate online for entertainment, has shown who had entered a prize draw by buying an original
the music industry that ticketed, cleverly produced, and NFT token issued by the headline performing artist (for
engaging livestreaming will be here for the long term. It is example, Drake). Prizes might include, at the top level,
likely that the most significant concerts and festivals that attendance at the live virtual event and an authentic piece
happen in the real world will, in the future, have a more of digital merchandise, while runners-up might still get to
dedicated, slick, and transactional online component. For see the concert on an on-demand basis at a later date,
that reason alone, the metaverse is here to stay in music. missing the live show.

More interestingly, we can already see that the The network of contractual obligations to navigate
combination of virtual value tokens and music is a and the rights-clearance issues to think about that are
match made in heaven. Companies are furiously trying illustrated by the example above are not wildly different
to work out how to enable fans to invest directly in their from the issues that lawyers may be dealing with in
artists and engage with them in a way that enables the real world. The half-time performance at the NFL
value exchange and support. Royalty streams could be Super Bowl is well known in the music industry for
fractionalized, with the blockchain underlying such royalty being a highly prestigious, but complex, production and
streams acting as a permanent record of who gets paid, clearance exercise. However, in many respects, the level
and how much. of complexity associated with clearing music and artist
imagery for the metaverse can be significantly more
complicated.

Guide to the Metaverse – 2nd edition Reed Smith 29

Music

Walled gardens. If we accept that the metaverse, Who clears the rights – I’m a user. It could be argued that
particularly looking forward, is made up of one or more consumers are accustomed to the platforms themselves
dynamic environments in which we can interact and covering music licensing, at least from a performance or
enjoy experiences, the obvious question is, how can each communication to the public standpoint. Online services
environment be regulated legally? In the early days of that have been reported to benefit from blanket licenses
the virtual world of Second Life, disputes were common. with music rights owners and collection societies include
In the 2000s, the discussion among lawyers concerned Twitch, Facebook (reference here and here), YouTube,
whether “virtual laws” could exist and whether avatars TikTok, and PlayStation. Notwithstanding that such
could find new freedoms to exploit their creations (or platforms are clear in their terms of service that music
adapt and copy other people’s creations). The law has licensing is the responsibility of the uploader, at least
since moved on considerably; it is now more widely consumers can feel more comfortable about using music
accepted that online environments are subject to in the environment in which they are operating.
offline laws. Any platform or environment of scale will
be careful to prescribe the contractual terms on which However, things become more nuanced when music
users are permitted to use the platform or environment. can be created, shared, and enjoyed in a real-time
Therefore, the use of music within a metaverse region gaming metaverse or social environment. The tools
will be subject to the terms of service applicable to that by which any user can now instantly manipulate, edit,
environment. Then, anyone seeking to use someone and deliver an entirely new musical creation by simply
else’s music in the metaverse will need to be sure that creating a meme are widely available and can be used
the terms under which they obtain a license align with the to devastating viral effect. Whoever came up with the
terms of the walled garden in which the music is used. dance challenge to Jawsh 685’s “Laxed (Siren Beat)”
While this sounds easy in principle, a truly global virtual could not have anticipated that a song created by an
environment is regulated differently, according to the legal unknown New Zealand artist in four hours as a tribute
jurisdiction. Censorship and content standards affecting to his Samoan heritage would soon become one of the
a live performance of a leading rap artist will be vastly world’s biggest hits, subject to a dispute over a sample
different in the United States from, say, Indonesia, Dubai, featuring Jason Derulo, and become a number one hit
or Hong Kong. Artists often have political views and song around the world. At the time of writing, TikTok is
make statements onstage (who remembers Rage Against unarguably the most important platform for breaking and
the Machine’s protest against Guantanamo or Sinead promoting new music, but now more than ever, it is users
O’Connor ripping up photographs of the pope?). These who are dictating whether and how a song catches fire.
types of incidents are more containable in real life, but For lawyers advising artists, labels, publishers, and even
they are the stuff of nightmares for the legal compliance the platforms themselves, the viral capacity of user-
teams at big platforms who often seek to maintain good created mashups and multiple synchronizations creates
relations with local governments around the world. never-ending potential for innovative licensing solutions,
disputes, and lucrative transactions.

30 Reed Smith Guide to the Metaverse – 2nd edition

 Music

“As always in music, the primary consideration

when music is created, performed, streamed,
and exploited online is rights clearances.”

Guide to the Metaverse – 2nd edition Reed Smith 31

Music

Who clears the rights – I’m an artist. Reflecting on legal Who clears the rights – I’m a promoter. Artists as diverse
issues affecting music users in the metaverse is to say as Ava Max, BTS, Marshmello, and Kaskade have
nothing, of course, of the tripwire territory created by performed through graphic representations in online
the implementation of article 17 of the Copyright (Digital gaming environments, while cutting-edge virtual reality
Single Market) Directive when it comes to music in services like MelodyVR (now rebranded as the next-
the metaverse. By way of reminder, article 17 was the generation Napster) and Facebook’s Oculus permit users
mechanism by which the music industry sought to make to view real-life concerts in a virtual reality format in real
it compulsory for video platforms to obtain sitewide time. There is no one-size-fits-all approach to clearing
licenses as opposed to relying on safe harbor exceptions. rights for these types of events; much will depend on:
While this goal may now have been achieved – and, in
fact, arguably the majority of Western video platforms • The artist performing
were already licensed or in the process of obtaining
• The basis on which the artist’s recording and ancillary
licenses when the new laws were finally ratified – the
rights are managed
law of unintended consequences may now be taking
effect when considering the scope of what those • The songs or compositions that will feature, including
platform licenses should cover. To recap (and to grossly whether those recordings were produced under the
oversimplify), while the platform will be responsible for SAG-AFTRA Sound Code
making efforts to obtain licenses for content uploaded
by users, it will not be held responsible for licensing • Production components that are included (for
copyrights in content that is brought to a platform by example, choreography – formerly the preserve of
commercial operators. In the context of music, this only the most diligent of production rights clearance
immediately raises the question of when an artist is a professionals – can now be a total minefield in the
“professional user.” metaverse environment)

• The virtual engine powering or underpinning the

production

• The creative input from digital artists and other virtual

contributors

In more straightforward production environments, those

responsible for delivering clearances and “legals” for
an online concert can follow tried and trusted video
production methodologies, supported inevitably by a
music clearance house that can gather together the
myriad reproduction licenses needed if the concert
will be recorded and exploited. At the other end of the
spectrum, however, lawyers are having to develop skill
sets that combine (a) the copyright and intellectual
property licensing disciplines associated with video
game production and game studio development; (b)
technology and software licensing expertise, especially
where multiple platforms or SaaS (software as a
service) products are used to power a virtual, avatar-
driven performance; (c) rights acquisition and capture
for proprietary elements; and (d) old-school live music
performance clearances.

32 Reed Smith Guide to the Metaverse – 2nd edition

 Music

Fence hopping. Once the preserve of fantasists, but Of course, when the combination of creative technology,
perhaps now more likely than ever before, it could soon people, and connectivity moves up a gear, so do the
be the case that a user’s avatar can move between legal issues. Music is already one of the most byzantine,
environments. Do you want your World of Warcraft challenging, and disparate areas of entertainment law.
character to play in Fortnite? Could Super Mario fight
with Sonic the Hedgehog? That may happen. In such The prevalence and expansion of music in the metaverse
a scenario, metaverse environments will need to find certainly presents new challenges, but it also creates
new ways of clearing music. Similarly, if a user has a massive opportunities for legal professionals to innovate
Spotify account, they may like to listen to their music and help their clients – not only to navigate through the
playlists while playing multiple games, perhaps even in existing frameworks but also to create new models and
a seamless manner. Traditional music distributors – and ways of exploiting copyrights that help drive incremental
remember that Spotify is more than 13 years old – may revenues and value to the industry, artists, creators, and
need to play catch-up to ensure that their services don’t the platforms that invest in the metaverse itself.
get swallowed up by the metaverse. Ideas that would
have sounded like pure fantasy from a legal perspective What about music NFTs?
10 years ago are now fast becoming a reality that could
burden lawyers for years to come (for example, creating While we have covered NFTs in general in other parts of
a coffee shop in a virtual world where users can get this Guide to the Metaverse, it would be remiss of us not
together and listen to and share their music). to explore how the music industry is taking advantage of
this technology.
Creating new music in the metaverse. Of course, if
people are going to exist, project their images, and Music NFTs have the potential to allow artists to build
spend their time in the metaverse, the next logical step scalable, customizable offerings to engage and reward
for them is to move out of the real-life recording studio their fans. Artists will have access to a decentralized
and into the virtual creative environment. Already, there database of their core fan base that they can choose
are extensive examples of this taking place. VR headsets to reward over time without being at the mercy of a
and controllers that allow users to interact with graphical centralized platform to do so. We will begin to see how
interfaces that represent musical instruments are widely artists take advantage of this as music NFTs reach mass
available. Literally, the air guitar becomes a real guitar - adoption. For instance, perhaps an artist will airdrop
Rock Band VR anyone? Forming your own band online, a free NFT to fans that have collected all of the artist’s
transforming yourself from a balding, middle-aged guy NFT music releases that will grant holders access to an
with a “dad bod” into a lavishly coiffured, tanned, lithe unreleased track. Maybe fans that have gone to see the
rock god, and living out your fantasies of playing guitar artist numerous times and have more than 10 proof-
in front of huge crowds is now completely possible. On of-attendance NFTs in their wallet will be invited to an
a more prosaic level, metaverse environments such as intimate private gig.
Minecraft, Roblox, and Fortnite contain song codes,
While there are limitless applications for NFTs to transform
instruments, recording tools, and music manipulation
the music industry, from ticketing (such as GUTS Tickets),
controls that enable users to be musically creative. While
unique collectibles (such as Serenade), distribution (such
the majority of this activity will result in original copyright
as Audius), and beyond, two forms of music NFTs have
that will be of almost zero monetary value, there are
been subject to much debate and discussion:
infinite possibilities for users to unwittingly infringe or
encroach on well-known commercial songs or properties.
Do you want to perform a Whitesnake track with your
virtual buddies, only to a drum and bass beat and
combined with lyrics from Dizzee Rascal, while playing
your virtual DJ decks and sharing your live set with your
new metaverse friends in Bangalore? No problem.
Guide to the Metaverse – 2nd edition Reed Smith 33
Music

Tokenized ownership. A growing number of web3 any) and by whom. Nevertheless, a key battleground
businesses are exploring tokenizing underlying copyrights between stakeholders will concern who gets paid what.
and/or royalty income streams (such as Royal, Opulous, We anticipate renewed arguments about what amounts
etc.). Conceptually, fans acquiring proprietary ownership to a “sale” or “license,” whether NFTs are a new format,
of rights to their favorite artist’s music is certainly and whether there is a “sync,” etc. Although on the face
compelling and arguably allows early fans to ride the of it, everything is up for grabs, our view is that traditional
wave of an artist’s success. rules and common sense will prevail.

As you may suspect, there are numerous legal and

practical issues that arise from these offerings, the most What about investing in music using web3
obvious of which is the extent to which such offerings technologies?
are regulated as investment products or securities.
Notwithstanding an increase in the cost of capital in
It is fair to say that the answer to this question is not
2022 amid soaring inflation and rising interest rates, the
straightforward, and the outcome will be highly fact
corporate appetite for acquiring music copyrights at scale
dependent. Businesses will need to keep abreast of
shows no real sign of abating. Partly, this appetite has
international regulatory changes, as regulators start to
been due to excess liquidity in the finance market and
establish what is and is not within their remit. We have
the strong revenue growth exhibited by music catalogs,
considered this in further detail elsewhere in this guide.
in turn, due to a combination of better, more accurate
Music NFT editions. Web3-savvy artists have taken full distribution technologies and the growth of subscription
advantage of selling their music as NFTs directly to fans streaming services like Spotify.
through music NFT platforms (such as Sound.xyz). With
Web3 threatens to further disrupt the market for music
little to no take-rate applied by these platforms, artists are
copyrights. There are several companies either exploring
making significant sums from selling these limited-edition
or offering investment models via which members of the
digital versions of their music.
public can “invest” in the creation of new music in return
With money to be made, we are beginning to see the for a fractionalized share of royalty revenue received from
various music stakeholders take their positions. Eager the exploitation of that music. These models typically
not to be left behind by the latest technical innovation, work by a combination of (i) users paying money for the
labels and publishers alike are already updating their artist opportunity to fund or invest in an artist’s work, by paying
agreements to accommodate NFTs. in cryptocurrencies toward the artist’s costs of creating
the music; and (ii) users receiving a token in return, which
Who has the right to issue and sell a music NFT? What is intended to represent a fractionalized share of the
rights need to be cleared in a music NFT? Who needs to overall royalty stream that is to be received from the track.
clear those rights? And, most importantly, who is entitled
to proceeds from sales and in what proportions? The Although the idea of consumers being able to “invest” in
answer to most of these questions comes down to a music is not new, these models raise a number of legal
simple analysis of basic copyright principles – assessing issues:
what copyright-restricted acts are being undertaken (if

34 Reed Smith Guide to the Metaverse – 2nd edition

 Music

• The offering of investments or the conducting of Authors

activities that are targeted toward the general public
as investments are, understandably, heavily regulated.
In many countries, it is illegal to offer investment
opportunities unless through a heavily regulated
business. Any entity that seeks to offer fractionalized
royalty interests is likely to be subject to regulation. Gregor Pryor
Some operators in the space seek to establish Partner
themselves as offshore businesses in favorable London
jurisdictions in an effort to indirectly avoid regulation. [email protected]

• Traditional music distribution models don’t lend

themselves well to disaggregated royalty collection
and distribution. In order to achieve a legitimate
fractionalized royalties model, rights owners may
need to transfer certain rights to the operator of Nick Breen
the business and sign letters of direction or other Partner
instruments via which the artist’s and even the label’s London
[email protected]
or publisher’s right to receive monies is instead
assigned to the entity responsible for paying out a
fraction of the royalties.

• There are abundant opportunities for fraudulent

behavior, whether by the artist or creator, the
consumer, or even the site or service operator. There
is no centralized or globally recognized mechanism
for preventing fraud or dealing with financially abusive
conduct.

Although blockchain technology lends itself well to

enabling the completely accurate distribution of royalties,
many of the legal issues associated with fractionalized
or automated investment models in music are difficult
to overcome and may ultimately render such activities
impossible in the longer term.

Guide to the Metaverse – 2nd edition Reed Smith 35

Film and TV

T
he film and TV sector is famously nostalgic: Hollywood loves glorifying
its own golden age, and in the past has been accused of struggling to
embrace change. And yet, the technological framework surrounding the
industry is advancing faster than ever before.

How, then, does the industry reconcile this apparent inflexibility with the advent
of the metaverse? The short answer is: tentatively. We are still in the early
stages of change creeping into the sector, but already some of the potential is
clear to see.
NFTs and financing NFTs and distribution
The three letters are unavoidable when discussing the NFTs also present a new route for distribution – in other
metaverse, and the legal implications of non-fungible words, releasing content itself as NFTs. Conceptually
tokens (NFTs) generally are covered in ample detail (and legally), this works in the same way as it would for a
elsewhere in this guide. There is no less potential in the piece of digital art, although it is perhaps more difficult to
film and TV space than other media industries – though fathom its acceptance by the wider public for now.
perhaps some of that potential remains more untapped
when compared to music and video games. Still, Mila Kunis’s production company recently produced
a web series, “Stoner Cats” (yes, you read that correctly),
Financing is the most obvious area of production where then sold NFTs granting buyers the right to watch
we might see swift incoming changes. A handful of episodes, and made over $8 million in 35 minutes in the
independent films have already been funded with NFTs, process (yes, you also read that correctly). So the hype is
each representing a small ownership share in the project. definitely there, and it is valid.

Film financier, The Forest Road Company, has also But a far more feasible, widespread application would
recently closed a $20 million fund of pre-production be to use NFTs as a way to exploit existing IP in novel
investments, and will issue collectibles based on the IP ways. Creators can leverage the inherent scarcity of NFTs
of each of those productions, using NFTs. It remains to to generate exclusive products to bolt on to traditional
be seen how this will tally up with the big institutional productions – think bonus content, digital posters,
financiers, particularly banks, which are notoriously commentaries, specialist cinema tickets, and so on. And
conservative in their approach to media financing. because of this potential value, we have seen a spike in
the number of negotiations centered on the grant of NFT
rights (and the exploitation thereof) between the rights
holder of an underlying property and the acquirer of those
rights looking to develop and/or exploit the property
through an audiovisual production. Historically, such
rights would have been customarily (or at least arguably)
included in the broad grant of rights provisions included
in the chain of title documentation. And because of the

36 Reed Smith Guide to the Metaverse – 2nd edition

 Film and TV

potential financial windfall of exploiting NFTs, we have Metaverse early adoptees

also seen an increased demand to revisit the old chain of
title documentation for a determination of who owns what It is clear that the utilization of the metaverse will continue
rights (studios want to confirm that they have control to grow in the coming years, and as it does, studios and
over their exploitation, and rights holders want to confirm streaming platforms need to be prepared to compete
that they have been reserved from the relinquished for subscribers and for the attention of their target
rights.) A leading example of why this has become a audiences, which is why we have seen some big players
hot topic is the recent lawsuit between Miramax and beginning to dedicate significant resources to the space
Quentin Tarantino regarding the NFT rights to Tarantino’s and how to leverage it. In particular, ViacomCBS (now
screenplay for “Pulp Fiction.” Paramount) has made a pointed move toward embracing
all things metaverse, creating a “futurist-in-residence” role
However, the concept is still in its infancy, and the press for executive Ted Schilowitz, and toying with the idea of
is eager to spot early adopters’ mishaps. Seth Green using and reimagining their vast, valuable IP universes in
was planning to develop and produce a show based on the VR and AR spaces.
a “Bored Ape Yacht Club” NFT that he had bought, in line
with the usage rights he had acquired along with the NFT.
Unfortunately, those plans have been shelved for now,
as Green fell victim to a phishing scam in which a hacker
gained access to the NFT and sold it to a third party.

Guide to the Metaverse – 2nd edition Reed Smith 37

Film and TV

Elsewhere in the metaverse, feature-length content is Authors

starting to flirt with the new worlds we are seeing unfold.
The Sundance Film Festival has been an early adopter
of the metaverse, seeking to showcase films that push
the limits of traditional cinema. For example, “We Met in
Virtual Reality” was a documentary film shot entirely within
the social platform VRChat – featuring real characters and Christian Simonds
real stories, being played out in an already-developed Partner
corner of the metaverse – and that received widespread New York
critical acclaim during its premiere at Sundance 2022. [email protected]

In the end, we think the metaverse will be embraced

by the film and TV community (and not replaced
by it), providing studios and production companies
an opportunity to engage their audiences in an
unprecedented manner (e.g., enhanced viewing Henry Birkbeck
experiences, interactive content, and virtual worlds built Associate
around a foundation piece of audiovisual content that London
[email protected]
fans can visit and engage with for marketing purposes).

Legal implications
The film and TV industry is, for the most part, still in the
idea stage of adopting web3. The potential is there, and
one need only look at the other media sectors covered
in this guide to see the sheer variety of opportunities that
the metaverse presents to all creative work, including the
audiovisual space.

Crucially for film and TV, new methods of exploiting

existing IP presents an opportunity for additional revenue
sources, and that optionality will continue to be a topic of
negotiation in rights deals. The potential interactivity with
viewers also creates an exciting – but legally complex –
prospect.

As ever, new formats will create new tensions between

rightsholders and licensees. The Content exploitation
section of this guide unpacks the myriad legal issues
facing exploitation of audiovisual content in the metaverse
in more detail.

38 Reed Smith Guide to the Metaverse – 2nd edition

Legal issues
in the metaverse

Guide to the Metaverse – 2nd edition Reed Smith 39

Intellectual property

W
e already understand that the known universe of the internet has caused
a great number of models that take advantage of intellectual property
rights to converge – challenging owners and users of protected content
in the areas of authorization, monetization, and enforcement. The metaverse and
web3, conversely, will likely continue to challenge the relevance of some of our
core IP mechanisms, put others – like interoperability - under the spotlight and
redefine the proprietary nature of technology, virtual worlds, virtual assets and our
“things” in the metaverse.

Software interoperability At its core, a metaverse is code: ones and zeros, overlaid
with unfathomably vast amounts of data. In such a world,
The purpose of interoperability is to enable different everything comes from code. From the clothes our
systems to “talk” and “understand” the information they avatars wear to the car that we drive in, our “things” can
pass to one another. Although it is valuable in any field, only exist in the metaverse after being coded.
interoperability is especially relevant for the metaverse,
where no single software will be used to build it. Khronos, one of the groups promoting standards behind
the MSF hopes that MSF’s standards will make much of
In legal terms, interoperability is a concept that limits that data as easily interoperable as JPEG is today. This is
the rights of computer program rights holders, which particularly relevant in relation to 3D objects for which no
are protected by copyright. In effect, their authorization Standard currently applies.
is not required where copyright-relevant acts pertaining
to the code are “indispensable” to obtaining the The creation of the MSF – just a year after we first
information necessary to achieve the interoperability of published this guide – highlights the importance of
an independently created computer program with other interoperable, nonproprietary data exchange formats and
programs, provided that certain conditions are met can result in a fundamental shift with how we interact with
(legitimate access to the software, necessary acts only, the internet.
etc.).
In a moment where the mere idea of proprietary
Today, the concept is increasingly coming to the fore, technology is being challenged by the advent of web3, all
with the creation of the Metaverse Standards Forum eyes are turning to the architects of the metaverse as the
by several big tech names (Meta, Adobe, Microsoft, decisions they will make in the forthcoming months will
Epic Games, Ikea, Sony, Nvidia, etc.) to “foster the likely impact IP rights for years to come.
development of open standards for the metaverse.” “The
Forum will explore where the lack of interoperability is
holding back metaverse deployment and how the work
of Standards Developing Organizations (SDOs) defining
and evolving needed standards may be coordinated and
accelerated,” the group said in its announcement.

