Is Regulating NFTs and Metaverse Unbearable for SEC?

The Securities and Exchange Commission is making some moves toward regulating crypto. There will be many challenges when deciding the best regulatory guidelines for Non-Fungible Tokens and Metaverse. This article will address some of these issues.

A Boundless Marketplace

Generally, transactions in the metaverse are made with cryptocurrencies or non-fungible tokens (NFTs). People can use these assets for various creative purposes, such as music or images. The market for NFTs is booming. Some estimates state that the NFT market is worth hundreds of millions of pounds.

Art purchased in the real world has a two-fold ownership structure, as dictated by property law. First, it belongs to the artist, and second, the buyer may or may not have the intellectual property rights of the work.

In the metaverse, however, the concept of ownership is not included in terms of a transaction. According to international law firm Reed Smith, in this type of transaction, the actual owner is the one who provides the services or license. It means that the buyer may not be able to sell the item without the owner's permission in some cases.

People are spending a lot of money buying real estate in the metaverse due to the rise of the virtual real estate market. It brings with it various legal questions. For instance, if a person owns a property in the metaverse, can they take out a mortgage on it?

The metaverse could also become susceptible to hosting a dark web marketplace like Silk Road, which was an illegal drug and weapons exchange. Are there laws that can prevent this from happening? An international regulatory authority for the metaverse would be ideal. However, its implementation would be challenging.

User Interactions

In some cases, an interaction between users in the virtual world can result in an incident that could be a criminal act if it happened in the real world. This move could be grounds for a lawsuit under various civil and criminal laws.

Let's try to understand that with an example. Imagine that a person attacks another person in the virtual world. It would be difficult to prove that an attack in the metaverse was intentional or not in most cases. Furthermore, since the attacker's actions cause no physical harm, it would be difficult to show that the victim suffered injuries.

It hasn't been that long, and sexual predators already exist in the metaverse. They use pseudonyms to hide their identities, making it hard for SEC and any other legal body to trace the event back to the predator.

Although sexual harassment laws do not explicitly require people to be physically touched for it to be considered sexual harassment, existing laws are not enough to address this issue in the virtual world. Sexual harassment is already an issue in the metaverse, and it will likely continue to worsen as more users become aware of this grey area.

Taxing in the Metaverse

The US IRS says that assets related to cryptocurrencies are subject to various taxes. Similarly to financial institutions, the IRS should handle non-financial transactions (NFTs) as it would any other type of asset. The agency will likely target the metaverse projects in the same manner.

While many states have applied sales taxes to digital assets, it's unclear if the same applies to NFTs. Therefore, it's unclear whether the sales tax will also apply to metaverse assets.

Data Protection

The metaverse could have legal implications related to the protection of personal data. It could expose new categories of data related to our activities in the virtual world.

Although the General Data Protection Regulation (GDPR) is already applicable to the metaverse, it is unclear if it will also apply to the virtual world. Given the nature of the data collected and stored in the metaverse, SEC must revisit the processes related to informed consent.

It is also necessary to clarify clauses related to data processing outside the European Union, given the fact that the metaverse has no borders. The General Data Protection Regulation (GDPR) applies to the location of the data collected and stored on the subject.

In regulating this issue, should the SEC look at the location of the data collected and stored on the subject based on the person operating the avatar? Or is it better to look at the data itself and determine the guidelines?

Author's Thoughts

As technology evolves, the metaverse will add to its ideas and become more practical and widespread. However, new laws and regulations are likely to affect the metaverse. The concept of the metaverse is still in its early stage. Nevertheless, it is already clear that this concept has the potential to transform the way we live and work.