In general, non-fungible tokens (NFTs) in the metaverse should be thought of as securities, but developers have been slow to realize this. Axie Infinity, Bored Apes, and other projects that threw caution to the wind can expect a quick reckoning from the government.
The metaverse is a futuristic version of the internet that has a digital economy, an immersive virtual world, and other ways to interact. This area is still fairly new, but it has grown so much in the past few years that even conservative estimates say it could be worth more than $800 billion by 2024. Google, Microsoft, Nvidia, Nike, and other Fortune-100 companies have put a lot of money into the metaverse. Meta, which owns Facebook and Instagram, is one of those companies.
Great valuations, on the other hand, bring a lot of scrutiny from financial regulators who know more and more about technology. Unlike traditional tech products, which often put growth ahead of revenue for years, some metaverse projects force their users to use questionable ways to make money before they go live. For example, Big Time Games sells land in their metaverse before letting people play.
Most of the time, the Securities and Exchange Commission doesn’t step in unless small investors are being taken advantage of and their money is being taken without them knowing what they are investing in. The line between what is and isn’t a security is often fuzzy, but under US law, selling land in the metaverse should be considered a security.
GameFi platforms like Axie Infinity show how quickly multibillion-dollar economies can be made by projects in the metaverse. Because of how big they are, they need internal controls and money policies like those of big banks or even small countries. They should be required to hire compliance officers who work with government regulators and even do Know Your Customer procedures for large transactions.
Financialization is tied to the metaverse in a way that can’t be broken. Even though there is no way to hurt someone physically in the metaverse (yet), a lot of money has already been lost. The company that made the nonfungible tokens (NFTs) for the Bored Apes Yacht Club was hacked this year after a community manager’s Discord account was taken over. Hackers stole NFTs worth 200 Ether (ETH).
A group of Wall Street banks was recently fined $1.8 billion for using messaging apps that were “banned.” Yuga Labs and other metaverse projects that don’t have secure financial and technical controls in place should be fined in the same way.
The first step of any metaverse project is to classify the type(s) of assets being issued. Is it something like a security? Is it a utility token? Or is it another thing? This may seem like a big job, but the groundwork has already been done by the initial coin offering era of 2017. Regulators and protocols should make more efforts to make things clear and keep consumers safe.
After the classification process is done, the next step will be to make a set of rules that can be used to govern the metaverse. This will almost certainly include rules and laws about selling securities, keeping money from getting laundered, and protecting consumers.
It is very important to find the right balance. Too much regulation could slow down new ideas and adoption, while not enough regulation could lead to widespread abuse. It will be up to politicians and business owners to work together to find that sweet spot.
Even with these concerns, the metaverse brings together a number of new technologies, such as virtual reality (VR), augmented reality (AR), and neural networks (NFTs). All of them work together to make the space move forward with more force in the short to medium term.
Working in the metaverse and its risks
Cybercriminals are always coming up with new ways to take advantage of metaverse users, like hacking schemes and identity theft. Because AR and VR wearables in these ecosystems collect a lot of personal information, including biometric information from eye-tracking and body-tracking technology, the metaverse is a tempting place for bad people to hang out.
Aside from financial theft, there are many privacy concerns as three-dimensional data sets reveal more and more sensitive personal information. The General Data Protection Regulation in the European Union and the Consumer Protection Act in California are both comprehensive pieces of privacy legislation that have forced tech platforms to hire data protection officers and data privacy compliance officers. Due to the sensitive nature of the data they may collect, metaverse platforms will need to play similar roles and may be subject to even more scrutiny from regulators.
As the metaverse becomes more popular, people will want better internet services because the metaverse needs a lot of bandwidth (estimated to be several orders of magnitude from internet traffic levels today). As a result, many telecom networks and the infrastructures they use to spread data may become too busy.
One way to solve this problem is to invest in 5G technology and build a stronger infrastructure. But this takes time, money, and other resources. The other option is to make data compression algorithms that work better so that less bandwidth is needed to send data around the metaverse.
In addition to the technical risks, another thing to think about with the metaverse is how it might hurt your mental health. Because criminal law doesn’t apply to the ecosystem, people who are abused online have no way to stop it (such as racism).
Problems with Regulation
Because any network operator, firm, or business can choose to exist on paper outside of a proposed regulatory framework, a country’s efforts to regulate will have little effect.
This is shown by the fact that many of the social media sites we use today, like Twitter and Facebook, are not based in the United States but in places like Ireland and Singapore, where data protection laws are much less strict.
The same rules apply to the metaverse. Even if a country tried to regulate this space with laws, it’s unlikely that all businesses would agree to follow them.
So, unless every participant in the metaverse agrees on the vision of establishing a uniform code of governance, there is no way to stop a third-party entity, like an offshore investment firm, from creating its own unregulated pocket within the metaverse, which users of other digital ecosystems can then access without apparent limits.
Looking forward to a time when power isn’t centralized
The metaverse is about to change our lives, whether we like it or not. Lastly, the “move fast and break things” philosophy is still alive and well in technology development, and history shows that founders move much faster than regulators can keep up with. But regulators need to step up and take proactive steps to allow innovation to grow without causing retail investors to lose a lot of money. After all, the way we use technology in the future will depend on the choices we make today.
Huy Nguyen is one of the people who started KardiaChain. This is Southeast Asia’s first blockchain infrastructure that can work with other blockchains. Since May 2022, he has been the vice president of the Vietnam Blockchain Association, which is the official government group working to get more people to use blockchain in Vietnam. He used to be a senior tech lead manager at Google. He has been building large-scale distributed infrastructures like the Google Access Wireless Platform and the Google Fiber Network Infrastructure for more than ten years.
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