40 Reed Smith Guide to the Metaverse – 2nd edition

 Intellectual property

Copyrights Trademarks
Copyrights and their use in the metaverse Trademarks and their use in the metaverse
Beyond software, copyright protection extends to A trademark is a word, phrase, slogan, design, or
“original works of authorship fixed in any tangible medium logo that operates as an indicator of source for goods
of expression.” As is evidenced by the colorful and or services. Trademark law protects against the
content-full metaverses developed by Decentraland, The unauthorized third-party use of a trademark in a manner
Sandbox or Second Life, there is seemingly no rock in the that may dilute or disparage the trademark or in a manner
metaverse under which no copyright exists. that would cause a reasonable consumer to believe that
the trademark owner either was the source of the goods
Collaboration and decentralization or services or endorsed or sponsored such goods or
There are many different aspects of the metaverse services.
that will be impacted by copyright laws and this guide
already touches on a number of them (see section on Trademarks are important features in the virtual
ArtificiaI intellegence and on Games etc.). One aspect landscape, and their use is prevalent in the metaverse. As
however deserves special attention as it is probably one people and companies continue to create and establish
of most significant challenges that we see emerging their presence online and in the world of virtual and
from the adoption of web3. It lies in shifting from a world augmented reality, this presents both opportunities and
of centralized and controlled servers to a decentralized risks. Trademark owners who successfully leverage the
internet, where content is hosted using peer-to- metaverse to engage in cross-promotional branding can
peer technology, like IPFS links and traded by online reach a wider audience, but they must be aware of the
intermediaries, hosting other people’s content. Rare are potential liability associated with that expanded reach.
the rightsholders in music and film having worked through
Issues for owners and users of trademarks in the
the nineties who won’t shiver at the thought of all the
metaverse
effort, money and time invested in shutting down peer-
to-peer platforms like Grokster, Kasaa, Limewire or The While mixed and augmented reality have allowed brand
Pirate Bay. Assuming that blockchain, a technology that owners to extend their reach to a growing new industry
does not (yet) allow the storage of content, will cure the and consumer base, they have also created issues for
internet and vaccinate it against new copyright challenges both owners and users of trademarks, particularly in the
would be naïve and short-sighted. The capacity of gaming space. For example, a common issue with the
copyright to adapt and survive technological revolutions intersection of the virtual and real worlds has been the
has been demonstrated time and time again, yet for all use of real-world, third-party trademarks in video games
its transformations it has always been used to enforce a that simulate the real world.
rightholder’s monopoly. How copyright will fare in a world In the United States at least, trademark owners have not
governed by DAOs and decentralized storage is anyone’s always fared well in their efforts to enforce trademarks
guess but certainly something that we will be watching used in virtual worlds. An early example of the potential
closely. pitfalls of using real-world trademarks in the virtual world
played out in the case of E.S.S. Entertainment 2000, Inc.
v. Rock Star Videos, Inc., 547 F.3d 1095 (9th Cir. 2008).
In E.S.S., the issue was whether a virtual depiction of a
real-world strip club in the popular game Grand Theft
Auto: San Andreas infringed the real strip club’s logo and

Guide to the Metaverse – 2nd edition Reed Smith 41

Intellectual property

exterior design trademark rights. The court ultimately held • Nike, Inc. v. StockX LLC, No. 1:22-cv-00983-VEC
that the depiction of the strip club in the video game did (S.D.N.Y. July 14, 2022): In this case, Nike alleges
not infringe the strip club owner’s trademark and trade that StockX – the operator of an online resale
dress rights as the video game was an artistic expression platform for various brands of sneakers, apparel,
protected by the First Amendment, and it was unlikely luxury handbags, electronics, and other collectible
that consumers would be confused into believing that the goods – is “minting” digital assets or non-fungible
strip club produced the sophisticated video game. tokens (NFTs) that prominently use Nike’s trademarks.
Nike further alleges that StockX is “marketing those
With the proliferation of user-generated content in the NFTs using Nike’s goodwill and selling those NFTs
last few decades, as well as online “virtual world” games at heavily inflated prices to unsuspecting consumers
such as Pokémon Go, The Sims, and Second Life, a who believe or are likely to believe that those
new set of issues has arisen involving the use of third- “investible digital assets” (as StockX calls them) are,
party trademarks in virtual worlds. For example, Second in fact, authorized by Nike when they are not.” Nike
Life, a large multiplayer role-playing game that also alleges claims for trademark infringement, trademark
operates as an online economy, allows users to create dilution, and several other related claims in this closely
their own virtual worlds, develop and promote intellectual watched case that is still in its early stages at the time
property, and even sell their own branded creations (or of writing.
those of others – more on that below) for a profit. Users
can even build an online business presence in Second • Hermès v. Mason Rothschild, 22-CV-384 (JSR)
Life to sell their products in the real world. Beauty and (S.D.N.Y. May. 18, 2022): In this case, the plaintiff –
fashion brands can also engage in the metaverse by the fashion house Hermès – sued Mason Rothschild
allowing avatars (virtual characters created by real users/ (an NFT creator) for trademark infringement as a
players) to try on clothing or cosmetics or wear an article result of NFTs created by Rothschild. Specifically,
of clothing that real users or players may not be able Rothschild created a virtual series of purses, coined
to afford in real life. However, with these opportunities “MetaBirkins,” in a series of NFT images that depicted
also come the risks of unauthorized use of third-party Hermès’ BIRKIN bag design covered in various furs.
trademarks and possible brand dilution. For example, Hermès’ complaint, which was filed in January 2022,
avatars can sell and purchase virtual goods bearing the asserted that the MetaBirkin NFTs infringed upon and
trademarks of third parties. Thus, trademark owners diluted its registered BIRKIN trademarks, as well as its
should also be aware of the risks presented with the trade dress rights in the BIRKIN bag form. Rothschild
use of brands in these “virtual worlds.” While case law submitted a motion to dismiss in February 2022,
surrounding the use of trademarks in the virtual space arguing that the MetaBirkins are works of art that
is unsettled and still developing, some issues that have provide commentary on “animal cruelty” and that the
arisen in recent cases include: NFTs “are not handbags.” In May 2022, the Southern
District of New York rejected this motion to dismiss
and allowed the case to move forward, concluding
that Hermès had made sufficient factual allegations to
support a conclusion of explicit misleadingness and
bad faith.

42 Reed Smith Guide to the Metaverse – 2nd edition

 Intellectual property

• Pellegrino v. Epic Games, Inc., No. 19-1806 (E.D. Best practices for trademark owners
Pa. Mar. 31, 2020): In this case, the plaintiff – a As the metaverse continues to grow and evolve, and
saxophonist who went viral on the internet for his the lines between the real world and the virtual world
dance moves – sued the developer of the popular continue to blur, brand owners may need to enforce
video game Fortnite, alleging that the game featured their trademarks not only in the real world but also in the
a virtual saxophone-playing avatar that copied his virtual world. Below are steps that brand owners should
dance moves. The court dismissed Pellegrino’s claim consider to protect their valuable trademarks.
for violation of his right of publicity based on the First
Amendment. The court also dismissed Pellegrino’s • Register the trademark. Brand owners are strongly
trademark claim, finding the allegations were better encouraged to register their trademarks with the U.S.
suited for copyright law. The court allowed Pellegrino’s Patent and Trademark Office (USPTO) and foreign
claim for false endorsement to proceed, but after the equivalents. In the United States, doing so creates
court issued its order, Pellegrino withdrew his case. a rebuttable presumption that the owner owns the
exclusive right to use its trademark in connection with
• AM General LLC v. Activision Blizzard, Inc., No. its goods or services, and it puts the owner in a much
17-cv-8644, slip op. 11 (S.D.N.Y. Mar. 31, 2020): better position to rebut any unauthorized use of its
In this case, AM General, the company behind the mark in either the virtual world or the real world.
Humvee truck, sued Activision Blizzard, alleging
trademark infringement for including the truck in • Consider subscribing to a trademark watch service.
Activision’s Call of Duty video game. The court found It is impossible for a trademark owner to monitor and
for Activision Blizzard on summary judgment under track every infringing use in the market, especially
the First Amendment, explaining that (1) “Defendants’ when the owner has a large trademark portfolio. As
uses of Humvees in Call of Duty games have artistic such, trademark watch services can assist trademark
relevance,” and that (2) “[f]eaturing actual vehicles owners in monitoring relevant markets and internet
used by military operations around the world in video content for possible infringing activity. Consider
games about simulated modern warfare surely evokes designating outside counsel to review these reports
a sense of realism and lifelikeness.” as they come in. By working with a watch service,
owners can be notified of infringing activity sooner
These cases establish that the risks of liability for a rather than later and can take swift action as these
user of a third-party trademark are greater when the issues arise.
unauthorized user is engaging in commercial activity
using the trademark. But certainly, questions of dilution • Immediately notify the platform of infringing activity.
and disparagement will become more prevalent themes Assuming the infringing activity is being conducted
as beauty and fashion brands continue to be immersed in by a third-party platform user, brand owners should
the metaverse. report this infringement to the platform. Many of these
entities do not want to be liable for any contributory
infringement and will have mechanisms in place to
remove the infringing content when they become
aware of it.

Guide to the Metaverse – 2nd edition Reed Smith 43

Intellectual property

• Evaluate the nature of use and the possible claim. Patents

Once aware of possible infringing activity, consider
the nature of the infringing use and how such use Patents and their expanding use in the metaverse
affects the overall brand and the market for the goods A patent for an invention is the grant of a property right
or services associated with the brand. As illustrated to the inventor, issued by USPTO. Generally, the term
in the above case examples, not all trademark use of a new patent is 20 years from the date on which the
in the metaverse is actionable. Outside counsel can application for the patent is filed in the United States or, in
assist with this analysis and can help to determine special cases, from the date an earlier related application
what obstacles, if any, may exist to the enforcement was filed, subject to the payment of maintenance fees.
of the trademark. It is also important to note that in U.S. patent grants are effective only within the United
the United States, brand owners of nationally known States, U.S. territories, and U.S. possessions. Under
brands are in a better position to enforce against certain circumstances, patent term extensions or
unauthorized use since under the Federal Trademark adjustments may be available.
Anti-Dilution Act, owners of nationally recognized or
“famous” brands can sue if the unauthorized use of Companies developing metaverse-related technologies
their trademark by others “tarnishes” or “blurs” the often use patents to protect their inventions. Most
trademark. The Act applies regardless of whether metaverse-related patents are in either the VR or AR
consumers are confused as to the source of the space. The number of new patents filed related to AR/
goods. VR has increased globally at an annual rate of 33 percent
since 2010. This exponential rise in the number of filings
• Establish a metaverse presence. Finally, brand owners indicates the increased research and development
should consider establishing a metaverse presence spending on metaverse-related inventions.
of their own. Aside from the benefits that come with
leveraging the metaverse as an alternate means of That observation is accurate both with regard to the
reaching consumers and building brand awareness United States and Europe. The widespread myth
via a thriving and growing market, having a metaverse according to which software solutions are not patent
presence also provides an opportunity to monitor eligible in Europe is, in fact, wrong. Provided that an
activity, and it may even help thwart trademark invention is computer-implemented, the subject matter
infringement by bad-faith actors. may potentially be patented. Statistics show that every
fourth patent application with the European Patent Office
relates to a computer-related invention.

Additionally, research on and development of

metaverse-related inventions are no longer restricted to
entertainment and science fiction. AR/VR-related patents
are now being used in a wide variety of industries, such
as online shopping, workplace training, health care
delivery, and real estate.

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 Intellectual property

Issues for owners and users of patented inventions Best practices for owners of metaverse-related
in the metaverse inventions
As with other intellectual property, patent use in the Because of the uncertainty surrounding patent eligibility
metaverse presents opportunities and risks. A particularly for software inventions in the United States, owners of
lucrative benefit of owning a patent focused on AR/ such inventions might consider not filing a patent at all,
VR technology is potential licensing revenue. However, and instead protecting the invention as a trade secret.
identifying potential licensees may present a challenge. In Furthermore, depending on the subject matter of an
fact, owners of patented inventions used in the metaverse invention (for example, a process-related one), it may
face even greater challenges in policing infringement than be preferable to opt for trade secret protection because
do owners of copyrights and trademarks. That is because patent enforcement against a competitor would prove to
the use of a software patent is not always visible in the be difficult. Every invention starts as a secret. At some
metaverse. Indeed, proof of infringement of a software point, the inventors (or the owners of the invention) have
patent such as an AR/VR patent often turns on the to choose whether to keep their invention a secret or to
analysis of source code, which is not available until the file for patent protection. Keeping a software invention
patent owner has filed a lawsuit and obtained the source a trade secret avoids having to prove that the invention
code during discovery. is not merely an “abstract idea” and that it is therefore
eligible for patenting. In determining whether to patent a
The risks to owners of metaverse-focused patents software invention or instead to treat it as a trade secret,
include potential invalidation of the patents during the owner of the invention should consider:
litigation to enforce the patent. U.S. courts increasingly
have been invalidating software-focused patents as • Whether the invention will be useful for more than
“abstract” and ineligible for patenting under section 101 20 years. If so, it is worth exploring trade secret
of the U.S. Patent Code and also under the landmark protection because trade secrets can last longer
U.S. Supreme Court decision in Alice Corp. v. CLS than the 20-year life of a patent, assuming the trade
Bank International, 573 U.S. 208 (2014). The law in this secret does not become stale due to advances in
area is still developing and is murky at best. On June technology.
30, 2022, the United States Supreme Court declined
the opportunity to clarify the law in the closely watched • How difficult it is for other companies to reverse
case, American Axle & Manufacturing v. Neapco engineer the invention. The easier it is to reverse
Holdings LLC. In that case, a fractured Federal Circuit engineer an invention, the less likely it will be to
(the U.S. appellate court dedicated to patent-focused consider it a trade secret.
appeals) found that patent claims for reducing vibration
• How often their employees who have access to the
in automotive propeller shafts were patent ineligible
invention change jobs. It becomes more difficult to
under 35 U.S.C. section 101. The Supreme Court’s next
protect trade secrets in industries with high turnover
term will present another opportunity for clarifying the
rates and in jurisdictions that do not view non-
law on patent eligibility – this time in connection with a
compete restrictions favorably.
metaverse-focused patent. Specifically, in Worlds Inc.
v. Activision Blizzard Inc., the Court will decide whether The good news is that thanks to the EU Trade Secrets
or not to weigh in on a decision invalidating a patent Directive, the level of protection afforded to trade secrets
claiming a method of avatar crowd control in a virtual has significantly improved. Indeed, standards in the
space, based on filtering avatar positioning information. United States and Europe are converging.
In the meantime, the continued uncertainty in this area of
the law creates uncertainty in the value of patented AR/
VR inventions.

Guide to the Metaverse – 2nd edition Reed Smith 45

Intellectual property

Domain names Open source

After some initial hiccups, the World Wide Web’s domain The open-source movement rose to prominence in the
name system has organized itself under ICANN with web1 dot-com boom era. This new platform required a
a finite number of Top Level Domains (TLDs) and has whole raft of tools (remember the browser wars?) in order
provided avenues for brand owners to defend their to tap its full potential. Open source provided some of the
online turf with the Uniform Dispute Resolution Policy answers with its online distribution model. In web2, the
(UDRP). Web3 and the metaverse threaten to turn back walled garden of social media giants meant that content,
that advancement. NFT-based domains using a new set eyeballs, views, and followers were key performance
of TLDs, independent from ICANN and the UDRP and indicators to the proprietary tools needed to run web2,
operating on a registrar-free smart contract, will possibly and open-source software took a backseat. Web3 might
bring us back to the dot-com era of domain name gold herald back the open-source era – the decentralized
rushes. This means that for now, trademark and brand applications are developed on open-source software and
owners need to be proactive and consider registering protocols and users can interact with each other through
the crypto and metaverse versions of their brand names interoperable metaverse properties. The real value in
as domain names. The blockchain-based domains often the metaverse lies in the user interactions and the user
have decentralized governance models and atypical data, and the fight will be over the ownership of these
registration terms. These have to be carefully considered properties. The applications and software will not take a
and understood, but it means that the old rules do not back seat this time; the data will be on the blockchain.
apply. In addition, it would be advisable to also register Going open source will encourage the metaverse to be
the new trademarks as a defensive measure to future as open and interoperable as possible while leaving the
domain name disputes. monetization efforts to other features of distributed ledger
technology. All the issues relating to jurisdiction and
intellectual property with regard to the metaverse apply
to open source as it is primarily based on copyright law,
which is a jurisdiction-dependent statutory matter.

These choices are strategic and require owners of AR/VR

and other metaverse-related inventions to think about the
broader picture of intellectual property ownership and its
associated benefits and risks.

46 Reed Smith Guide to the Metaverse – 2nd edition

 Intellectual property

Authors

Sohie Goossens Dr. Anette Gärtner LL.M.

Partner Partner
London Frankfurt
[email protected] [email protected]

Christine Morgan Bryan Tan

Partner Partner
San Francisco Singapore
[email protected] [email protected]

Fred Ji Sarah Bruno

Associate Partner
San Francisco San Francisco
[email protected] [email protected]

Guide to the Metaverse – 2nd edition Reed Smith 47

Investing in the metaverse

W
hile the blockchain markets – alongside many other global markets
– experienced broad downturns in the first half of 2022, this has
not deterred founders and investors in the industry, who continue
to see the long-term prospects for the technology and so have maintained a
tremendous level of interest in building new projects in the space, including
those focused on the metaverse.

Prior to the downturn, 2021 saw a range of big-ticket The basic assumption for conventional tech start-up
crypto M&A announcements, highlighted by Galaxy investments is that the value of the enterprise is captured
Digital’s $1.2 billion purchase of digital-asset custodian through equity interests in the company that houses the
BigGo, as well as deals like Mastercard’s foray into the project. The project founders and other key participants
industry with the acquisition of crypto intelligence firm pool the intellectual property and other key assets relating
CipherTrace, Nike’s purchase of NFT development and to the project into a corporation or other legal entity, and
production house RTFKT, and a wide variety of other that entity is tasked with building a business that will
major transactions. eventually generate profits that can be distributed to its
owners. The potential for future profits to be generated by
Reports indicate that we can expect 2022 to continue to the enterprise is also captured by the share value of the
be an extremely active time for investment in the space. entity, which is expected to appreciate as the business
According to PwC, the total amount raised by companies grows, execution risks are mitigated, and the business
in the crypto industry in 2021 was almost eight times proposition is validated.
higher than it was in 2020, reaching a total of $34 billion,
which was more than all prior years combined. Early In this conventional start-up context, the assumption
indications are that 2022 may yet outpace that record is that the value of the enterprise is mirrored 1:1 by
year, with capital inflows from crypto VC firms topping the value of its shares. Consequently, investing in the
$14.6 billion in the first quarter, which is equal to about enterprise almost always involves acquiring shares of the
48 percent of the total raised in all of 2021. company that houses the project. The company sells
shares to investors to raise capital to build the enterprise,
With big institutional investors such as a16z and FTX and investors acquire shares on the assumption that the
raising new multibillion-dollar funds in 2021, and other shares will appreciate in value if the venture is successful.
familiar names, including Sequoia and Bain Capital, taking Investors expect to make a return on investment
in hundreds of millions of dollars of their own, investment through receiving a share of profit distributions – or,
interest in this space can be expected to persist for more importantly, by selling their shares at a profit at a
years to come. Investment in the blockchain industry is later point. The opportunity to sell is expected to come
no “flash in the pan,” and has captured the attention of through a sale of the company, through an IPO or
entrepreneurs and investors who wish to align to create exchange listing that generates a public market for the
valuable products and reap the benefits of their efforts. shares, or through private secondary sales.
Compared to conventional technology start-ups,
investing in a metaverse or blockchain project can be
more complex in some respects, but also more attractive
in others.

48 Reed Smith Guide to the Metaverse – 2nd edition

 Investing in the metaverse

Equity interests in a conventional technology enterprise All of this may make investing in a metaverse start-up
also play another important role – they facilitate seem like a daunting proposition. However, the flip side is
governance mechanisms to ensure that the interests that web3 projects may offer investors paths to liquidity
of the external stakeholders in the enterprise are not present with conventional venture investments.
adequately protected. Investors in tech companies will
often participate in governance of the enterprise through That’s because these projects often entail building
rights to vote on and approve key events – such as a an economy around tradeable digital assets created
sale of assets or additional financing transactions – and by the project. A central mechanism of metaverse or
rights to elect company directors to directly oversee its other blockchain projects is often one or more digital
management. These governance functions are enabled “tokens” that enable access to features, functions, and
through voting rights attached to the shares investors services offered by the platform, or, in some cases, digital
hold. currencies that act as a medium of exchange within the
online economy enabled by the project. For instance, a
In the context of a metaverse project, however, some of digital virtual world project may employ a token to enable
the base assumptions for traditional venture investments users to vote on referenda about the evolution of the
may not be present. For one thing, the declared goal online platform, or to access tools to build their presence
of many blockchain projects is not to create a profit- within the online universe. The project may also support a
making enterprise. On the contrary, web3 projects are digital currency that enables actors in the digital universe
often designed to avoid a result where the originators to exchange goods or services within the online realm.
of the project profit at the expense of the community
that eventually adopts and uses the platform to be These digital assets are often designed to be transferable
developed. Instead, the professed motive is often to and tradeable, whether within a trading system operated
build an infrastructure that generates benefits shared by the project itself, or on a variety of third-party digital
equally among the community. Therefore, there may not asset exchanges (including popular “centralized” asset
be a stream of expected future profits to be captured exchanges such as Coinbase, Binance, and FTX, as well
by shares of the legal entity that originates the project. as smart-contract-based “decentralized” exchanges such
Moreover, the likelihood of an “exit event” generating as Uniswap and Sushi).
liquidity for holders of these shares may be questionable. These digital assets also typically serve as a mechanism
Outright acquisitions of web3 companies have – to date for incentivizing the teams of developers that create and
at least – been comparatively rare. And public offerings support the project, including the founders that originated
and exchange listings of equity interests in the blockchain it, by allocating certain of these tokens or coins to these
projects have been rarer still. key players. And, importantly, such digital assets can
For investors, holding shares in the company they invest serve as a mechanism for rewarding early investors in the
in may not afford much assurance of involvement in project for their support. A common practice for web3
governance matters either. In part, this is due to the fact projects is to devise a digital asset economy with a limited
that the legal entity that accepts investor capital may not supply of digital assets (to support a sustainable long-
be the entity that ultimately launches and operates the term value for these assets), with a defined portion of the
project – many blockchain projects evolve to operate available supply allocated to rewarding and incentivizing
under the auspices of multiple legal entities, often spread different constituencies supporting the project, including
across several legal jurisdictions. Moreover, many projects investors that helped underwrite the cost of developing
aim to ultimately place much of the authority for steering and launching the project.
the project in the hands of their user community through
decentralized governance processes.

Guide to the Metaverse – 2nd edition Reed Smith 49

Investing in the metaverse

This means that investors supporting a web3 project may Beyond the structuring of the deal itself, investors
be able to count on access to a class of digital assets conducting their due diligence in the blockchain space
that are liquid and act as a proxy for the overall value of must be mindful of the unique regulatory compliance
the project the investors supported. As a result, investors issues affecting the industry, as compared to traditional
in these projects are often not solely reliant on the equity venture capital deals.
interests they purchased to realize liquidity. Multiple paths
to liquidity may be available if investors hold both equity Often, the most prevalent and pressing compliance
in the legal entity that originated the project and the concerns for a crypto project relate to the potential
digital assets that the project produces. Indeed, some classification of its associated digital assets as
of these paths may offer a much shorter time horizon to securities under the laws of the United States and
liquidity than traditional venture investments – whereas other jurisdictions. In the past, the U.S. Securities and
the timeline for exiting an early-stage equity investment Exchange Commission (SEC) has provided rough
through an M&A transaction or public stock offering guidelines regarding its thinking around which digital
is measured in years, if not a decade or more, a liquid assets may be deemed to be securities. However, even
market for digital assets of a web3 venture could emerge if these guidelines are taken to still represent the SEC’s
within a year or less of the project raising initial external working framework (which is not guaranteed, given the
funding. recent changes in regulators heading the SEC and other
agencies), such guidelines are incredibly complex and
The key consideration for investors in blockchain start- nuanced – there are around 40 factors that must be
ups is therefore often to ensure that they are positioned evaluated and weighed against each other regarding
to participate in all potential sources of value – including any given digital asset, just to glean a rough probability
ownership not only in the legal entities they support but on how the SEC may land regarding such an asset’s
also in the digital asset economies the projects aim to securities status.
create.
Classification of a project’s digital assets as securities
Once the parties have aligned on structure, the question could have substantial negative implications for the
of valuation becomes important. While the valuation value of the assets and, therefore, for an investor’s
of traditional start-ups is often difficult, the valuation of investment in the project. Digital assets that are deemed
metaverse and other blockchain start-ups is even trickier. to be securities may have far fewer options regarding
For one, there are few established comparators to use as centralized exchanges that are willing to list the asset,
benchmarks with respect to a newly proposed deal (and thus limiting the market liquidity for the asset. And the
even fewer that are public), particularly in the metaverse assets would likely be subject to restrictions on transfer
space. Further, the technology underlying these projects for considerable periods of time, even further impacting
is still evolving and many metrics, such as daily active the assets’ salability and the enterprise’s commercial
users, are estimates, lending even more uncertainty to viability. Depending on the degree to which a project
the medium- and long-term forecasts of a particular operates in a decentralized manner, certain reporting
investment’s value. Using a discounted cash flow analysis requirements imposed by current securities laws could
is also difficult, as the token structures used by many even be impossible for the project to comply with.
metaverse and other blockchain start-ups effectively
amount to indirect and non-regular income streams, and
thus do not cleanly align with this kind of conventional
modeling. In addition, the uncertainty over the ownership
of data and intellectual property in the metaverse casts
doubt over key factors traditionally used to value start-
ups.

50 Reed Smith Guide to the Metaverse – 2nd edition

 Investing in the metaverse

Beyond the complicated analyses that must be Authors

conducted regarding federal securities laws, certain
crypto projects could also implicate several other U.S.
legal, regulatory, and monetary regimes, overseen by
agencies such as the Commodities Futures Trading
Commission (CFTC), the Financial Crimes Enforcement
Network (FinCen), the Internal Revenue Service (IRS), Ramsay Hanna
the Office of the Comptroller of the Currency (OCC), the Partner
Federal Reserve Board, the Federal Deposit Insurance Century City
Corporation (FDIC), the Department of Justice (DOJ) [email protected]
and any number of other international and state-level
oversight bodies. Investors must also bear in mind that
many web3 projects are designed in ways that are not
limited geographically, and as such, their compliance
obligations are inherently global. The fact that the
regulatory framework for digital assets is largely unsettled Bryan Tan
– both within and beyond the borders of the United Partner
Singapore
States – presents unique challenges and risks for industry [email protected]
participants beyond those faced by most conventional
start-ups.

In summary, while differences between investment

in conventional start-ups and in metaverse or other
blockchain projects may deter some would-be
participants, it is clear that these novel risks and Evan Zinaman
considerations have not deterred a large class of Associate
Century City
investors from entering the industry. Those seeking to [email protected]
join in on the excitement in this space should do so with
clear eyes and an understanding of how best to structure
crypto-related projects and avoid regulatory pitfalls
associated therewith.

Guide to the Metaverse – 2nd edition Reed Smith 51

Artificial intelligence

I
n 2018, a painting created using artificial intelligence (AI), “Portrait of Edmond
de Belamy,” was sold at a Christie’s auction for $432,500, while AI start-up
JukeDeck composed music sung at a K-pop concert in Seoul. In 2016, Flow
Machines – an AI system developed by SONY CSL Research Lab – composed
new music based on everything from the Beatles to Bach. Veritone, a leader
in enterprise AI software, recently partnered with the estate of Walter Cronkite
to create a synthetic voice model of the iconic American broadcast journalist.
Craiyon’s AI text-to-image generator, which is publicly available, draws art based
on word prompts.

Advances in technology, the development of the

metaverse(s), and the expectations of today’s consumers
continue to propel the demand for next-level content. The
considerable cost of producing high-quality, ultra-realistic
artwork at a faster rate is a harsh reality for creators
across many industries, including games, film, television,
automotive, architecture and more. The finite amount
of creators and time available to design adds another
layer of challenges and causes an increasing number
of industries to turn to AI assisted artistry to solve the
problem of producing and scaling high-quality content.

“Portrait of Edmond de Belamy” by Paris-based arts-collective Obvious

52 Reed Smith Guide to the Metaverse – 2nd edition

 Artificial intellegence

Introduction Training AI with data protected by copyright

AI uses machine learning technologies to review, digest, Generating works using AI is a creative process that
and analyze vast quantities of data to create rules of often differs from traditional computer-generation. With
application called algorithms. Once “trained,” machine the latest types of AI, the computer program can make
learning software can continually improve itself through many of the decisions involved in the creative process
the analysis of new data sources and through the without human intervention, thereby elevating it from the
observation of its own data output. In recent years, AI status of “tool” to that of “creator.” At European policy
has expanded to include computing systems that aim to level, considerable thought is currently being given to
replicate the function of the human brain in analyzing and this particular question of AI-generated creations, as
processing information (called artificial neural networks), indicated in particular by the European Commission in its
as well as pairing computer networks in generative Communication of November 25, 2020.1
adversarial networks where the computers learn from
each other. Separately, policy-makers continue to debate questions
arising from the use of data that is protected by copyright
The massive ingestion of data by AI machines and the for machine learning purposes, during the stage leading
works they create have generated considerable debate to the development of software capable of self-generating
in the legal world, from which two key questions have “creations.”
emerged:
Data and information used to train an AI system may or
1. Can AI digest massive databases that include works may not be subject to restrictions. Not all information
protected by copyright and use machine learning is “protected” or “owned” – for example, protection is
to “author” creative works without infringing on unlikely to extend to historical information about weather
copyright? patterns, pollution levels, the shape of clouds, satellite
imagery or birdsongs.
2. Is the output generated by an AI system protectable
under copyright laws? What about content protected by copyright? In any text
and data mining (“TDM”) process it is typically necessary
Another area of increasing scrutiny in the sphere of to “clean” the text and data being mined (which in some
machine learning and AI is that of ethical compliance of cases takes up to 80 percent of the mining time), in
AI systems – as evidenced by the increasing number of order to remove inconsistent, unreliable or redundant
academic papers and debates occurring in that space. data, and to “normalize” the data into a specific format
adapted to the relevant application. These mining
operations usually involve copyright issues because
they involve upstream acts of reproduction of the works
or databases concerned. In order to be “read” by an
AI system, they must be stored, at least temporarily,
and sometimes modified (e.g., by formatting, cutting,
merging, compilation, etc.) to make them usable. Each
of these copying operations is likely to engage the right
of reproduction that is reserved to the relevant copyright
owners, which requires the express authorization of

1 Communication from the Commission to the European Parliament, the Council, the
European Economic and Social Committee and the Committee of the Regions, Making the
most of the EU’s innovative potential – an intellectual property action plan to support the
EU’s recovery and resilience, 25 November 2020, available here.

Guide to the Metaverse – 2nd edition Reed Smith 53

Artificial intellegence

those copyright owners for the exercise of those rights. Under section 107 of the Copyright Act, “fair use” is
In the same vein, the storage and, if necessary, the a four-factor test: (1) the purpose of and character of
communication of copies of the initial data set to third the use; (2) the nature of the copyrighted work; (3) the
parties without such authorization is likely to infringe the amount and substantiality of the portion used in relation
monopoly rights of those copyright owners, unless an to the whole; and (4) the effect of the use on the potential
applicable exception exists. One of the most frequently market for, or value of, the copyrighted work. Fair use
used exceptions, under U.S. law, is the doctrine of fair of a copyrighted work for such things as teaching,
use. However, the U.S. law approach differs considerably scholarship, and research is specifically permitted by
in that respect from the approach adopted recently under section 107. A key consideration that courts have used
EU law, at articles 4 and 5 of the Copyright Directive in deciding whether fair use exists is whether the use is
(2019-790). “transformative.”

The differing, patchwork approaches of different Whether copying of copyrighted material for the purpose
jurisdictions to TDM exceptions creates opportunities of machine learning constitutes fair use is a hotly debated
for arbitrage of national copyright laws when it comes to topic that will affect the future of AI in the United States.
carrying out TDM, particularly for commercial purposes. For example, Thomson Reuters and West Publishing
The absence of an untrammeled TDM exception within Corp. have sued Ross Intelligence, Inc. over, among
the EU clearly has potential to encourage AI users to other things, its alleged use of machine learning to create
train their AI systems on data placed on servers in a legal research platform for Ross from the Westlaw
jurisdictions with clear copyright exceptions, and to database. The outcome of this case is still pending,
create consequential effects in areas such as business although Ross’ motion to dismiss was denied.2
structuring, investment decisions and talent retention.
Will fair use protect machine learning?
Text and data mining in the United States
In a seminal case from 2015, the Second Circuit found
As AI search engines crawl through the World Wide Web Google Books’ scanning of more than 20 million books,
endlessly seeking, digesting, and aggregating content, many of which were subject to copyright, to be a non-
they inevitably digest copyrighted works such as music expressive” and transformative fair use of the texts
videos, songs, novels, and news stories. Since this because Google Books enabled users to find information
digestion – which generally requires the making of a copy about copyrighted books, as opposed to the expressions
– is frequently performed without the express consent contained in the books themselves.3 A key learning from
of the copyright holder, its legality often depends on the case was the distinction made between “expressive”
whether it is permitted under an exception to, or outside and “non-expressive” use of copyrighted materials, the
the framework of, copyright law. Under U.S. copyright latter being deemed fair use by the court. Applied to AI,
law, the exception that is most frequently relied upon is could the solution mean that so long as the original text
“fair use.” does not “express” in the final work product, the act of
machine reading is fair use?

We are not aware of U.S. courts applying fair use in

the context of TDM, in part because cases considering
AI functionality have often involved the express use of
copyrighted material that qualified as traditional copyright
infringement. For example, the Second Circuit found in
a 2018 case, that although TVEyes’ “search feature”
for Fox News content in and of itself might have been

2 Thomson Reuters Enter. Ctr. GmbH v. ROSS Intelligence Inc., 529 F. Supp. 3d 303 (D.
Del., Mar. 29, 2021).
54 Reed Smith Guide to the Metaverse – 2nd edition 3 Authors Guild, Inc. v. Google Inc., 804 F.3d 202 (2d Cir. 2015).
 Artificial intellegence

sufficiently transformative to be fair use, the fact that this regard are respected. This raises significant questions
TVEyes also had a “watch feature” that redistributed such as: (1) the exact manner in which the opt-out must
copyrighted Fox News content to TVEyes users for a be expressed; (2) at what point the TDM user needs to
monthly fee did not permit a fair use defense (Fox News check whether the opt-out has been exercised (e.g., at
Network, LLC v. TVEyes, Inc., No. 15-3885 (Feb. 27, the time when it first accesses the data, or on a continual
2018)). basis?); (3) who bears the burden of proof as between
the rights owner and the user (bearing in mind the
In practice, major TDM search projects are generally dealt difficulty a user will have in “proving a negative,” i.e., that
with under contract, which has resulted in low instances the opt-out right has not been exercised); or (4) how to
of litigation. Academic and commercial arguments have determine the period of permitted retention.
also been raised against over-reliance on “fair use” for
TDM. As a practical matter, a key factor that U.S. courts Assuming that certain types of rights owners will largely
will look at is whether TDM deprives the copyright owner seek to exercise their opt-out rights, these new TDM
of the value of their copyrighted material. exceptions are likely to provide a contrasting level of
protection to businesses, depending on the type of data
Text and data mining in the European Union they use. If the data being used is likely to belong to
the most traditional areas of the entertainment industry,
(Directive 2019/790) then these exceptions may provide little support for use
In Europe, the recent Copyright Directive adopted in 2019 in commercial AI applications. The geopolitical context
created two TDM-specific exceptions. thereby created is one in which other jurisdictions have
positioned themselves favorably in the race to become
1. TDM for research that focuses on TDM by research global centers for TDM and AI development, through their
organizations and cultural heritage institutions, limited more developed, fit for purpose copyright exceptions.
to the purposes of scientific research (art 4).
Is AI-created content copyrightable?
2. TDM for any purpose that applies for everyone else,
but with a significant caveat: the ability for copyright AI creations are certain to constitute large parts of the
holders to opt out of that exception (art 5). landscape of the metaverse’s virtual worlds – sometimes
literally, as in the case of the Azure-driven location models
The caveat allowing rights owners to opt out is significant, and maps generated in Microsoft Flight Simulator. The
and could potentially place a considerable burden on questions of rights and ownership in the outputs of AI
the shoulders of businesses that would arguably need systems raise their own problems.
to verify, each time a training set needs to be copied,
whether owners of the underlying copyright-protected International law espouses the human-centric concepts
material have opted out or not. Otherwise, businesses of personal expression, authorship, and originality as
could inadvertently be infringing copyright. prerequisites for the existence of copyright in a creative
work (and therefore for its protection and “ownership”).
Given that there is no incentive for rights owners not to
reserve their rights, we suspect that a great number of Those concepts break down when the link between
(traditional) copyright owners will want to reserve their a human author and the creative work is interrupted
rights and “opt out.” With regard to the manner in which – most infamously in the “monkey selfie” case, where
rights owners could exercise their opt out, the Directive a photograph taken by a monkey was found not to
is somewhat unclear. It explains that a rights owner may enjoy copyright protection.4 Outputs generated purely
only reserve those rights by the use of machine-readable by AI systems (which are, depending on the facts,
means, and should be able to apply measures (e.g., distinguishable from works created by humans with AI
technical measures) to ensure that their reservations in
4 Naruto v. Slater, 888 F.3d 418, 426 (9th Cir. 2018).

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Artificial intellegence

“In the future, making the metaverse a safe

place for all is likely to require that every
AI-generated three-dimensional gaming
environment is devoid of biases, bullying, and
other man-made expression of violence.”
56 Reed Smith Guide to the Metaverse – 2nd edition
 Artificial intellegence

Guide to the Metaverse – 2nd edition Reed Smith 57

Artificial intellegence

assistance) challenge the norms that only contemplate works produced solely by mechanical processes, and
human creation of copyright works. Even the UK’s unique has included the requirement of human authorship in its
provision governing “computer-generated works,” – Compendium of Copyright Office Practices.5
where the person “by whom the arrangements necessary
for the creation of the work are undertaken” is deemed In 2018, the Copyright Office rejected Stephen Thaler’s
the author – confirms the need to identify a human rather application to copyright “A Recent Entrance to Paradise,”
than a system as the author of a “creation.” a work generated by his AI system and listed author,
the Creativity Machine, on the grounds that it “lacks the
Likewise, traditional justifications for copyright protection, human authorship necessary to support a copyright
such as incentivizing creation of works or protecting the claim.” The Copyright Office also rejected Thaler’s
natural rights of creators, break down when the creator claim that AI can be an author under the work-for-hire
is a machine requiring no incentivization and having no doctrine.6
personality.
The view of the Copyright Office is that a work generally
In short, both the EU and the UK legal systems do not needs to be of human authorship in order to be
appear to welcome or accommodate creations by robots, copyrightable, with the computer merely being an assisting
which (currently) seem destined to fall into the category instrument, and where the traditional elements of authorship
of information that is free and free-flowing. Could an AI- (such as literary, artistic or musical expression) were
generated metaverse reset our world by providing a great conceived and executed by a human.7 This means that
space for the public domain and “commons” to thrive? AI-created works in the United States will likely become
part of the public domain when created and can be freely
Will an AI-generated metaverse compete with human- distributed. As it stands, this has profound implications
generated worlds in a great clash of intellectual property for the development of AI-created works because the
battles? The android’s doodle of an electric sheep may have companies and investors behind the machines that produce
no author and no copyright protection, but the programmer them at present are not afforded protection under U.S.
of the android may still want to license it to you. copyright law. There has been a lot of discussion as to
In the United States, the primary purpose of copyright whether U.S. copyright will evolve to afford this protection.
law is to promote the production of creative works by One argument for extending copyright protection to non-
providing an economic incentive to authors through human authors is that other non-natural persons have
the protection of their works. This economic incentive been extended legal rights. Corporations in the United
is provided to authors for the public good, because States have long been afforded the right to enter into
enabling authors to be rewarded monetarily for their contracts and enforce contracts to the same extent as
works will lead to the production of more creative human beings, as well as the obligation to pay taxes.
content. As AI companies continue to invest in the
technologies necessary for the machine-based Some commentators have argued that the end user of
production of creative works, will they be able to enjoy an AI program generating creative content should be the
the economic protections of copyright? owner of that content, using a concept of a machine-
based work-for-hire doctrine, with the AI program being
Section 102 of the Copyright Act requires that for a deemed the equivalent of a contractor who is hired by an
works to be copyrightable, they must be “original works employer to produce content owned by that employer.8
of authorship fixed in any tangible medium of expression
now known or later developed…” While neither the
Copyright Act nor the U.S. Constitution addresses 5 “[T]he Office will refuse to register a claim if it determines that a human being did not create
the work.” U.S. Copyright Office, Compendium Of U.S. Copyright Office Practices § 306
the requirement of human authorship, the courts and (3d ed. 2021).
the Copyright Office have operated on that basis. The 6 Letter from Shira Perlmutter, U.S. Copyright Office Review Board, to Ryan Abbott, Esq.
(Feb. 14, 2022) (on file with the U.S. Copyright Office).
Copyright Office has rejected attempted registrations of 7 U.S. Copyright Office, Compendium Of U.S. Copyright Office Practices § 313 (3d ed.
2021).
8 See Wenqing Zhao, AI Art, Machine Authorship, and Copyright Laws, 12 Am. U. Intell.
58 Reed Smith Guide to the Metaverse – 2nd edition Prop. Brief 1 (December 2020).
 Artificial intellegence

“Governments have used versions of the

technology in criminal justice and the allocation
of public services like income support.”

Others have cited the creative contributions that the Ethics

end user makes in directing the AI program to produce
a creative work as a justification for the end user being The other area of considerable interest in the sphere of
deemed an author of the AI-produced content, viewing machine learning and AI is that of ethical compliance of AI
the AI program as a tool of the end user.9 systems – witness the increasing number of papers and
debates happening in that space.
AI as an enforcement mechanism to protect Today, the ethical ramifications and pitfalls of AI are
copyright considered to be highly application-specific. The potential
for in-built biases of the AI system to create serious
Beyond having the ability to produce creative works, consequences for human subjects is deemed much
machine learning also provides human authors with more obvious in the context of, for example, criminal
the ability to enforce their rights and to better monetize justice applications than that of an AI generator of
their rights. Companies like Audible Magic, as well as artwork. This underlies the identification by the European
Google and YouTube, have developed AI software that Commission in its recent draft AI Regulation of “high
recognizes content and helps detect potential copyright risk” AI applications, which are to be subject to statutory
violations. Their technologies should yield significant standards.
economic benefits for human authors.
In the future, making the metaverse a safe place for all is
Is AI-created output infringing? likely to require that every AI-generated three-dimensional
gaming environment is devoid of biases, bullying, and
The fact that AI can create output that mimics human other man-made expressions of violence all too often
expression and personalization means that AI’s use of experienced in our real-world environment.
copyrighted works for the purposes of machine learning
may harm the market for works by human authors When the day comes, it seems very likely to us that all
and thus come under increased scrutiny by (human) AI operators – to a greater or lesser extent, depending
rightsholders. Even if the creation of the AI systems in on the nature of their applications and whether, as a
and of itself is not infringing, if output generated by an AI matter of legal compliance or commercial best practice
system that has been trained on a particular type of data (for example, in adhering to voluntary sector standards
is substantially similar to the data in the dataset, it may be and benchmarks) – will need to consider their internal
an unauthorized “derivative work” that infringes copyright processes and governance with respect to the high level
in the preexisting works, which is a scenario far more of safety and security that will be required to enter the
likely to unfold with small and very small datasets. building site of the metaverse.

The scope for bias in systems and outputs; the quality

Should AI copyright be based on creativity? and nature of training data; systems resilience and
accuracy; human oversight and intervention – to name
Some countries, such as the United Kingdom, have but a few factors – are likely to be necessary to ensure
moved toward protecting computer-generated works that humans feel comfortable, safe, and at ease in the
(steered by humans) based on the elements of creativity metaverse.
contained in the work in order to encourage investment
in AI systems. As AI continues to develop and generate
more “creative” works, the debate over the ability to
copyright these works, and who can own them, will
undoubtedly grow.

9 See Nina Brown, Artificial Authors: A Case for Copyright in Computer-Generated Works, 20
Sci. & Tech. L. Rev. 1 (Fall 2019). Guide to the Metaverse – 2nd edition Reed Smith 59
Artificial intellegence

Europe’s approach to AI and the metaverse What is in this proposal?

On April 21, 2021, the European Commission published The Commission takes a risk-based but overall cautious
their long-awaited proposal for a regulation on AI, aiming approach to AI and recognizes the potential of AI and
to turn Europe into the global hub for trustworthy AI the many benefits it presents, but at the same time is
(Proposal for a Regulation laying down harmonized rules extremely aware of the threats these new technologies
on AI, Artificial Intelligence Act). pose to the European values and fundamental rights and
principles.
The EU Commission’s proposal is the result of several
years of preparatory work by the Commission, including They follow a risk-based approach that is essentially
the publication of a “White Paper on Artificial Intelligence.” divided into four parts:
The vision of the Commission is to protect and strengthen
fundamental rights of people and businesses while at the 1. Unacceptable risk: AI systems that are considered
same time encouraging AI innovation across the EU. as a clear threat to the safety, livelihoods, and rights
of people are generally prohibited. An unacceptable
Various EU member states have already reacted to the risk exists especially when systems or applications
proposed AI Act. A decision on the proposal is intended manipulate human behavior to influence the user’s
for November 2022. However, it is not yet clear whether free will, and that could lead to psychological or
this timeframe can be met as there are still too many physical harm. For example, toys using voice
topics being heavily discussed. Moreover, it also seems assistance to encourage minors to engage in
that there are still some gaps in data protection law, dangerous behavior would fall in this category.
which could be a major barrier to the Artificial Intelligence
Act. 2. High risk: AI systems identified as high risk are
permitted, but subject to special requirements and
conformity assessments. Such systems include AI
To whom does the proposal apply? technologies used in various areas that need higher
The newly proposed regulation would apply to (1) protection, such as education, critical infrastructure,
providers that place on the market or put into service employment management, security components of
AI systems, irrespective of whether those providers are products, law enforcement in cases of interference
established in the European Union or in a third country; with people’s fundamental rights, or asylum and
(2) users of AI systems in the EU; and (3) providers and border control management.
users of AI systems that are located in a third country Just to name a few special obligations: The
where the output produced by the system is used in the systems must go through adequate risk assessment
EU. and mitigation systems before being placed on
the market. In addition, they have to provide a
high quality of data sets, a detailed documentation
about all information necessary on the system,
and its intended purpose so that authorities can
assess compliance. The systems must meet the
requirements of transparency and information for the
user and must be overseen by humans to minimize
risks.

60 Reed Smith Guide to the Metaverse – 2nd edition

 Artificial intellegence

In particular, all remote biometric identification The proposal now goes to the European Parliament and
systems are placed in this category and are subject the member states in the ordinary legislative procedure.
to these strict requirements. Their live use in publicly Given the controversial nature of AI and the large number
accessible spaces for law enforcement purposes is of stakeholders and interests involved, it seems likely
generally prohibited. Very few strict exceptions are that this will not be a straightforward process. There will
allowed, and these must be authorized by a judicial likely be many amendments and, hopefully, also some
body (for instance, when absolutely necessary to further clarification. Once the law is adopted and passed,
search for a missing child). the regulation would be directly applicable in all member
states in the EU.
3. Limited risk: AI systems with limited risks are
generally permitted but also have to fulfill specific Authors
transparency obligations. AI systems such as
chatbots shall make users aware of the fact that they
are interacting with a machine so that they can make
an informed decision to either continue or stop.

4. Minimal risk: The vast majority of AI systems, such

Sophie Goossens
as video games or spam filters, fall into this category Partner
and are legally allowed as there is minimal risk or no London
risk at all for users’ rights or safety. [email protected]

What’s next?
The European Commission’s 108-page proposal is an
attempt to regulate an emerging technology before it
becomes mainstream. As the European Union has been Jess Drabkin
the world’s most aggressive watchdog of the technology Partner
industry, it may serve as a blueprint for similar measures New York
[email protected]
around the globe.

The rules have far-reaching implications for major

technology companies that have poured resources into
developing AI, but also for scores of other companies
that use the software to develop medicine or judge
creditworthiness. Governments have used versions of Thomas Fischl
the technology in criminal justice and the allocation of Partner
public services like income support. The broad definition Munich
[email protected]
of AI systems ensures that the regulation would have
a significant impact in all industry sectors, in particular
in those sectors that want to have success with the
metaverse.

Guide to the Metaverse – 2nd edition Reed Smith 61

Data protection and privacy

T
oday’s privacy and data protection laws were built for physical
filing cabinets and then updated for the internet. Applying them to
tomorrow’s metaverse, an alternate digital real-time existence offering
a persistent, live, synchronous, and interoperable experience, could well
prove to be a stretch too far.
The following sections describe some of the ways in which current privacy and data protection laws could
potentially be applied to, or end up becoming obsolete in, the metaverse.

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 Data protection and privacy

The datasets collected in the metaverse may A further layered challenge sits in the fact that additional
be more numerous and extensive than ever contractual requirements apply in many countries where
personal data is transferred out of certain jurisdictions.
The technology, interactions, experiences, and Transfers out of the EU have been a particular focus area
interconnectivity of the metaverse could mean the in the last year and now require careful assessment on
collection of personal data on a scale we have never a per transfer, per country basis. How will the metaverse
seen before. Although, inevitably, the actual data needed take into account (or not) such requirements, given its
and collected will depend on the specific use cases that all-encompassing, global reach and the aim to achieve
emerge. freedom of movement within the metaverse? Will
regulators be able to provide templates and guidance to
While an avatar may likely be in a different form to its allow the right balance between efficiency, pragmatism,
creator, the data collected in relation to and generated by and protection of privacy rights for individuals?
it remains linked to the individual behind it and constitutes
personal data. Such data may comprise information Furthermore, how can one determine any jurisdiction
collected via familiar registration and payments to service within the metaverse? This could ultimately be either
interactions and systems data generated through log ins. the location of the user, the location of the avatar or the
However, what concerns many commentators, is the location of the relevant server.
collection of new, even richer combined datasets in the
metaverse including anything from gait, gaze, posture, The question of applicable privacy laws in
emotion and haptic data involving sensations as well as
interactions with other individuals, content and objects
the metaverse
in real time. There is a potential that some such data The metaverse will connect the person to their “avatar”
may even constitute special category or sensitive data (or other digital representation(s)). Therefore, regulators
demanding higher protection under data protection laws. around the world would likely consider information
collected about a metaverse user’s activities to be
The data sharing required for the metaverse personal data, subject to existing privacy and data
to operate could be unprecedented protection laws.

The sheer number of companies (not to mention legal As those who have practiced privacy and data protection
entities) involved in making the metaverse tick could be law know, the cross-section of applicable laws, especially
on a scale never seen before. The intended experience in the United States, is a constant challenge. Regulation
for the user will require rich personalization, dependent on of a digital interaction may involve the engagement
their profile, preferences, and actions. of privacy rules in some countries based on physical
location of the organization or the individual; the type of
Users will be able to move around between different organization or individual (say, a health care organization
metaverses so that multiple data sets can be collected or or a child); the type of data collected (say, race or
shared between different spaces of the metaverse. sexual orientation); and the purpose for collecting the
data (for example, marketing or profiling). Applying this
Such mass personal data use brings various privacy cross-section of laws is unwieldy even in a relatively
challenges. A key problem is how to manage the static environment like the internet. It is unclear how
sharing of such personal data and set up the contractual organizations could navigate legal compliance in a
accountability and privacy obligations required to protect persistent, live, synchronous, interoperable digital
its use.

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Data protection and privacy

environment. Organizations operating within the “one- Even in a virtual life, relationships and encounters, both
stop-shop” privacy rules of the EU General Data private and business-related, must be protected and
Protection Regulation (GDPR) may fare better here, but regulated by a legal framework, especially in order
this raises another issue – which privacy rules of which to protect fundamental rights. Following on from the
country apply in the metaverse? Does it still make sense question of the applicable legal regime in the metaverse,
to have privacy laws such as the California Consumer the GDPR, for example, could be applied under certain
Privacy Act (CCPA), which focuses on Californian circumstances. Under the GDPR, the data controller
residents, and won’t the metaverse make it even harder would then be the entity that alone or jointly with others
for organizations outside of the UK and Europe to know decides on the purposes and means of the processing of
when they are targeting products or services to or personal data (Art. 4 No. 7 GDPR).
monitoring those in the UK and Europe and therefore
caught by the GDPR? The definition of the extent of decision-making
possibilities regarding the purposes and means of
Further, who will be held responsible for privacy in the the processing of personal data in the metaverse for
metaverse? We don’t know what (if anything) will own individual entities seems particularly problematic in
or control some or all of it. Possibly, it will operate with this context. On the one hand, it is conceivable that
single-organization ecosystems (similar to today’s social responsibility may be determined for a respective space
media platforms), centrally operated platforms hosting within the metaverse, similar to the case with platforms or
different organizations offering their goods and services, individual companies. Responsibility could also be seen
but alternatively, it will be characterized by interacting to sit with access point providers, i.e., individual service
access points and multiple controllers. If governments providers that enable users to access the metaverse,
hold organizations responsible for others’ activities in the such as internet service providers. This could lead to
metaverse, it is difficult to envision organizations building almost intolerable provider liability for individual service
anything but a collection of proverbial “walled gardens” providers.
that will not fulfill the promise of the metaverse.
Or is the metaverse a starting point to move controllership
and responsibility to the data subjects – who carry their
Determining who is responsible will be data in their wallets and give participants in the metaverse
challenging access? Such a vision of the metaverse would not sit well
with the current framework for data protection control
In a metaverse, diverse entities will be present and a web
and responsibility that has been designed for digital
of relationships and encounters will emerge, making it
platforms and services today and could demand a full
difficult to determine who is responsible or liable within
rethink.
these different relationships. With regard to applicable
data protection laws, it will also be particularly challenging
to determine who can be considered a controller and Operationalizing transparency and control
who a processor in the context of processing personal in the metaverse could stretch notice and
data. consent models to their limit
Some commentators about the metaverse state that one A central theme of most privacy laws around the world
of its key features is that “no one controls the metaverse” require the use of notice and consent, which has led to
(although others have different views and it is certainly lengthy privacy policies and multiple just-in-time notices.
the case that many walled garden private metaverses The last few years have seen an acceleration in such
exist today). Ultimately, however, if no one is supposed to requirements with an ever-growing list of details that
control the metaverse, can there be any data protection organizations need to tell their customers. For example,
responsibility at all? in the United States, if a company is using data for
cross-context behavioral/targeted advertising, it must
notify users and provide them with an opt-out under the
64 Reed Smith Guide to the Metaverse – 2nd edition
 Data protection and privacy

requirements of five new privacy laws coming into effect Determining which individual rights apply,
in 2023. These laws have a variety of new requirements who is responsible for complying, and how
involving notice and choice. For example, these laws will
to operationalize them will be a difficult
require a business to provide notice and consent if data
is going to be used for a new purpose that is unrelated undertaking
to the initial purpose of collection. This means that as Many privacy laws around the world give individuals rights
services grow and evolve, so do the corresponding with regard to their personal data, and individuals are
notices. Users are now confronted with pages and pages increasingly aware of those rights. As a result of these
of privacy notices and pop-up consent banners. This mounting laws, individuals are now even more conscious
model was developed for desktops and large displays of their ability to “access” or “delete” their information.
and is already proving difficult for mobile users. The In Europe, users refer to the right to delete as the “right
metaverse proves an even greater challenge, as the to be forgotten,” which proves to be a challenge for
layers of data use by multiple parties will mean lengthy some businesses, depending on the length of time the
privacy policies, as well as layers of pop-up notices. consumer has interacted with the company and the
Detailed notice and consent at each interaction will not nature of their services. In addition, many organizations
be operational in the metaverse. Imagine your journey in the last few years have dealt with requests from
through the metaverse being interrupted with notices consumers and even employees (or ex-employees) to
about the various entities that collect and use your data. “delete all of the data immediately!” or “provide all of
Then consider that each interaction in the metaverse will the data that the company holds on me.” As those who
present you with endless controllers that will tailor their deal with such requests will know, it’s not that simple
content (i.e., your metaverse) based on the user (i.e., in practice and, for every right, there exist additional
the user’s personal data) and what they have permitted. exemptions and exceptions. However, all requests need
For example, one user may not have opted in to a new to be carefully considered on a case-by-case basis, and
secondary purpose for her data use – does that mean companies need to take time to consider how to inform
that her journey will stop? These are the challenges that individuals about their rights and to comply with requests
companies in the metaverse face as they juggle the within the required period of time.
development of new interactive frontiers with brands and Applying this in the metaverse, the first issue to
entertainment developers, while also keeping an eye on consider will be which rights apply to which individuals?
the various privacy regulations around the globe. As discussed above, the issue of jurisdiction is also
This is not an entirely new journey for some businesses. applicable here. Today’s privacy laws largely focus on the
Companies collecting data from residents of the EU and physical location of the consumer. In a physical world this
UK have already been grappling with the requirements makes sense. But in a digital universe that is borderless,
for cookie pop-up notices, which are the bane of many. not so much. It would seem the laws should attach
Now, as a result of the new laws, will users be confronted based upon the physical location (or residence) of the
with pop-ups and clickwraps at every turn? At what point user as a first step but the analysis would not end there.
does visibility, consent, and choice over data use become We’d have to consider all the laws that could attach
unworkable and no longer in the interests of those it to the user as she travels through the metaverse and
serves to protect? Or, will we need another solution, one engages with different services and content, which are
that is made for this new frontier? This would be the hope offered by companies in multiple jurisdictions. She may
of many who are developing content and interacting in have the “right to correct” as a result of her interactions
the metaverse. with a European business, but she may not have the
same right for a company operating from Japan. This
leads to complicated questions of what rights does the
user legally have as a result of her physical location, and

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Data protection and privacy

what rights does she have as a result of her interaction • Measurement and cross-platform tracking of ads
within the metaverse? Then, operationally, how will the for attribution purposes is already an issue in the
functionality to exercise these rights be built into the advertising industry generally, especially in light of
metaverse? Again, pop-ups and lengthy notices are not the imminent demise of third party cookies and the
an ideal solution. ever-changing landscape of privacy laws. Advertisers
should ask: How does measurement and tracking of
AdTech and the metaverse ad performance in the metaverse work? Will acronyms
like CPM and CTR no longer be relevant? How are
AdTech already exists in the gaming industry where standards set? Who is responsible for measuring ad
providers give advertisers opportunities to place performance? How will this technically be achieved?
advertisements in-game, such as on billboards or jerseys Will technology, such as eye tracking, be deployed to
and other in-game items, and the AdTech ecosystem has provide more accurate reporting?
begun to find a way to support advertising opportunities
in the metaverse. Besides the obvious data and privacy • Ad fraud is any activity that fraudulently represents
issues addressed above, typical issues that advertisers online advertisement impressions, clicks, conversions,
consider when contracting with an AdTech provider are or data events in order to generate revenue. There is
obligations around compliance with laws, representations no doubt that fraud will be present in the metaverse
and warranties, indemnities, insurance, and ownership as well. Advertisers should ask: How can we prevent,
and licensing of data. However, there are other issues track and measure fraud in the metaverse? How can
and concepts that are relevant in today’s advertising we understand whether it is different to the fraud the
landscape that will likely also be relevant to advertising advertising industry already grapples with?
opportunities in the metaverse:
 Data protection and privacy

• Viewability is the advertising metric that aims to track • Given that the metaverse, like the internet, will not be
only impressions that can actually be seen by users. centrally owned, this brings about questions on how
This metric will likely be relevant to at least some technically ads will be displayed. Advertisers should
advertising opportunities in the metaverse. As such, consider how contractual liability for this will flow
advertisers should ask: How will we know if the ad through to the appropriate parties, from publishers to
is viewable? Are viewability standards different in the tech stack providers.
metaverse – or should they be?
These are just some of the many considerations that arise
• Brand safety is a set of measures taken to protect when trying to apply existing data protection laws in the
the image and reputation of a brand from the metaverse. It will be fascinating to see what changes will
negative or damaging influence of questionable need to be made in practice either to the metaverse to
or inappropriate content when advertising online. suit existing privacy laws, or to existing privacy laws to
Advertisers should consider brand safety issues suit the metaverse.
when engaging in the metaverse and ask: How can
AdTech providers help to ensure that advertisements
are placed in brand-safe environments? What do I
know about the metaverse I’m going to participate in
and what are the community standards?
Data protection and privacy

Children’s privacy in the metaverse here with there even being fundamental differences as
to when an individual is a child and when they become
The past few years have seen a marked soar in the an adult, let alone the detail. The potential for mass data
protection of children’s data protection rights, with the collection and targeting presented by the metaverse,
advent of the UK Age Appropriate Design Code, the discussed earlier in this chapter, run contrary to any of
German Interstate Treaty for the Protection of Minors these developments in kids privacy however, begging
in the Media (Jugendmedienschutz-Staatsvertrag), and the question as to whether we will see robust age gating
the Irish Fundamentals for a child-oriented approach to to bar children from metaverse experiences, or the
data processing to name just a few initiatives. Again, the development of parallel kids-friendly metaverses.
issue of the convergence of rules for different jurisdictions
raises its head when we think about the metaverse,

68 Reed Smith Guide to the Metaverse – 2nd edition

 Data protection and privacy

Authors

Elle Todd Joana Becker

Partner Associate
London Munich
[email protected] [email protected]

Tom Gates Hubert Zanczak

Associate Associate
London Chicago
[email protected] [email protected]

Keri Bruce Charmain Aw

Partner Counsel
New York Singapore
[email protected] [email protected]

Andreas Splittgerber Wendell Bartnick

Partner Partner
Munich Houston
[email protected] [email protected]

Sarah Bruno
Partner
San Francisco
[email protected]

Guide to the Metaverse – 2nd edition Reed Smith 69

Content exploitation

T
he metaverse will continue to provide new opportunities for content
creation, consumption, and exploitation. However, the successful
monetization of such content presents new challenges for stakeholders. In
short, rights holders who create and license content will want robust protection
to ensure that they are fairly remunerated for each new form of exploitation. In
contrast, licensees who acquire and exploit content will want licenses sufficiently
broad to adapt to the evolving use cases. End users’ interests will be primarily
focused on the user experience, but their interests may also overlap with those
of rights holders and licensees, subject to whether they participate in content
creation or consumption. Regardless, it is clear that the metaverse is changing
the way we think about content licensing.

Key challenges
While the terms of any license will vary depending on the content and use case, among other factors, there are several
common factors that will need to be carefully considered when licensing content for use in the metaverse, as further
set out below.

Term Current position Implications for licensing parties

Territory Licenses are typically granted on a territorial Is the metaverse included in existing territorial definitions? When air
basis, with the licensed territory being defined travel became popular, the rights to in-air entertainment were carved
at a national, regional, or worldwide level. out so that they could be licensed separately. This may also be the
Some agreements specify “the universe” as the case with the metaverse. As the metaverse continues to grow, we will
applicable territory. continue to see the creation of new virtual worlds. To exploit content in
these environments, licensees and licensors will need to consider how
the virtual world is defined. This is particularly relevant in the context of
augmented reality where real and virtual worlds may overlap. Licensees
also may seek to include provisions granting them a right of first refusal
for new virtual worlds.

Ownership There are well-established laws and principles The metaverse will create new opportunities for AI-generated content.
governing ownership of copyright in audio, However, as in the real world, there are challenges in establishing
audio-visual, and other traditional content ownership of such content, which means there will be additional
formats. Any person intending to exploit third- challenges for anyone seeking to further exploit content that has been
party content is required to identify and then created by AI. As the metaverse extends beyond traditional territorial
obtain a license from the copyright owner. boundaries, licensors will need to ensure they can evidence adequate
territorial ownership. This will require particular diligence where the
licensor is an intermediary who had obtained its rights from the original
content creator.

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 Content exploitation

Term Current position Implications for licensing parties

Rights granted The owner of a piece of content has certain While basic copyright principles, as further set out in the Intellectual
exclusive rights in that content by way of property section, will likely translate into the metaverse, the use cases
copyright and other intellectual property rights are likely to be incredibly broad and constantly evolving. From a
laws. A licensor will grant certain rights to licensee’s perspective, a grant of rights will need to be broad enough
use the content, depending on the licensee’s to adapt to the constantly changing environment without the need to
intended use case. repeatedly amend and renegotiate the underlying license. For example,
the law remains unsettled on what rights are required to exploit content
through NFTs, so it is important for licensees to obtain as broad a
grant of rights as possible. Licensors should also review any exclusive
grants of rights they have made to determine whether there is scope to
argue that the metaverse falls outside the exclusivity conditions. To the
extent the content contains any underlying third-party rights, whether
intellectual property or publicity rights, the licensor will need to ensure
that it can pass those rights on to the licensee. In addition, to the extent
that a piece of content (for example, a clip from a music video, television
show, movie, video game, or commercial) was produced under one of
the many SAG-AFTRA collective bargaining agreements, the creator of
such content must ensure the licensee’s compliance with any payments
due to the performers as a result of the licensee’s use of the content.

Negotiating Traditionally, the bargaining power between The metaverse will likely continue to disrupt the power balance between
positions licensors and licensees has been determined licensors and licensees by presenting new opportunities for content
by several key factors, such as (i) who the more exploitation and enabling less established licensors to make their content
powerful entity is, (ii) whether the licensor has a available. There will also likely be more opportunities for individual or
monopoly on the rights being granted, (iii) the independent content creators to distribute their content directly, which
perceived value of the content, and (iv) whether may mean greater competition for original content. This could result in
the licensee is under pressure to obtain licensees being required to offer more attractive licensing packages to
a license (for example, if it was previously obtain licenses for original content.
operating without a license). Often, this results
in major licensors having a strong bargaining
position in content licensing negotiations.

Licensed Licenses are often limited to a particular The interactivity of the metaverse may make it more challenging for
services, service, device, or use (or a combination licensors and licensees to agree to limit the license to specific use
devices, and thereof). For example, a licensor may grant a cases. Licensees will likely demand greater flexibility to facilitate the
uses license that allows end users to stream music development of and interaction with the metaverse, while licensors will
through a branded service on named devices. want to rein in the grant of rights as tightly as possible and maximize
the number of licenses that can be granted in connection with the same
content. As licensors and licensees become more attuned to how
content is exploited in the metaverse, key use cases will likely develop as
industry standards for granting rights, subject to the further evolution of
the metaverse.

Fees A license fee may be based on a flat fee, a fee While the basic fee mechanisms may remain the same, the metaverse
per subscriber, a fee per viewer hour, minimum will complicate (1) the definitions of revenue and usage metrics; (2)
guarantees, advances, proportions of revenue, how usage can be tracked across different services, devices, and use
or other usage models (or a combination cases; and (3) how the fee is calculated. Fees may also be impacted by
thereof) in exchange for the grant of rights from the collective bargaining obligations referred to above. Additionally, the
the rights holder. metaverse tends to attract alternative payment structures as parties may
agree to cryptocurrencies or digital wallets. Licensors and licensees alike
will need to make sure they are well versed in the laws governing both,
and what implications they may have on their businesses.

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Content exploitation

The above is by no means an exhaustive list of the challenges the metaverse brings to content
licensing, but it represents some of the key commercial and legal issues that will need to be
considered by licensees and licensors. Flowing from these overarching considerations are other
challenges that will also need to be assessed, such as usage tracking, file format standardization,
delivery and ingestion of content, scope of warranties and indemnities, and conduct of claims for
infringing use, among others.

Traditional
territories
Usage
Infringement
tracking

Existing License fee

devices structures

Warranties and File

indemnities Metaverse formats

Grant Existing
of rights use cases

Negotiating
Ownership
positions
Delivery
and ingestion

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 Content exploitation

Different perspectives whether such licenses are sufficient. The reach,

immediacy, and interactivity of the metaverse will demand
Inevitably, licensors and licensees will have different the broadest set of rights possible, and it will likely be
perspectives on these key challenges. Licensors will likely more important than before for licensees to negotiate
seek to maintain a restrictive approach to licensing in the rights of first refusal for new forms of exploitation or
metaverse, for example, by limiting the grant of rights and new digital worlds. Licensors and licensees will need
clearly defining the licensed services, devices, and uses, to consider the overarching user experience when
unless there is a substantial financial incentive otherwise. negotiating the scope of the grant of rights. The licenses
The underlying considerations will remain the same – that facilitate content exchange in the metaverse will
licensors want to control how their content (and ultimately need to be flexible enough to ensure a seamless user
their brand) is used and consumed. Licensees typically experience between increasingly overlapping and
want as broad a license as possible, as this allows them interconnected services. This may force conservative
to be more creative with content exploitation and to take licensors to provide greater flexibility regarding bundling
advantage of market developments and trends. This and associated limitations, but equally makes it ever more
will be even more important in the metaverse, as the important for licensors to ensure that their reputations
rights implicated in certain key use cases, such as the and brands are adequately protected (as further set out in
exploitation of NFTs, remain subject to debate. Service the Deepfakes in the metaverse section).
providers with existing licenses will need to determine

“This may force conservative licensors to provide

greater flexibility with regard to bundling and
associated limitations, but equally makes it ever
more important for licensors to ensure that their
reputations and brands are adequately protected.”

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Content exploitation

Key industries Games – Gaming and eSport companies will most easily
be able to adapt their existing services and operations
While there are some key challenges that will apply to function seamlessly in the metaverse. Because of this
across a variety of different sectors (as further set out in head start, “players” in this industry should, on the one
the Advertising, Games, and Music sections), different hand, carefully consider how to protect their content and
industries will face their own particular issues in terms of assets while also exploring how they can license out their
content licensing in the metaverse. rights to other less metaverse-ready industries. On the
other hand, the traditional use of buyout models in the
Advertising – The right to include a song or other item
content creation process means they are not constrained
of content in any form of advertising is often strictly
by a limited grant of rights. Companies operating in this
controlled. Even if such rights are granted, they are
space will likely be the leaders in pushing the boundaries
often subject to numerous restrictions and approvals,
of content licensing as the metaverse continues to grow.
such as payment obligations to performers, singers, and
musicians under the various SAG-AFTRA and American Music – Usage tracking poses a particular challenge
Federation of Musicians (AFofM) collective bargaining for music licensing in the metaverse, particularly when
agreements. While the licensee may not be a signatory, you layer in the SAG-AFTRA and AFofM payment
the licensor will typically include a specific provision requirements for songs recorded under their collective
that requires the licensee to nonetheless comply with bargaining agreements (which includes most songs from
such collective bargaining agreements. In addition, major labels). With different services, devices, and use
rights holders want to ensure that their content is not cases, the likelihood of receiving duplicate or triplicate
being used to promote a product they do not support, claims for a single use are even greater. Already complex
or in a way that does not fit with the creator’s image. and expensive usage tracking and reporting systems will
This will be even harder to manage in the metaverse need to be adapted to deal with the interactivity inherent
because there will be numerous scenarios in which a within the metaverse. Existing collective management
particular advertisement is viewed, depending on how licensing structures will also need to be examined,
the viewer interacts with the metaverse. In the United particularly considering what rights such entities will hold
States, individuals appearing in the content being in the metaverse and whether they will continue to license
licensed (including deceased individuals) may have on a territorial basis.
rights of publicity that require permission for the use of
their likenesses (including digital ones) in advertising. Social media – The terms and conditions for the use
The metaverse will likely become a source of advertising of social media services set out intellectual property
inventory (for example, virtual billboards, point of sale ownership provisions, but the increased interactivity
at virtual stores, event sponsorships, etc.), raising across services and devices in the metaverse will
questions regarding how best to track and measure likely blur the lines between where one service begins
the effectiveness of and engagement with virtual and another ends and, therefore, which terms will be
advertisements. Similarly, there will be sponsorship controlling and also who owns the IP created. Similarly,
and branding opportunities, and sponsors will need to if a user creates a piece of content in one corner of
consider the extent to which any real-world restrictions the metaverse, questions will arise as to how it will be
on these activities will apply in the metaverse. licensed in another area and who will be liable for any
infringing use. Increasingly, end users may demand
compensation for any such exploitation – meaning that
service providers will need to consider how revenues can
be shared across different services and devices.

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 Content exploitation

Film and TV – We are already starting to see increased Authors

interactivity in how we view film and TV – take, for
example, interactive TV and films on Netflix, such as
Bandersnatch and You vs. Wild. As the metaverse
continues to grow, there will likely be additional
opportunities to exploit existing audio-visual content
formats within the metaverse as well (think of movie Jess Parry
theatres and branded digital merchandise for your Associate
avatars). There is more opportunity for increased London
[email protected]
interactivity between content creators and viewers in the
metaverse, both with and between viewers and also with
their surroundings, which will create new opportunities
for content origination and funding, and may also impact
how stories are told. This may also raise ownership
issues: to what extent does the viewer transition to a
creator who holds certain rights in the content, and what Hannah Kong
Associate
does that mean for continued exploitation of the content?
London
Also, what does it mean if the interactivity leads to [email protected]
infringement of another party’s rights? And who is liable:
the producer or the interactive viewer?

What you can do to prepare

As the metaverse evolves, we will see an influx of the
development of new services and devices to facilitate
user engagements. New entrants will need to prepare
bespoke agreements for how content is licensed. At
the same time, existing service and device providers will
transition their services to fit the metaverse, and they
may wish to review existing content licenses to determine
whether they are sufficient. For the reasons set out
above, this will not be an entirely straightforward exercise
as there are new challenges to consider in the metaverse.
Existing stakeholders will need to either enter new
licenses or amend existing ones to build in the flexibility
necessary to operate successfully in the metaverse.

Guide to the Metaverse – 2nd edition Reed Smith 75

NFTs: Ownership in the metaverse
– the birth of a new concept

O
wnership, a legal concept almost as old as humanity, is being tested by
the advent of the metaverse. The staggering rise in popularity of non-
fungible tokens (NFTs) demonstrates how much appetite there is for a
solution capable of replicating the personal ownership enjoyed in the real world.

The advent of the metaverse, an always-online, Property and proprietary metaverse(s)

persistent, spatial “second” world, represents a
fundamental shift in our notion of digital frameworks and Ownership (or “property”) is a legal concept that is almost
presence, but metaverses – literally, beyond the universe as old as humanity. Prehistorians believe that it is the
– are not entirely new concepts. Videogames like the emergence, during the Neolithic period, of a sedentary life
17-year-old game Second Life and more recent games and agriculture that gave birth to the concept of property,
such as Fortnite, Roblox or The Sandbox – a platform a basis upon which our capitalistic societies continue to
where users can buy virtual land and create, play and be run today.
monetize their creations on the blockchain – may all be
Property rights of all sorts – in real estate, in shares of a
labelled early versions of immersive metaverses.
corporation and in musical compositions, to take three
At its core, a metaverse is code: ones and zeros, overlaid examples – give their beneficiaries a monopoly over a
with unfathomably vast amounts of data; a manufactured resource. The recognition of this monopoly is generally
environment in which all assets are synthetic, created seen as stemming from the idea that it gives the owner
and experienced from within. In such a world, everything an incentive to invest in improving the property because
comes from code. From the clothes our avatars wear it receives benefits from its use or sale. Accordingly, a
to the car we drive in, our “things” can only exist in the “proprietor” or “owner” can exercise exclusive possession
metaverse after being coded. or control over an object.

From a legal standpoint, our immersion in this entirely Intellectual property (IP), in particular copyright, has been
digital world poses a challenge to a number of legal created to enable a similar reservation of rights for its
concepts that have arisen out of the material world, beneficiaries. The companies building the metaverse
including the fundamental concept of “ownership.” are no stranger to this; as many other entertainment
Important questions, such as whether virtual assets businesses, the architects of the metaverse use IP rights
qualify for “ownership,” or whether new forms of to protect and monetize their investment. In fact, there is
ownership will emerge from the metaverse, are going a clear incentive for these businesses to build proprietary
to demand attention from users of the metaverse, and virtual worlds, where all that is created – software,
potentially from lawmakers, as the world transitions into graphic elements, characters and features – qualifies for
virtual environments. IP protection.

This new world, in which “IP is everywhere,” will present

challenges and interesting legal issues for the users of
the metaverse, whose expectations, forged in a world
of brick and mortars, may not always transpose in the
metaverse. After all, if I can own a car in real life, what
stops me from owning the same in the metaverse?

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 NFTs: Ownership in the metaverse – the birth of a new concept

Ownership vs. licensing: The three cases mentioned above illustrate the
A well-documented tension continuous tension existing between the expectations
of users of digital items and the companies that are
Since the internet was invented, a number of landmark licensing them. In Usedsoft, the only decision where the
cases have illustrated how users of certain digital “goods” CJEU did not entirely rule out the possibility of transferring
want the goods to replicate exactly the same tangible secondhand software licenses, the dominant narrative
goods in the real world. was that it would be “unfair” not to allow the existence
of a secondhand market, and an undue restriction of
In Usedsoft, a case heard by the Court of Justice of the consumers’ rights, which probably explains why the court
European Union (CJEU) in 2011, the debate regarding went to such length to try and find an acceptable middle
the legal capacity for software purchasers to resell their ground.
“used” software licenses on a secondhand market
captured the attention of the entire digital world; could Today, the narrative that consumers may be unduly
software licenses be resold or, rather, “novated”? In 2018, restrained keeps resurfacing and, while owners of IP
in Capitol Records v. Redigi, the U.S. Court of Appeal for rights have so far managed to successfully contain
the Second Circuit was asked the very same question in the idea that digital goods should be tradable, it will
relation to users who wanted to sell their legally acquired become increasingly difficult to convince the users of
digital music files, and buy “used” digital music from the metaverse that their assets merely exist by way of a
others at a fraction of the price currently available on limited metaverse end-user license agreement. As in the
iTunes. More recently, a Dutch company by the name real world, users are far more likely to claim the right to
of Tom Kabinet also took its case all the way up to the “own” the virtual handbag, land or car they just “bought”
CJEU, to try and obtain a recognition that e-books could in the metaverse.
be legally resold, secondhand.
Why not simply make it clear that metaverse items are
The outcome of these cases is well known: Software, in fact licensed? The solution is tempting but seems
digital films, digital music and digital books cannot be unrealistic. For users of digital items, limited licenses are
resold on a secondhand market, for they are not “owned” often seen as an imperfect substitute for “ownership.”
by their purchasers in the first place, but licensed. This is further illustrated by several socioeconomic
theories that have demonstrated our human attachment
With tangible items, there are two separate forms of to ownership as a concept, including that of the
property that can be exercised: There is the property of “endowment effect.” According to this theory, individuals
the tangible item itself, in the form of the paper, the disc, place a higher value on an object that they already
the plastic box, etc., while separately, there is also the own than the value they would place on that same
intellectual property (i.e., copyright) in the book, music, object if they did not own it (for example, if they merely
software or film. By contrast to tangible property, IP received some limited controls over it). This theory,
can only be appropriated by the persons designated by which seems widely accepted, could explain why digital
the law as benefiting from the copyright (generally their items are so rarely advertised as being licensed, and so
authors). When a work loses its material element, such as often presented as being “sold” to customers. In brief:
when a book or a compact disc becomes nothing more Ownership sells, licensing does not, yet there is nothing
than a file, there is no equivalent digital “property” in the to be “sold” in a virtual world, and that is the gigantic
file that can be acquired separately from the intellectual paradox that the metaverse users and builders will need
property. A digital file ultimately only comprises data in to confront.
the form of zeros and ones, and data – or information
– cannot be “appropriated” in the same way a physical
object can be. Information and data, just like ideas, are
free-flowing.

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NFTs: Ownership in the metaverse – the birth of a new concept

Enter the NFT This is where the NFT magic operates, where the
millennium concept of property is once more reinvented,
The staggering rise in popularity of NFTs demonstrates, by being displaced from a tangible medium (disc, book,
if anything, how much appetite there is for a solution tape, etc.) to an intangible certificate. To think, notarial
capable of replicating the personal ownership enjoyed in certificates of authenticity were already proposed by
the real world. Usedsoft as a way to enable the reselling of software
licences back in 2007 – a solution both remarkable and
From a legal standpoint, the concept of NFTs is ingenious
logical, and a promise of what was to come.
and yet very simple: If one cannot own a digital item
made of free-flowing information, then let’s find something Today, the proponents of the secondhand market
else that may be “owned,” separately from the intellectual for digital goods are not alone in rejoicing: The whole
property. For example, an unfalsifiable certificate of industry is suddenly reinvigorated by the concept.
authenticity associated with that digital item. Authenticity Christie’s and Sotheby’s, two pillars of auctioneering, are
certificates, issued by the item’s creator in very small enthusiastically selling NFTs of works that never before
numbers, are indeed a very clever way of recreating entered the sanctuary of these respectable houses for
scarcity and a sense of ownership and therefore of they could not be “felt” or made unique. From Beeple’s
value, without the need to assign or transfer IP rights “Everydays: the First 5000 Days” to drawings Andy
to the acquirer of the token. What is being traded here Warhol made digitally, creations once banned from
is a unique connection with the digital work and, most the auction market are being tokenized and making a
importantly, the much sought-after feeling of ownership, remarkable entrance on the art market.
be it only of a token encapsulating a certificate.

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 NFTs: Ownership in the metaverse – the birth of a new concept

Digital ownership reinvented? Intellectual property: What IP rights are

granted to NFT holders?
If NFTs appear to be solving a lot of the problems that
arose when trying to grant impossible ownership rights No two NFT projects are the same and what rights are
over digital items, including by embodying a clever resale granted to purchasers vary widely. We typically see three
right mechanism allowing the initial offeror of the NFT broad types of IP treatment for NFT projects:
to participate in the profit generated by each resale, a
bigger question is whether NFTs will fulfill our ownership • No IP rights granted. A significant proportion of NFT
expectations. An NFT does not confer a monopoly over projects we have reviewed make no reference to IP
a work, nor does it permit its holder to decide how the rights and grant no express permissions to use the
work will be used, distributed or shown. By the once- underlying IP. From a legal perspective, purchasers
enjoyed monopoly of an art collector being displaced in these instances are purchasing a service from the
from that exercised over the object itself to that exercised seller in the form of an authentication of a work of art.
over a certificate, it is our entire understanding of the
concept of ownership that may be changing. What this The value of the NFT comes from the verified
shift is saying about our human values is both fascinating provenance it guarantees through the blockchain
and ominous. Welcome to the “meta-propriety.” (i.e., that the NFT can always be traced back to
having been issued by the artist).

Crypto-assets, in practice • IP license granted. Some NFT projects often

grant purchasers express license rights to use the
In version 1 of this Guide to the Metaverse, we explained underlying works in particular ways. Often these
that respected legal commentators have suggested licenses are carefully drafted and provide limited rights
that some common law systems (English law in for the NFT holder to display the work associated with
particular) may well have sufficient flexibility to expand their NFT for personal purposes. However, inspired by
the application of property law to certain types of purely the iconic “Bored Ape Yacht Club,” there are a rising
informational crypto-assets. Since then, there have been number of creators taking a different approach to
two court decisions, in the UK and Singapore, that have intellectual property and starting to give NFT holders
established that NFTs may be capable of being property commercial usage rights over their NFTs.
in their own right. In the UK, in an interim judgment,10 the
English High Court found that there was an arguable case “Bored Ape Yacht Club,” one of the most successful
that NFTs are property under English law, giving owners NFT projects to launch in 2021, gives holders an
important proprietary remedies to enforce their rights “unlimited, worldwide license to use, copy, and
over third parties. In practice, this means it is arguable display the purchased Art for the purpose of creating
that, distinct from the item it represents, the NFT token derivative works based upon the Art.” Some holders
itself is capable of being owned. These developments are have taken full advantage of this, with Adidas sporting
certainly positive for web3 advocates who see NFTs as a Bored Ape as its official web3 avatar and itself
the key to unlocking true ownership over digital assets. launching a derivative NFT; Universal Music’s 10:22PM
label signing a new group called Kingship, consisting
Importantly, this property right is in respect of the token of four characters from “Bored Ape Yacht Club;” and
itself, rather than the off-chain asset to which the token one ape being signed with CAA for future commercial
relates. This nuanced distinction is critical and often not opportunities.
appreciated by the average NFT purchaser, leading to
potential confusion over what purchasers are “buying.” In
the case of artwork NFTs, while the token itself is freely
transferrable and tradable as a distinct form of property,
the NFT owner’s right to use the associated underlying
artwork will be governed by established intellectual
property principles. Guide to the Metaverse – 2nd edition Reed Smith 79
NFTs: Ownership in the metaverse – the birth of a new concept

• IP rights assigned. In rare circumstances, we related question is, how can a seller or marketplace
have also seen NFT projects seek to transfer legal easily enforce the terms of those contracts against
ownership of IP through NFTs. When the NFT is the applicable purchaser? Sellers and marketplaces
traded on the secondary market, the seller assigns all have to walk a fine line between ensuring they impose
of their IP rights in the underlying work associated with appropriate terms on purchasers of NFTs and ensuring
the NFT to the purchaser. those NFTs can be traded easily and with little formality.
The more sophisticated the usage rights are, the more
Giving away IP rights to NFT holders is a credible idea critical it will be to ensure that the seller imposes robust
in principle, but it does inadvertently trigger various contractual restrictions and remedies on purchasers.
legal issues. The vast majority of people buying NFTs Sellers will need to bear this in mind when choosing the
are not used to conducting due diligence on their marketplace through which to sell NFTs.
purchases, and the marketplaces for NFTs are simply
not set up to accommodate this. Conducting chain-
of-title analysis of digital assets that are traded like The hosting issue
stocks is near impossible. We have established already that NFTs comprise
The key takeaway from this is that purchasers of NFTs information that relates to another asset. More often
should understand what they are “buying.” Equally than not, the asset to which an NFT relates is stored
important is for those tokenizing artwork to be careful in “off-chain.” Due to capacity issues, it is too expensive
how they market and advertise their NFTs. Advertising the and resource-intensive to host content on a blockchain.
“sale” of artwork could be potentially misleading if all the Typically, only basic pixelated artwork is hosted on the
NFT creator is offering is a digital certificate. As we learn blockchain itself (such as CryptoPunks, an NFT collection
from behavioral economics and the endowment effect, of 10,000 profile pictures). Hosting the asset on the
the temptation might be strong to advertise NFTs as blockchain itself is recognized as being as close to full
nothing less than a “sale,” but the consequences of doing decentralization as possible; the asset will be available
so might be fraught with serious legal issues. permanently for so long as the supporting blockchain
continues to operate.

The (smart) contract issue The majority of NFT projects host the associated assets
on third party servers. The smart contract to each NFT
A key feature of NFTs is that they are (or ought to be) (or at least each Ethereum ERC-721 standard NFT)
liquid and thus easily tradable. This is what gives them contains a universal resource identifier (URI) that provides
their apparent value and why we are seeing digital assets for the online location of the associated NFT asset. The
being sold and bought for millions. But where the NFT is URI operates like a traditional hyperlink to a location from
nothing more than a license, how liquid can the license which the NFT smart contract pulls the relevant asset.
really be? A typical license agreement invariably offers
some form of warranty or indemnity from the licensor Certain projects (particularly those launched by web3
to the licensee, against anything disturbing the quiet native brands) choose to use decentralized or distributed
enjoyment of the rights granted, but if the NFT changes forms of hosting for their NFT assets (such as IPFS or
hands 20 times, who will stand behind the content? Arweave) that operate on a peer-to-peer basis. While this
is currently the best alternative to on-chain storage for a
Another challenge of using NFTs to “sell” certain limited decentralized solution to storage, it does raise a number
licenses or usage rights over digital artwork is knowing of issues, particularly for rightsholders. Once content
how to effectively “attach” the contract or terms and is uploaded to IPFS, it is almost impossible for it to be
conditions to the NFT such that the purchaser (and removed, leading to potentially significant consequences
future purchasers) of the NFT is bound by them. A in cases where the asset infringes third party IP.

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 NFTs: Ownership in the metaverse – the birth of a new concept

The alternative that many brands choose to implement 2. Consumer law. NFTs are offered to the public;
for their NFT projects is good, old-fashioned, centralized they are not restricted to professional buyers only.
storage. Naturally this gives brands the best form of Accordingly, marketplaces and sellers are subject to
control over their assets, but if a brand can simply take local consumer law, which requires them to operate
down or change the NFT work, this does arguably with a high level of transparency and brings them
undermine the decentralized promises of web3 and within the scope of consumer protection laws on
democratization of digital content. Indeed, this is precisely unfair commercial practices, including the right
what web3 is trying to prevent. Nevertheless, to what for consumers to withdraw, to receive appropriate
extent the masses will expect, demand or care about this information about the NFT in their local language, to
level of decentralization remains to be seen. subject the NFT sale to their local law, etc.

3. Tax law. The nature of the transaction will determine

Regulation, regulation its tax status (is it a sale or a license, a national or an
There is no specific regulation yet regarding NFTs, but international transaction, B2C or B2B, etc.?). The
the carefree attitude of early adopters should not serve tax treatment will also be different for marketplaces,
to elude the reality: NFTs are regulated exactly like any sellers and purchasers. With the high fluctuation in
other type of asset you can buy online. As transaction prices, it will be critical to obtain proper tax advice to
volume grows, we suspect there will be greater scrutiny understand your exposure to sales and other taxes.
applied by regulators, authorities and watchdogs. While In conclusion, NFTs may be fun experiences, giving
the issues will be as numerous as there are NFTs, three people special access to something they personally
compliance issues deserve a special mention. value (like an unreleased track by your favorite band, or
1. Securities regulation. As described above, NFTs a digitally signed artwork), but those looking to make
have been designed to carry a number of similar a solid investment should understand the risks and
characteristics to a financial asset. Although they limitations attached to NFTs and not let the sirens of
are not fungible, NFTs have been encouraging, and digital ownership replace a robust due diligence exercise.
used as a tool for, speculation. Consequently, it is Authors
possible that they may come to be regulated within
financial regulation, but the question is still open. One
of the primary factors that will determine whether
an NFT is a security is the purpose for which it is
being created and sold. If the NFT is being created
and sold as a way for members of the public to earn
Sohie Goossens
investment returns, then that type of NFT is more Partner
likely to be considered a security. Those considering London
minting an NFT should take advice before doing so [email protected]
to avoid unintentionally breaching financial regulatory
law. Even the way in which the NFT is described and
marketed can influence the extent to which it may
be considered falling within the scope of securities
law, and we foresee some marketplaces and sellers
coming unstuck if they do not consider this seriously. Nick Breen
Partner
London
[email protected]

Guide to the Metaverse – 2nd edition Reed Smith 81

Is my NFT a security?

A
s NFTs continue to surge in popularity, questions swirl around their legal
and regulatory status. For some NFTs there is lingering uncertainty on
issues such as the ownership rights they convey to the buyer, whether
the NFT can qualify as “property” under applicable legal frameworks, and which
consumer-protection principles should apply to the sale and purchase of the NFT.

With NFTs being structured in an increasingly complex Financial regulatory frameworks around the world
manner, an additional question that now commonly generally function in a technology-neutral manner – i.e.,
arises is whether the NFT qualifies as a regulated financial they apply to digital tokens that have features of financial
product under the laws governing its issuance and products irrespective of how the token is labelled or
distribution. In their purest form, NFTs represent unique presented, and regardless of whether the token is offered
items such as collectibles or pieces of art that are not or supported by a company that does not otherwise
intended to be a financial product, notwithstanding that operate in the financial sector. Accordingly, a token –
they may represent an attractive investment opportunity whether fungible or non-fungible – that gives the holder
(as is the case of many non-financial real-world items). ownership or control rights in a business or portfolio of
But when NFTs give their holder the right to income assets, or which entitles the holder to certain income or
streams or to a share in an underlying portfolio of revenue streams, may qualify as a regulated product such
investment assets, the NFT potentially transforms into a as a security or a unit in a collective investment scheme.
regulated financial product. With the increasingly exotic In determining which regulatory frameworks to consider,
structuring of rights attaching to NFTs, the conventional the relevant jurisdictions are usually those where the NFT
industry perception that NFTs are unregulated products is is issued and those where users are located.
gradually eroding.
Determining whether an NFT is a regulated product is
Use cases for NFTs with complex tokenomics abound. important because the issuance, offering, marketing and
Such NFTs are, for example, integrated into play-to-earn distribution of such a product will typically give rise to a
gaming platforms, where they may represent avatars raft of requirements that apply in the financial services
or other in-game items that can be used to generate sector, and non-compliance with these is usually an
income for the holder. NFTs may also be minted as an offence. These may include, for example, a requirement
on-chain representation of a unique real-world asset that for the issuer and distributors of the NFT to be licensed
a decentralized autonomous organization (DAO) wishes or approved by the relevant regulator(s) and to comply
to invest in, thus giving the DAO participants collective with ongoing conduct-of-business requirements (e.g.,
exposure to the value of that asset. A further noteworthy in relation to disclosure of information to purchasers of
development is the emergence of platforms that issue the NFT, fitness and properness of personnel involved
NFTs that give their holders rights to a share of royalties in running the NFT offering, etc.). Establishing and
generated by underlying music catalogues. In some maintaining frameworks to ensure compliance with
cases, payments made to holders of the NFT may be these requirements typically requires a high degree of
automated via smart contract, for example where the
NFT is issued on the Ethereum blockchain using the
ERC-721 or ERC-1155 standard, both of which have
proven popular in the NFT space.

82 Reed Smith Guide to the Metaverse – 2nd edition

 Is my NFT a security?

specialism and significant human and financial resource. • Decentralization: If the NFT is issued by a
While an NFT offering may be run within the confines of DAO or other protocol that is fully decentralized
exemptions and may thus avoid regulation, typically such (i.e., it is governed solely by the community of
exemptions will only allow the offering to be directed at protocol participants, without centralized control
sophisticated investors in the wholesale markets and will being exercised by any particular person), it may be
not enable any offering to the retail public. possible to argue that the NFT, even if it has features
of a security, does not qualify as a security because
Consequently, issuers and distributors of NFTs whose decentralization prevents the relevant product
core operations are situated in sectors such as definition from applying. For example, where an NFT
entertainment and media or gaming will typically not wish has features of a debt note (i.e., periodic fixed-interest
to upscale and retool to meet the onerous requirements payments are made to the holder) but is issued
of financial services regulation, and will instead entirely on-chain and is not booked as a debt liability
collaborate with appropriately regulated industry partners on the balance sheet of any entity, it may be possible
or will seek to structure their offering in a manner that to argue that the NFT does not qualify as a debt
avoids the NFT becoming a regulated product to begin security. However, legal arguments of this nature that
with. Factors that potentially help mitigate the risk of an rely on decentralization remain largely untested with
NFT qualifying as a security or other regulated product the regulators and courts, and they may not be future-
include the following: proof given that regulators are increasingly focused
on how to approach the supervision of decentralized
• Tokenomics: In some cases it may be possible
finance.
to avoid an NFT qualifying as a security or other
regulated product if returns accruing to the NFT holder • Offshoring: Where the NFT does constitute a security
need to be earned by the holder on the NFT’s native or other regulated product, an option that some NFT
platform, rather than the holder having a passive issuers consider is to establish their issuer company
entitlement to such returns. In this case it may be in an offshore jurisdiction and launch a website for
possible to characterise payments received by the their platform that is generic and not directed at users
NFT holder as being part of a simple commercial quid in any particular location. The platform then refrains
pro quo because they represent consideration for the from conducting active marketing in any location and
holder performing actions that are useful to the NFT’s relies solely on users on-boarding themselves to the
native platform (such as staking or exercising platform platform on a reverse-solicitation basis. However,
governance rights). this approach may not be aligned with what most
NFT platforms wish to achieve, because it precludes
any marketing. It is also not risk-free because some
jurisdictions in which users are based may not
recognize reverse solicitation as a means of avoiding
regulation. Furthermore, it would always be advisable
to use geo-fencing to exclude users in some high-
risk jurisdictions (e.g., the United States), even if they
approach the platform at their own initiative.

Guide to the Metaverse – 2nd edition Reed Smith 83

Is my NFT a security?

As the structuring options for NFTs multiply, developers,

platforms and other stakeholders involved in the NFT
issuance and distribution process need to remain alive
to the financial regulatory implications. Navigating the
relevant frameworks and confirming the regulatory
position should be treated as a key part of the product
development process, as the consequences of
inadvertent non-compliance can be costly. Appropriate
structuring is key to ensuring that the product remains on
the right side of the regulatory perimeter.

Authors

Hagen Rooke
Partner
Singapore
[email protected]

Nina Carlina Sugianto

Associate
Singapore
[email protected]

84 Reed Smith Guide to the Metaverse – 2nd edition

Guide to the Metaverse – 2nd edition Reed Smith 85
The ultimate NFT?

F
raudulent paper bills of lading have long plagued the trading, financial
and logistic industries. The system of bills of lading dates back at least a
few hundred years and has largely been unchanged. However incidences
of fraud have continued unabated and a trio of cases in Singapore involving
counterfeit and duplicated bills of lading racked up billions of dollars of losses
for banks and counterparties in 2020. One possible solution to this problem
is by digitization. Following work done by the United Nations Commission on
International Trade Law (UNCITRAL) and promoted by the International Chamber
of Commerce (ICC), a solution in the form of the UNCITRAL Model Law on
Electronic Transferable Records (MLETR) has arisen.

MLETR aims to enable the use of electronic transferable In the same vein, countries are digitizing their trading
records (ETRs) both domestically and across borders, by systems by setting up single windows that they interface
recognizing the legal validity of ETRs that are functionally and interoperate with other single windows of other
equivalent to their paper-based counterparts. MLETR countries in their region to form regional single windows
recognizes the additional requirements which documents such as the EU Single Window and the ASEAN Single
transferring ownership and title in goods require and Window where verified parties such as approved traders
relies on the additional safeguards afforded by distributed may submit trade documents digitally to government
ledger technology, thus introducing electronic bills of and other parties. The principles of this structure of
lading (eBLs). MLETR has been ratified by countries such walled gardens interconnected and interoperable with
as Bahrain and Singapore. The G7 and the European other walled garden bears an uncanny resemblance to a
Union have also begun steps to implement MLETR in metaverse.
their member countries. Commercial parties such as
Maersk, COSCO, HSBC, DBS, Fonterra, Syngenta and Author
Transfigura are all piloting or implementing eBLs.

One favoured protocol to implement eBLs is the ERC-721

protocol, which is also used for a number of NFTs. The
eBL is the digitization an already existing commonly used
commercial document representing billions of dollars Bryan Tan
or more of trade annually and solves a longstanding Partner
and ever-increasing fraud problem. This is possibly the Singapore
ultimate NFT. [email protected]

86 Reed Smith Guide to the Metaverse – 2nd edition

Investing in crypto

T
here are over 19,000 different cryptocurrencies, including stablecoins, that
have been generated and made available for sale and trading on various
exchanges. Bearing in mind the various warnings that governments, such as
those in the UK, Israel, the United States, and Singapore, have issued regarding
investment in digital assets – including specific warnings about scams and the
advertising restrictions on crypto advertisements to the general public that have
been enacted in the UK, Spain, and Singapore.

We have set out some basic due diligence steps • Anti-money laundering/know your client (AML/KYC):
when investing in cryptocurrencies. Of course, where Transactions involving regulated wallets will already
necessary, professional advice should be sought. have AML and KYC features built in. For transactions
involving unhosted wallets, AML and KYC measures
• Mode of investment: Most purchases of will be necessary – especially for significant
cryptocurrencies will be from exchanges. Then, upon transactions. In the EU, the proposed transaction floor
payment, the cryptocurrencies will be sent to a hot for required reporting is €1,000. In all transactions,
wallet, typically hosted by the exchange. In some the source of funds must be determined in order to
cases, the cryptocurrencies are obtained directly ensure that the cryptos being transferred are not the
from the token generation event in a process called proceeds of criminal activity.
the initial coin offering. However, there is a class of
cryptocurrency transactions that use cold or unhosted A final note on significant unhosted wallet crypto
wallets where the technical assistance and transaction transactions – in order to ensure that the transaction is
mechanism of an exchange will not be available. In executed smoothly and with reasonable levels of privacy
this case, extra care should be taken, as discussed for the parties, practice has evolved to includes measures
below. and techniques such as zero knowledge proof (where
information is exchanged to validate the transaction with
• Research: Conduct thorough research on the high probability without revealing confidential data such
cryptocurrency. Read and understand its business as wallet addresses), proof of coin (the crypto equivalent
model and tokenomics, and check out the of proof of funds), and the Satoshi test (to demonstrate
background of the key team. The website, the control over a specific address).
white paper, and the accompanying contractual
documentation should set out clearly and consistently Author
the entities involved with the cryptocurrency.

• Whether the cryptocurrency is listed: Although not

conclusive, a listed cryptocurrency indicates that there
is a ready market should you need to liquidate. If the
exchange is reputable, it will also have done some
Bryan Tan
level of basic due diligence. Partner
Singapore
• Security measures: Cybersecurity hacking incidents [email protected]
such as those relating to Solana, Harmony, and Axie
Infinity have given rise to the term cryptojacking.
A significant investment requires that some due
diligence be carried out on the cybersecurity
measures employed by the token issuer or platform as
crypto companies have been targeted by hackers. Guide to the Metaverse – 2nd edition Reed Smith 87
Crypto and other digital assets:
Europe, the United States and the
United Arab Emirates

W
e have reviewed the relevant regulatory and commercial environment
in Europe, the United States and the UAE.
Crypto and other digital assets:
Europe

I
n September 2020, the European Commission published a draft regulation on
crypto-assets, the so-called Markets in Crypto-assets (MiCAs) regulation. The
European Parliament adopted its negotiating position on March 14, 2022, which
cleared the way for the formal “trilogue” between the European Commission
(the Commission), Council, and Parliament. On June 30, 2022, the trilogue
negotiations resulted in an agreement whereby, after formal adoption by the
Council and the Parliament, the regulation could enter into force over the course
of this year. Then, according to the current draft, it would take effect 18 months
after its promulgation.

As a regulation, MiCA will have direct effect in all EU It must include detailed descriptions of the issuer, the
member states, while creating an EU-wide and uniform issuer’s project, and the type of crypto-asset to be offered
set of regulations with regard to crypto and other digital or for which admission to trading is sought. Also required
assets. It contains measures to achieve objectives is a description of the rights and obligations associated
such as transparency, disclosure, authorization, and with the crypto-assets and the disclosure of information
supervision of transactions in relation to the distribution, about the underlying technologies and standards that
issuance, and trading of crypto and digital assets. the crypto-assets issuer uses to enable holding, storing,
This is intended to create comprehensive consumer and transferring the crypto-assets. Likewise, a detailed
protection and at the same time establish measures description of the risks associated with the respective
against criminal activities such as market manipulation, assets is mandatory.
money laundering, and terrorist financing in all EU
member states. MiCA also includes rules on capital requirements for
custody of assets and a mandatory complaint procedure
MiCA imposes strict rules regarding the authorization available to investors. Issuers of significant asset-backed
and licensing of financial intermediaries and therefore will cryptocurrencies (global stablecoins) would be subject to
have the greatest impact on issuers, service providers, more stringent requirements, for example, with respect to
and trading venues – which, however, serves the required capital, investor rights, and oversight.
interest of achieving a secure EU-wide crypto financial
market. Further, MiCA determines that crypto service providers,
such as crypto-asset custodians and operators of trading
Measures such as increased information requirements venues, must have a registered office in a member state
with the aim of informing potential buyers about the if they want to offer their products and services in the
characteristics, function, and risks of crypto token and European Union.
digital assets are enshrined in detail. The requirements
for the information document to be prepared for this
purpose – the so-called “white paper” that must be
submitted to the relevant financial supervisory authority
– are regulated in article 5 of the MiCA regulation.

Guide to the Metaverse – 2nd edition Reed Smith 89

Crypto and other digital assets: Europe

For smaller companies and fintechs, these provisions In terms of sustainability, it must be noted that the EU
could cause certain disadvantages. In member states Parliament’s and Council’s proposal on MiCA envisaged
where the market has been virtually unregulated to date, a total ban on individual cryptocurrencies. This is not
companies face high costs due to, for example, the against the backdrop of regulatory difficulties, but is due
acquisition of licenses or the costs incurred in connection to the negative impact on the environment caused by
with reporting requirements or a secure IT infrastructure. high-energy consumption in the process of mining the
It is therefore foreseeable that the regulation will make currency – so-called proof of work. Such a ban, however,
it more difficult for cryptocurrency issuers to enter the has not prevailed.
market.
For the crypto industry, it is relieving that a ban on proof
However, once licensed, the strict rules allow for fewer of work was not adopted, as corresponding provisions
legal and administrative hurdles when intermediaries enter would otherwise have limited the development of the
another EU market in another member state with the goal crypto market in the EU.
of expanding their financial services. The reason for this
is that once a crypto intermediate is licensed in one EU Nevertheless, even if there is no ban, the EU continues
member state, that license can become “passportable” to make efforts to stimulate environmentally friendly
under MiCA, meaning that the intermediate could choose investments in order to reduce the high carbon footprint
to operate in another EU country without having to that is inevitably connected with some cryptocurrencies.
obtain further approval or additional licenses from the Members of the EU Parliament have urged the
local government. The current patchy legal framework Commission to prepare a legislative proposal by January
in different European countries makes it difficult for 1, 2025, to include in the EU taxonomy a classification
companies to start a business in this still new area of system for all crypto-assets that contribute significantly
the capital market. In addition, the different national to climate change. Currencies that operate outside the
regulations create unequal opportunities for market proof of work mechanism and that subsequently have a
participants. Against this backdrop, the possibility of lower carbon footprint could then be considered “green”
“passporting” could provide for simplification in the future. according to the EU Taxonomy Regulation.

A central innovation is the regulation of the future

supervision of issuers and crypto-asset service providers
by the European Supervisory Authorities and the national
authorities. According to MiCA, the European Securities
and Markets Authority is to supervise the issuance of
asset-referenced tokens, whereas the European Banking
Authority will be in charge of supervising electronic money
tokens. To distinguish between the individual crypto-
assets, the regulation provides a set of definitions of
the different crypto-assets, including utility tokens and
certain types of stablecoins and thereby undertakes a
categorization of different crypto-asset types, each with
different legal consequences.

90 Reed Smith Guide to the Metaverse – 2nd edition

 Crypto and other digital assets: Europe

MiCAs’ impact on German legal regulation One prerequisite for the regulations to apply would
regarding crypto and digital assets be that the token is a “financial instrument” within the
meaning of section 1 (11), sentence 1 KWG. Although
When it comes to MiCAs’ effect on the national German “crypto tokens” are not mentioned as a separate
regulatory landscape, we anticipate that the new category in the KWG, in the sense of a technology-
regulation will not have an extensive impact on existing neutral interpretation, they may be included in the
national provisions since reporting obligations and the individual categories listed in section 1 (11), sentence 1
handling of crypto-assets specified in MiCA are already KWG, for example, in the category called “crypto-assets.”
covered by existing financial regulations in Germany. For It should be noted that, according to the German Federal
this reason, Germany is considered a good entry point for Financial Supervisory Authority (BaFin), section 1 (11),
companies looking to enter the European crypto market. sentence 1, No. 10 KWG is designed as a catch-all
provision, as crypto securities may already fall under one
This is because the existing national regulatory network of the other categories of financial instruments of section
is structured in such a way that it applies generally 1 (11), sentence 1 KWG because of their diverse design.
to financial instruments in Germany with which also This means that if the respective crypto token is already
relatively new crypto tokens that meet the relevant subject to one of the other categories in an individual
factual requirements are subject to the existing regulatory case, a renewed license is not required.
structure.
This is advantageous for many banks, as they regularly
Applicable laws include the German Securities Trading already hold the necessary license to operate the custody
Act, (Wertpapierhandelsgesetz), the German Securities business.
Prospectus Act (Wertpapierprospektgesetz), the German
Capital Investment Act (Vermögensanlagengesetz Whether the regulations apply is decided on a case-by-
or VermAnlG), the German Investment Code case basis and depends, again, on the legal structure of
(Kapitalanlagegesetzbuch), the German Banking Act the token.
(Kreditwesengesetz of KWG), the German Insurance
Supervision Act (Versicherungsaufsichtsgesetz or VAG), An NFT may fall under the definition of “crypto-assets”
and the German Payment Services Oversight Act and then be regulated accordingly as a financial
(Zahlungsdiensteaufsichtsgesetz). instrument under the existing regulatory framework, if it is
created with the intention of generating monetary profits,
In the context of the question of whether a token is and therefore the investment purpose is in the foreground
subject to the existing national regulatory framework, it when creating the NFT. This is also the case if the token
should be noted that crypto and digital assets cannot holder ultimately acquires exclusively an asset position
be defined in a uniform manner. Without the examination via the token ownership, but never takes possession of
of all individual circumstances and characteristics of the or uses the tokenized object itself. In such cases, it is
respective token, it is not possible to make a regulatory also conceivable, for example, that the token may be
classification because of the diverse and different design classified as an “asset investment” under the VermAnlG.
of the numerous tokens that appear on the market.

Guide to the Metaverse – 2nd edition Reed Smith 91

Crypto and other digital assets: Europe

Like NFTs, stablecoins can also be subject to the term Although Germany already provides a national regulatory
“financial instruments” under German regulatory law. network that covers crypto and digital assets, a
In particular, a classification as “units of account” or as common EU framework is welcome. Especially against
“Crypto-assets” – according to the KWG or the German the background of simplifying cross-border activities of
Securities Institutions Act – can be considered. This is financial service providers within the EU to achieve a
because the legal definition also covers assets that are stimulating effect on the crypto and digital assets sector,
not alternative means of payment but serve investment it is foreseeable that MiCA will bring real progress to the
purposes. Algorithmic tokens fulfill this purpose as a crypto financial industry market as a whole.
possible investment.
Authors
Also, crypto custody is covered by the existing
regulations. The German Act Implementing the Amending
Directive on the Fifth EU Anti-Money Laundering Directive
(Gesetz zur Umsetzung der Änderungsrichtlinie zur
fünften EU-Geldwäscherichtlinie) has introduced crypto
custody business into the KWG as a new financial Simon Grieser
service. Pursuant to section 1 (1a), sentence 2, No. 6 Partner
of the KWG, crypto custody is defined as the custody, Frankfurt
administration, and safeguarding of crypto-assets or [email protected]
private cryptographic keys used to hold, store, or dispose
of crypto-assets on behalf of others, therefore qualifying
as a so-called “financial service” under the KWG. In
addition, crypto-assets themselves are also to be
regarded as so-called “financial instruments” within the
meaning of section 1 (11), sentence 1, No. 10 KWG, as Friedrich Lutter
crypto-assets are the digital representation of a value. Intern
Frankfurt
Therefore, with regard to the custody of crypto tokens, [email protected]
the custody is subject to authorization according to
section 32 KWG. A corresponding license must be
applied for at BaFin.

Just as the MiCA will demand in the future, financial

service providers that wish to distribute banking and
financial services products in Germany on a targeted
basis must already have established a subsidiary (section
32 (1) in conjunction with section 33 (1), sentence 1,
No. 6 KWG) or a branch (section 32 (1) in conjunction
with section 53 KWG) in Germany in order to obtain the
necessary license. In this respect, as well, the regulations
in Germany are already in line with the new EU regulation.

92 Reed Smith Guide to the Metaverse – 2nd edition

Crypto and other digital assets:
United States

I
n the United States, the Securities and Exchange Commission and the
Commodity Futures Trading Commission (CFTC) are the agencies that
are most closely involved in the regulation of crypto and digital assets.
The mission of the SEC is to protect investors; to maintain fair, orderly, and
efficient markets; and to facilitate capital formation.

The SEC’s approach to whether a digital asset is In the United States, crypto and digital assets remain
categorized as a security derives from application of the largely unregulated, with the crypto community often
test set forth in the 1946 Supreme Court decision, SEC complaining that regulators have been regulating by
v. W.J. Howey Co. (referred to as the Howey Test). The enforcement. That appears to be rapidly changing in
Howey Test determined whether an asset constitutes an favor of more regulatory clarity.
“investment contract,” one of the enumerated types of
instruments defined in the securities laws. The test states On March 9, 2022, President Biden signed an executive
that an investment contract involves (i) an investment order addressing the risks and benefits of digital
of money, (ii) in a common enterprise, (iii) in which the assets – including whether the United States should
investor is led to expect profits, (iv) derived from the establish its own Central Bank Digital Currency. “The
entrepreneurial or managerial efforts of one or more third rise in digital assets creates an opportunity to reinforce
parties. American leadership in the global financial system and
at the technological frontier, but also has substantial
The mission of the CFTC is to promote the integrity, implications for consumer protection, financial stability,
resilience, and vibrancy of the U.S. derivatives markets. national security, and climate risk,” said the Biden
The CFTC seeks to protect the American public from administration in a White House press release. The
fraudulent schemes and abusive practices in those administration stressed that “[t]he United States must
markets. Under the Commodity Exchange Act (CEA); the maintain technological leadership in this rapidly growing
CFTC has oversight over derivatives contracts, such as space, supporting innovation while mitigating the
futures, options, and swaps, that involve a commodity. risks for consumers, businesses, the broader financial
The CEA defines “commodity” to include agricultural system, and the climate. And, it must play a leading role
products, “all other goods and articles,” and “all services, in international engagement and global governance of
rights, and interests...in which contracts for future delivery digital assets consistent with democratic values and U.S.
are presently or in the future dealt in.” global competitiveness.” The executive order represents
the Biden administration’s first step toward regulating the
While the SEC has suggested that many digital assets cryptocurrency market, which SEC Chair Gary Gensler
are securities, arguably, the two most important digital has compared to the Wild West.
assets – bitcoin and ether – have been recognized as
commodities by both the CFTC and the SEC.

Guide to the Metaverse – 2nd edition Reed Smith 93

Crypto and other digital assets: United States

The executive order sets forth six key priorities for Meanwhile, United States legislators seem to favor
government oversight of cryptocurrencies: (1) consumer an approach that would bring much of the regulatory
and investor protection; (2) financial stability; (3) mitigating oversight for crypto and digital assets under the
illicit finance; (4) U.S. leadership in the global financial CFTC’s umbrella. On June 7, 2022, U.S. Senators
system and economic competitiveness; (5) financial Kirsten Gillibrand, a Democrat, and Cynthia Lummis, a
inclusion; and (6) responsible innovation. While the Republican, introduced the first major bipartisan crypto
executive order is a first step toward additional rules and legislation. The bill would give the CFTC exclusive
regulations for digital assets, it does not provide any jurisdiction over digital assets, subject to certain
concrete guidance. The order, however, is likely to lead to exclusions. “Digital asset[s]” are defined as a natively
additional regulation in the near future. electronic asset that confers economic, proprietary or
access rights or powers, and that is recorded using
Since the executive order, regulators and legislators have cryptographically secured distributed ledger technology. It
begun to make their intentions clear. later defines virtual currency as a digital asset that is used
“primarily” as a medium of exchange, unit of account,
On April, 4, 2022, SEC Chairman Gary Gensler provided
or a store of value not backed by an underlying financial
remarks at a capital markets conference on the future
asset.
of crypto and digital assets. Gensler compared crypto
trading and lending platforms, whether centralized Five types of digital assets are explicitly excluded from the
or decentralized, to traditional securities exchanges CFTC’s jurisdiction, and would be subject to the SEC’s
regulated by the SEC, and made clear that crypto jurisdiction. The five types of digital assets subject to SEC
platforms need to be registered and regulated to protect jurisdiction include digital assets that grant the holder with
investors. any of the following rights with respect to a business: (1) a
debt or equity interest; (2) liquidation rights; (3) interest or
Gensler also discussed how stablecoins, a class of
dividend payments; (4) a profit or revenue share derived
cryptocurrencies often backed by stable reserve assets,
solely from the entrepreneurial or managerial efforts of
raise three important sets of policy issues. Gensler said
others; or (5) any other financial interest. In addition, the
that most crypto tokens are “investment contracts” (in
CFTC does not have jurisdiction over NFTs.
other words, securities) under the Howey Test. Gensler
emphasized the importance of getting crypto tokens While the United States’ regulatory regime remains in flux,
registered with the SEC and requiring issuers of crypto it appears to be coming into focus quickly. Further, the
tokens to comply with the SEC’s disclosure requirements, Gillibrand-Lummis bill would appear to seek to make the
noting that “[a]ny token that is a security must play by the United States attractive to crypto and digital assets by
same market integrity rulebook as other securities under providing greater regulatory clarity.
our laws.”
Author
Gensler’s comments on stablecoins are particularly
interesting, because most critical observers of the United
States’ regulatory regime believe stablecoins to be within
the purview of the CFTC, not the SEC. For example, in
October 2021, the CFTC issued an order settling charges
against the stablecoin Tether for making misleading
Mark Bini
statements in connection with the reserves for USDT, its Partner
stablecoin pegged to the price of the U.S. dollar. New York
[email protected]

94 Reed Smith Guide to the Metaverse – 2nd edition

Crypto and other digital assets:
UAE

T
he United Arab Emirates (UAE) has positioned itself at the forefront of virtual
assets. In addition, according to reports, a comprehensive framework for all
metaverse-related commerce and activity is in the works.

It is worth noting that the UAE is a federation of seven Abu Dhabi Global Market
individual emirates, where each emirate is subject to
individual rules and laws and all emirates are subject The Financial Services Regulatory Authority (the financial
to federal law. In addition, there are several economic services regulator of the ADGM) was the first UAE
free zones in the UAE that have their own independent regulator to issue a comprehensive set of rules, guidance,
rules and legal frameworks. The most prominent free and regulations. For carrying out activities in relation to
zones of the country are its two financial free zones – the virtual assets and cryptocurrencies and to introduce
Dubai International Free Zone (DIFC) and the Abu Dhabi a bespoke framework for the regulation of spot virtual
Global Market (ADGM), which are separate, common asset activities, including those undertaken by multilateral
law jurisdictions with their own common law courts and trading facilities, brokers, custodians, asset managers,
financial services regulators. The rest of the territory of and other intermediaries.
the UAE (which for the purposes of this article is referred
The new regulatory regime instated rules for the
to as “onshore” UAE is subject to a civil law-based legal
management of risks generally associated with virtual
system (comprising a mixture of federal and Emirate-
and crypto-asset-related businesses, including those
specific laws and regulations). Within this complex
related to market abuse and financial crime, consumer
jurisdictional system, several different approaches to the
protection, technology governance, custody, and
regulation of crypto and digital assets have emerged and
exchange operations.
are developing.

Blockchain strategy Dubai International Free Zone

While the ADGM positioned itself as a pioneer in the
In April 2018, the federal government unveiled the
crypto space, the DIFC, adopted a much more cautious
Emirates Blockchain Strategy 2021 (EBS), setting out the
approach. As a first step, in October 2021, following
nation’s objective to create a framework and environment
a consultation process, the Dubai Financial Services
where blockchain technology will thrive. The government
Authority (DFSA) – the financial services regulator in the
committed to transporting 50 percent of all government
DIFC – issued a new regulatory framework relating to
transactions into the blockchain by 2021, which it is
investment tokens. In April 2022, the DFSA issued a
estimated to lead to savings of:
consultation paper on a proposed regulatory framework
• AED 11 billion in transactions and documents for crypto-assets. It is expected that the new regulations
processed routinely will be published in the latter half 2022.

• 398 million printed documents annually

• 77 million work hours annually
The EBS was followed by the adoption of the Dubai
Blockchain Strategy (DBS), which intended to establish a
roadmap for the introduction of blockchain technology for
Dubai and the creation of an open platform to share the
technology with cities across the globe.

Guide to the Metaverse – 2nd edition Reed Smith 95

Crypto and other digital assets: UAE

Onshore UAE (federal level) Central Bank of the United Emirates

Within onshore UAE, the responsibility for the regulation All onshore UAE currency-related transactions are
of virtual and crypto-assets is divided between the UAE regulated by the CBUAE. On September 30, 2020, the
Securities and Commodities Authority (SCA) and the UAE CBUAE revamped its regulatory framework applicable
Central Bank (CBUAE). to digital payments by issuing the Stored Value Facilities
Regulation (Circular No. 6/2020) (the SVF Regulations).
SCA The purpose of the SVF Regulations is to create a
framework for the operation and regulation of crypto-
The SCA is tasked with regulating crypto-assets, which assets.
are deemed to be a product or security.
Pursuant to the SVF Regulations, the CBUAE may
In 2020, the SCA released its much-anticipated Decision authorize and license companies and organizations in
No. 21/R.M of 2020 concerning the Regulation of crypto- the UAE that issue or provide SVFs, which is defined as
assets (the SCA Regulations), which is intended to regulate “a facility (other than cash) for or in relation to which a
the offering, issuing, listing, and trading of crypto-assets in Customer, or another person on the Customer’s behalf,
onshore UAE, as well as associated financial activities. pays a sum of money (including Money’s Worth such as
values, reward points, crypto-assets or Virtual Assets) to
The SCA Regulations apply to: (a) any person in the UAE the issue in exchange for the storage of the value of that
who offers, issues, or promotes crypto-assets; (b) anyone money (including Money’s Worth)…(Article 1(27) of the
who provides crypto custody services and/or operates SVF Regulations).”
a crypto fundraising platform and/or a crypto-asset
exchange in the UAE; and (c) anyone who engages in
other financial operations in the UAE in relation to crypto- Emirate of Dubai (onshore) – virtual assets
assets (Article 3 of the SCA Regulations). regulatory authority
It does not apply to crypto-assets issued by the On February 28, 2022, the government of Dubai issued
government and/or public undertakings, a currency, virtual Law No. 4 of 2022 relating to virtual assets (the Virtual
currency, digital currency, unit of stored value, or any other Assets Law). This landmark piece of legislation intends
payment unit issued through a system licensed, approved, to cement the position of Dubai – and the UAE – as
and authorized by the Central Bank of the United Emirates a key market for virtual assets and the commercial
(CBUAE) from time to time, and Securities held in marketplaces they engender.
dematerialized form that are not issued as crypto-assets.
The Virtual Assets Law applies to the provision of services
relating to virtual assets throughout Dubai, including all
of its free zones, except the DIFC. The Virtual Assets
Law governs non-fungible tokens, cryptocurrencies, and
security tokens.

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 Crypto and other digital assets: UAE

Notably, the Virtual Assets Law has established Dubai’s Authors

Virtual Assets Regulatory Authority (VARA). VARA is
tasked with providing a full range of services for virtual
assets in coordination with the CBUAE and the SCA,
including the licensing and regulation of entities carrying
out activities in the virtual asset space, development of
strategic plans and policies surrounding virtual asset Adela Mues
activities, regulating and supervising the issue and Partner
offering of virtual assets and tokens, and prescribing Dubai
regulations in relation to personal data protection and [email protected]
KYC/AML.

VARA is collaborating with its counterparts in various

leading jurisdictions, such as the United States,
Switzerland, the UK, Singapore, and Hong Kong with
the aim of creating an interoperable set of regulations Soham Panchamiya
for activities in the metaverse that can be “passported” Associate
to any other jurisdiction. The ultimate goal of VARA is to Dubai
ensure that any company operating under and complying [email protected]
with its regulations in Dubai can obtain recognition as a
reliable and stable company in this space globally.

VARA’s approach for the short- to medium-term is to

identify and support Virtual Asset Service Providers
(VASPs) and numerous other companies through its
MetaHQ that import dimensions of virtual assets in their
strategy. VARA’s main goal is to support what it describes
as game-changers, innovators, and market makers
across ICT, financial and professional services, lifestyle,
entertainment, and FMCG sectors, beyond the world of
gaming and VASPs.

Numerous projects, initiatives, and developments are

already being encouraged as the UAE is positioning to
be a leader in the field of metaverse-related laws and
regulation.

In the UAE, we can expect to see regulations being

adopted, adapted and amended to keep pace with the
rapid advance in the world of web3 and innovations in
the metaverse. Any company looking to expand into
the metaverse will find the UAE a tax-friendly business
foundation with a supportive legislative framework.

Guide to the Metaverse – 2nd edition Reed Smith 97

Deepfakes in the metaverse

D
eepfakes take the form of face reenactment (where software
manipulates an individual’s facial features), face generation (where a
new face is created that does not relate to a specific individual), face
swapping (where one person’s face is swapped with another’s), and speech
synthesis (where voices are re-created). Shallowfakes are similar, but they
involve more basic editing techniques.

How do deepfakes and shallowfakes relate What are the legal issues?
to the metaverse?
Deepfakes and shallowfakes can be used for the
By their very nature, deepfakes and shallowfakes are a manipulation of pornographic material (for example,
direct threat to the accuracy of information relating to any revenge porn) and for political purposes (for example, to
individual in the existing digital environment. However, the fake political statements or actions). Such uses (which
threat that they pose will only increase as our interactions are just two examples among many) can have an obvious
with the metaverse increase, given that there will be more and dangerous impact on the privacy and reputation of
opportunities for the use of deepfake technology. While individuals. This is particularly the case for those in the
many deepfakes have been created as obvious parodies public eye, but also more widely.
(such as a 2020 deepfake of Richard Nixon announcing
Deepfakes and shallowfakes can be used to suggest
the failure of the 1969 Moon landing or the use of
that individuals have made comments or taken part
deepfakes of Queen Elizabeth II by a UK public service
in activities (ranging from the controversial or socially
television network in their 2020 “Alternative Christmas
unacceptable to the illegal) when they did not. There are
Message”), their increasingly convincing nature means
also clear implications for the safety of convictions in the
that this technology can be used for more troubling
criminal justice system.
purposes. By way of example, in June 2022 it was
reported that the mayors of several European capitals On the other side of the coin, the existence of such
had been duped into taking part in video calls with a technology allows wrongdoers appearing in unaltered
deepfake of the Mayor of Kyiv, Vitali Klitschko. material to claim that it has been altered – again with
potential implications for the justice system and the
political landscape – potentially allowing wrongdoers to
claim that video evidence is “fake news.”

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 Deepfakes in the metaverse

There are a number of ways that the law can tackle In terms of upcoming changes to the law, the European
deepfakes and shallowfakes. For example: Parliament recently ratified amendments to the draft EU
Digital Services Act (due to come into force in 2023) to
• Revenge porn could be dealt with under the Criminal require “very large online platforms” to label that footage
Justice and Courts Act 2015. is a deepfake and inauthentic in a “clearly visible” format.
It has however been noted that the UK Online Safety Bill
• The Protection from Harassment Act 1997 may be
does not appear to include equivalent proposals.
helpful in some cases.
Authors
• The owner of the copyright in the footage used may
be able to bring an action for copyright infringement
(although in many cases, the owner may not be the
individual featured). Deepfakes created for comedic
purposes may be protected by the parody exception
under the Copyright, Designs and Patents Act 1988,
relating to any work that “evokes an existing work Carolyn Pepper
Partner
while being noticeably different from it, and constitutes London
an expression of humour or mockery.” [email protected]

• Defamation is a potential route in the case of

deepfakes that “lower the claimant in the eyes of right-
thinking members of society” or cause such members
to “shun or avoid” them provided that serious harm
is caused. This would be a viable cause of action
for more serious deepfakes, such as those wrongly Jonathan Andrews
Associate
suggesting that individuals in the public eye have London
made a statement or carried out an activity that might [email protected]
cause serious harm to their reputation.

• Passing off may be helpful, for instance, where a

deepfake is used to fake endorsement of a product.

• Privacy law and the tort of misuse of private

information may be helpful where footage not
intended for public distribution is used, but the fact
that most deepfakes are derived from widely available
footage may mean that its use is limited.

• If the deepfake is being used in connection with

advertising, the affected individual (including a
deceased individual) may have a right of publicity
claim within the United States. Right of publicity laws
vary by state, with some states, such as New York,
California, and Tennessee, extending that protection
to after death.

Guide to the Metaverse – 2nd edition Reed Smith 99

Managing antitrust and
competition risk

I
n January 2022, the European Commissioner for Competition, Margrethe
Vestager, whose responsibilities also include Digital Regulation, was quoted
as stating that competition authorities “should start thinking about [the
metaverse] now.” While almost all competition authorities and legislative bodies
around the globe have made digital markets a priority area for enforcement,
this call to action is one of the first times that the head of one of the major
antitrust authorities has explicitly recognized the need to consider the future of
competition enforcement in the metaverse. The emergence of the metaverse
and the reinforcement of the ever-increasing pervasiveness of digitization will
undoubtedly come under close scrutiny from competition regulators worldwide.

However, to date, there are more questions than answers on how this should be done. Indeed, Ms. Vestager’s
comments note a concern that developments are occurring that need to be followed, but that the competition
authorities are still trying to work out how to ask the right questions to understand potential competition concerns.

• As the world becomes increasingly interconnected, • Will there be a way to provide legal certainty for
how will competition law enforcers adjust to this trend, companies doing business in the metaverse, and will
and will the individual competition authorities be able there be guidance that companies can rely on when
to find a way to work together to address issues on a adapting their business models to the new age?
global, rather than a piecemeal, individualized basis?
• What steps should be taken to safeguard consumers
• At what stage should regulators intervene? If they in the metaverse jungle?
intervene too soon, innovation could be stifled, and
if too late, the market could “tip,” causing substantial Even at this early stage, it is possible to identify a
distortion of competition, risk of monopolization, and number of issues competition authorities across the
emergence of mega-corporations. world will have to grapple with. The competition issues
the metaverse is likely to create can be looked at from
• Do regulators have a choice at all of balancing different perspectives, including
intervention, just in case they risk falling behind rapidly
changing digital developments? i. the infrastructure needed in the metaverse,

• Will the competition tools that have been or are ii. operating a business in the metaverse, and
currently being developed to address powerful iii. the roles of users in the metaverse.
digital platforms prove to be sufficient, or will they be
outdated even before they are effectively applied?

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 Managing antitrust and competition risk

Infrastructure needed in the metaverse tends to entail lengthy administrative proceedings

often followed by even lengthier court proceedings.
Access to the metaverse and gatekeepers – competition Ex post intervention often fails to address the
authorities will likely want to ensure that there is sufficient competition issues in the fast-changing digital world
access to products or services deemed indispensable in a timely manner. Especially in the digital economy,
for effective competition in digital markets, in particular many markets show a high degree of concentration,
in the metaverse (for example, access to data, hosting/ and the metaverse is unlikely to change this trend.
server capacities, critical technologies or solutions for Furthermore, takeovers and mergers can tip a market
metaverse-specific types of advertisement, augmented or create ecosystems that are almost unassailable for
reality/display, etc.). competitors. For this reason, regulators are likely to
take merger control more seriously than ever in the
Standard setting and interoperability – In order for the
context of the new digital era.
metaverse to operate effectively, it appears likely that
there will need to be agreement on technical standards. • Saving innovation from “killer acquisitions” –
We expect regulators will want the metaverse and Innovating firms are often acquired by incumbents,
markets therein to remain open and accessible to market typically in the early stages of product development
participants (in particular smaller players) on FRAND (fair, and often for large amounts that do not appear to
reasonable, and non-discriminatory) terms, balanced be justified by current revenues. Such acquisitions
against the legitimate commercial interests of relevant are referred to as “killer acquisitions” where there
suppliers to incentivize development and innovation. The is a risk that the purchase of a new challenger by
tensions between intellectual property holders, licensors an incumbent will eliminate promising, yet likely
of standard essential intellectual property, and licensees competing, innovation. Such acquisitions seem all
that continue to be prevalent in a number of sectors can the more likely to occur in the metaverse, as large
be expected to arise in the context of the metaverse. digital platforms jostle to position themselves to
take advantage of the new technology. Competition
• Merger control and ex ante regulation – Today, there authorities are developing tools to enhance pre-
is a consensus among competition authorities around
merger screenings to discourage these acquisitions
the world that ex ante regulation (preventing harm
when competition is negatively impacted, and the
to competition before it occurs) is far more effective,
authorities can be expected to vigorously enforce
less invasive, and thus generally preferred to ex post
these tools in the context of metaverse M&A.
regulation (retrospective enforcement activity), which

“The overall challenge for regulators will be to keep

markets open and free, and to allow companies to
do business with consumers in the metaverse.”

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Managing antitrust and competition risk

Doing business in the metaverse • Users will need some manner to interface with the
metaverse. Where this occurs – particularly if there is
• The overall challenge for regulators will be to keep only a single interface platform or a small number of
markets open and free, and to allow companies to interface platforms – those platforms have a benefit
do business with consumers in the metaverse. This in being able to favor their own services in secondary
is always a challenge for competition authorities in markets within the metaverse over services offered
times when new “markets” are developing or major by their competitors. Competition authorities consider
developments or innovations occur with the potential this type of self-preferencing practice by digital
to disrupt existing business models. platforms to be potentially harmful as likely distorting
competition and increasing dependencies of third-
• Generally, we expect that the rules currently being party businesses from the platform’s services. This
developed to address market power identified among
practice can therefore be expected to remain on the
certain digital companies will continue to be relevant in
“blacklists.”
the context of the metaverse. A number of the issues
that have the potential to arise in the metaverse are • Advertising markets in digital ecosystems have been
already being considered in existing digital markets. the subject of a number of competition investigations
in recent years. We expect that competition
• The tendency for markets to “tip” due to the benefits authorities will continue to take a keen interest in
to users and businesses of a critical mass of other
digital advertising in the metaverse, particularly if
users on the same platform can make it very difficult
an advertising-funded business model becomes
for new competitors to break into the market.
prevalent.

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 Managing antitrust and competition risk

• The further integration of the digital world with In the metaverse, interoperability will set new standards –
consumers’ day-to-day lives will generate huge but not only from the perspective of enabling businesses
amounts of data about individuals’ routines, habits, to connect to the digital platforms. Interoperability will
and preferences. Access to this data can be vital also likely become a standard requirement imposed by
in ensuring the popularity of services offered in the competition policy to require digital platforms to provide
metaverse. The position of the platform provider can, consumers with the ability to port their data when
therefore, impart a significant advantage over rivals, deciding to leave a platform. Digital platforms are more
serving to reinforce the platform’s market power or likely to gather market power if consumers are “locked in”
enable it to leverage the power to other service areas. due to the lack of interoperability and the consequence
that data is lost when leaving. If consumers are allowed
Users in the metaverse to migrate their data to competing systems (for example,
using an application programming interface), lock-
Over recent years, users have become familiar and in effects would be diminished, which may promote
comfortable with platforms being provided for free competition between platforms.
at point of use. It seems likely that users will expect
digital services in the metaverse to be available on the Authors
same basis. However, not being required to pay money
does not mean the consumer is not paying anything.
Consumers are generally paying for such “free” services
with their data. Given the interconnectedness with so
many aspects of their lives in the metaverse, this data will
be hugely valuable to businesses. There will be a need Ross Mackenzie
for higher privacy standards, more transparency, and a Legal Consultant
London
simplification of the ways for consumers to agree to or [email protected]
reject the transfer of their data.

This personalized information can be used to create

increasingly personalized product and service offerings,
which may include setting personalized pricing for
different consumers for the same product or service
based on what the business knows about that consumer Michaela Westrup
(the strength of their preference for the service, their Partner
Munich
income, other products they have bought, their location, [email protected]
etc.). Competition authorities have already been
considering this issue in digital markets and debating
whether exploiting customers’ willingness to pay is fair
and where the limits of any possible efficiencies will be
reached.
Michelle Mantine
Partner
Pittsburgh
[email protected]

Guide to the Metaverse – 2nd edition Reed Smith 103

Aviation in the metaverse:
Breaking the reality barrier

A
viation has always been an industry of pioneers, so it comes as no
surprise that it has been quick to embrace new technology. The endless
possibilities offered by the metaverse are being explored at pace, and the
advent of electric vertical take-off and landing (eVTOL) aircraft and unmanned
aerial equipment like drones marks the arrival of the next generation of urban
air mobility vehicles. At Reed Smith, we have been privileged to play a leading
role in the introduction of this transformative technology – albeit a small one in
comparison to that of the engineers and entrepreneurs.

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 Aviation in the metaverse: Breaking the reality barrier

Leaving on a jet plane I can see for miles

Aviation was one of the industries most severely If the metaverse can facilitate airport access and airport
impacted by the COVID-19 pandemic, and it remains shopping, it can also make it easier to earn and redeem
under pressure from various macro factors: rising interest air miles. Many of us are lured by frequent flyer programs
rates, staff shortages, the price of fuel, and, of course, that offer benefits with an airline, and these create huge
the increasing replacement of business travel with virtual real-world value for both travelers and airlines in addition
meetings. Against that backdrop, airlines and airports are to generating customer loyalty. Air miles are very lucrative
turning to the metaverse to augment their offering. for those airlines that manage to monetize their loyalty
programs, which are often worth considerably more than
For example, the airport experience has been digitally the airline itself. American Airlines, for example, used its
enhanced with: program as collateral to borrow money from the U.S.
government.
• Virtual queuing: trialed at LAX
Taking this a step further, airBaltic, the first airline to
• Immersive shopping: London’s Heathrow Airport
accept cryptocurrencies in payment for tickets, also
partnered with luxury brands like Chanel and their
became the first airline to issue non-fungible tokens
“beauty spaceship,” enabling shopping passengers to
(NFTs) when it launched “Planies,” an NFT collection
try on products virtually
of tokens that it will be linking to its loyalty program.
• Virtual replicas: Qatar Airways recently launched QVerse, Emirates will also launch NFTs and experiences in the
a virtual reality program that allows passengers to look metaverse, alongside both collectible and utility-based
inside the aircraft from the comfort of their homes NFTs.

Manufacturers are also pushing boundaries via the Air mile programs are also closely connected with ticket
metaverse, with Airbus and Boeing looking at ways sales, and this new technology offers novel distribution
to streamline production by creating digital replicas of opportunities. Air Europa, for example, has established
aircraft and using these to run tests and simulations. This a partnership with blockchain distribution company
means they would be able to gather data and results TravelX (the company building the first blockchain-
without needing to accumulate flight hours on a physical based distribution protocol for the travel industry) to
trial aircraft, saving costs and mitigating safety risks to the come up with the world’s first NFT flight ticket series, or
test crew. Airbus and HeroX also held a crowdsourcing “NFTickets,” entitling owners to access a special flight
competition called “Metaverse and the Future of Flight,” to an event in Miami Beach. This will allow passengers
seeking innovative ways to use the metaverse to to manage and transact with tickets using their own
reimagine and elevate the traveler experience. blockchain wallet, combined with a new kind of collectible
art piece. At auction, Air Europa’s first NFT sold for $1
million. As another example, Vueling is looking to sell
flights in the metaverse that can be used in the real world,
providing the airline with a new distribution channel.

Guide to the Metaverse – 2nd edition Reed Smith 105

Aviation in the metaverse: Breaking the reality barrier

Learn to fly possible, for example, to overlay a Google Earth-style

functionality on top of the virtual replica of the landscape,
Advanced air mobility marks the next inflection point in including marking safe glide paths for use in the event of
aviation’s continual evolution, and is described by leading a malfunction and the “obstacle-free volume” area to be
industry figures such as Dómhnal Slattery as “the next stipulated for each vertiport. This could be supplemented
big frontier” for aviation. It is a frontier being explored by in real time by each vehicle’s cameras and other
a combination of entrepreneurs, giants of aerospace, sensors (to deal with, for example, cranes moving over
and global logistics companies, like Airbus and Boeing construction sites) and input from passengers.
(Aurora), Amazon Prime, DHL, and even an online food
ordering and delivery service. Taking the pilot out of the payload offers an immediate
uplift in return, enabling the same vehicle to carry an
eVTOL aircraft in particular represent (among other things) additional paying passenger or more revenue-generating
an evolution in the aviation industry’s focus as the need cargo and enabling the industry to reach economic
to design modes of transportation with substantially lower sustainability sooner, even before complete autonomy of
greenhouse gas emissions and noise pollution becomes flight is achieved. Building this support infrastructure in
ever more urgent. eVTOLs have a wide variety of use the metaverse could also help address the global pilot
cases in both urban and regional areas, and will be used shortage, which could be alleviated if the next generation
for passenger service, freight, disaster relief, defense, and of pilots of eVTOL aircraft could be trained remotely,
final mile logistics. certified centrally, and deployed globally.
These aircraft are being developed by a range of
companies working in this space, but many (if not The legal issues
most) of the proposed models will have to commence
With such complex and novel technology, the range of
commercial passenger operations with a pilot physically
legal and regulatory obstacles to be considered and
on board. It is expected that piloted models will achieve
addressed by the fledgling eVTOL industry is vast and
certification in various jurisdictions several years ahead
growing. It will be critical for industry stakeholders to
of autonomous aircraft, which is reflective of the need to
engage with the following topics in particular:
develop the technology, the regulatory framework, and
the passenger buy-in necessary to make this possible. 1. Certification: eVTOLs are difficult to define due to the
However, the achievement of autonomous flight without a multitude of designs currently being proposed. This
pilot is critical to the ultimate economic viability of eVTOL makes the task of creating certification standards
flight. Consider, for example, a four-seat model of eVTOL challenging. Close collaboration with regulators and
aircraft: with a pilot present, the capacity of the aircraft aviation authorities is obviously therefore essential.
to generate return for its operator (and that operator’s
financiers) is reduced by 25 percent. 2. Insurances: Industry thinking on the applicable liability
issues, and the laws that may regulate accidents and
But what if there is an interim stage between piloted incidents, remain in progress. Recent lessons learned
and autonomous flight, where the aircraft could be by the insurance community from developments
piloted remotely? If the metaverse can be used to build in the unmanned aerial vehicle/drone market have
a digital twin of a physical space, the conditions in an demonstrated that traditional policy wordings are
eVTOL operating location could be replicated such that probably not fit for purpose when it comes to insuring
a pilot in any location could operate it safely. It might be new technology such as eVTOLs. This is especially
the case if operational infrastructure is built in the
metaverse, and new insurance policy wordings
accommodating the new technology will need to be
developed.

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 Aviation in the metaverse: Breaking the reality barrier

3. Liability and risk allocation: The liability regimes for Authors

the carriage of passengers and cargo on board
traditional civil aircraft have developed by international
convention since commercial flights began in
the 1920s, but questions remain as to whether
the existing liability framework is flexible enough
to accommodate eVTOL flight. Manufacturers Richard Hakes
and operators will also need to consider how to Partner
apportion liability among themselves, as well as London
the risks that can be passed on to end users via [email protected]
their contractual ticketing arrangements. A careful
balance will need to be struck because overly robust
indemnity and liability wording could significantly
undermine confidence in the industry and would
no doubt be met with resistance from regulators
and legislators (if not already fettered by consumer Ashleigh Standen
protection legislation). It remains to be seen how Associate
London
liability issues in the metaverse more broadly will [email protected]
be addressed, but a single metaverse with multiple
stakeholders having different needs, purposes, and
levels of sophistication will require carefully designed
interoperability standards. In particular, different
aircraft manufacturers and vertiport developers
will need to permit interoperability between their
Luke Drake
platforms. Associate
London
4. Cybersecurity and physical safety: Security and [email protected]
safety issues may arise because of closer operating
proximity to potentially malicious actors and to urban
public infrastructure. If vehicles can be operated
using the metaverse, there is a risk that they could
be interfered with in the same way. In addition, both
passenger data and flight ops/aircraft-specific data in
Celine Collis
the metaverse will be extremely valuable, both to bad Associate
actors and to marketeers alike. London
[email protected]
Aviation is well placed to maximize the potential of the
metaverse, particularly in conjunction with emergent
technologies like eVTOL aircraft. As these fields develop
and overlap, the legal and regulatory frameworks
facilitating this potential must evolve quickly and in close
collaboration to ensure that aviation is able to benefit from
the wealth of new possibilities.

Guide to the Metaverse – 2nd edition Reed Smith 107

Insurance issues in the metaverse

A
s more companies and people migrate to the metaverse to conduct
business, interact, and spend time, companies need to be prepared
for losses and claims that could arise from their presence and activity
there. Insurance coverage, including bespoke policies and coverage from
policies within a company’s existing insurance program, can be vital to
protect companies against these potential risks.

Many risks companies face in the real world will exist in D&O insurance
the metaverse, albeit with a digital twist. For example,
many metaverse projects involving the use of a “currency” D&O insurance shields a company’s board and
feature their own native coins, which in many instances management and protects their personal assets from
can be swapped for other cryptocurrencies or even fiat liability. It typically insures claims made against (1) the
currency. These activities and operations may lead to directors and officers when the company does not
allegations of wrongful acts implicating directors and indemnify them (“Side A” coverage) and (2) the company
officers (D&O) or errors and omissions (E&O) coverage, itself when it is required to indemnify its directors and
among other types of coverage. Many metaverse officers for those claims (“Side B” coverage). D&O policies
projects will feature content creation that could implicate also can include entity coverage protecting the company
intellectual property rights, thereby triggering these same against its own liability in a securities claim or (in the case
coverages or, potentially, commercial general liability of private companies) any non-excluded claim made
(CGL) coverage or specialized intellectual property against the company (“Side C” coverage). D&O insurance
coverage. In the metaverse, people can interact with is particularly important because it can cover defense
each other via their avatars and haptic feedback and, costs and indemnity for a variety of claims and suits,
in some cases, may be accused of causing emotional depending on the policy language.
distress or other torts through those interactions. Events
D&O risks presented by the metaverse may include:
like that may trigger a variety of liability insurance policies,
including, if occurring within the virtual workplace, • Securities claims
employment practices liability policies. These examples,
and the examples set forth below, are just a sample of • Intellectual property claims
the core insurance coverages that could be implicated by
risks presented by the metaverse. • Breach of fiduciary duty claims
• Misrepresentation claims
• Shareholder and derivative lawsuits
• Regulatory investigations

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 Insurance issues in the metaverse

An insured must be wary of the specific terms and Cyber and crime
provisions of their D&O policies. While existing D&O
policies likely would cover metaverse-related claims With its increasing adoption, the information stored in
for directors and officers of companies entering the the metaverse will entice bad actors who want to steal
metaverse in the same manner that they cover non- valuable data and items. Among other things, hackers
metaverse claims, many insurers deny coverage for could target:
cryptocurrency-related losses or issue policies with
language severely limiting such coverage. In particular,
• User information and sensitive data (including
biometric data)
companies dealing in cryptocurrency should be mindful
of the definition of a “Securities Claim.” Depending • User identity information and credentials
on the policy language and the applicable law of the
jurisdiction, a D&O policy may protect a company and/ • Confidential and proprietary information
or its management from metaverse-related liability as a
“Securities Claim.”10 • Cryptocurrencies and NFTs

Additionally, regulators in the future could investigate Cyber and crime insurance can mitigate some of these
metaverse companies for a variety of alleged acts or risks. Cyber insurance is designed to provide first- and
omissions involving operations, cryptocurrency and third-party coverage for claims arising out of security
non-fungible token (NFT) transactions, user conduct, or privacy breaches, such as ransomware attacks or
and privacy and data security, to name just a few. cyber extortion. Depending on the policy language and
These investigations can be costly. A D&O policy may coverages purchased, cyber insurance may provide
cover some or all of the costs associated with such an coverage for costs of investigation, ransom payments,
investigation. However, it is important to ensure that the data recovery and restoration, crisis management,
policy does not exclude investigations for cryptocurrency- business interruption, and liability claims for disclosure of
related activities or the insured’s operations in the or failure to protect confidential information.
metaverse. Similarly, crime coverage may cover losses arising
from certain criminal incidents, such as theft of money,
securities, or property; ransomware attacks; social
engineering; fraud; and phishing, among others. In a
recent case in New York, a court examined coverage
under an identity theft policy for the theft of private key
credentials to an insured’s cryptocurrency account and
subsequent looting of the insured’s cryptocurrency.11
The court partially sided with the insured, finding that
the hack and subsequent theft of the insured’s private
keys constituted a covered “Stolen Identity Event.”12 The
court permitted the insured’s stolen key credentials claim
to proceed, but held that the insured was not entitled to
remediation coverage for its lost cryptocurrency because
the private wallet was not an “Account,” i.e., an account

10 At the time of writing, it is not clear whether cryptocurrency is a security under U.S. law. 11 Atwal v. NortonLifeLock, Inc., No. 20-cv-449S, 2022 U.S. Dist. LEXIS 93153 (W.D.N.Y. May
In S.E.C. v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y. 2020), a U.S. federal court is 24, 2022).
considering arguments from the U.S. Securities and Exchange Commission that Ripple’s 12 Id. at *13-18.
cryptocurrency, XRP, is a security.

Guide to the Metaverse – 2nd edition Reed Smith 109

in a U.S. regulated and domiciled financial institution.13 Authors
The decision demonstrates challenges in obtaining
coverage for emerging metaverse-related risks, including
crypto.

It is important to note that cyber and crime policies

sometimes include language purporting to limit or exclude Noel Paul
coverage for cryptocurrency and digital asset-related Partner
losses. An insured must be wary of such exclusions Chicago
and – as is true regarding many risks associated with the [email protected]
metaverse – consider negotiating more favorable terms.

Other considerations
Metaverse projects may involve alternative governance
structures, e.g., decentralized autonomous organizations Miranda Jannuzzi
(DAOs). For this reason, nontraditional organizations and Counsel
companies active in the metaverse must be particularly Philadelphia
[email protected]
careful in naming the correct entities as insureds under
their policies. In many jurisdictions, DAOs are not legal
entities so they may be precluded from purchasing
insurance policies and may need to secure insurance
through another legal entity structure. Some DAOs
have foundations to protect their legal rights (e.g., The
Decentraland Foundation), while others may utilize Nick Pappas
Associate
more traditional forms of corporate governance. Either Los Angeles
way, a company must ensure that it and its board and [email protected]
management have adequate insurance coverage against
risks presented by the metaverse.

If metaverse-related losses or liabilities arise, companies

should take a careful look at their existing insurance
programs to see whether coverage may be available.
Companies operating in the metaverse should also keep
abreast of any new insurance products for metaverse
applications, such as specific coverages for digital assets.
As this area develops, it is especially important to retain
experienced insurance coverage counsel to assist with
negotiating and procuring insurance and in navigating any
disputes that may arise related to losses and claims.

13 Id.

110 Reed Smith Guide to the Metaverse – 2nd edition

Guide to the Metaverse – 2nd edition Reed Smith 111
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