NFTs and the metaverse – A Breakfast Roundtable from Memery Crystal and Rosenblatt

The following article summarises key points and themes from the discussion at this event hosted by sister law firm brands Memery Crystal and Rosenblatt.

The metaverse

Truly immersive, metaverse experiences already enable medical students to travel through ‘live’ organs or respiratory/digestive systems as they are learning about them. Dubai – a huge investor in the metaverse – has released a taster of Meta Dubai, enabling virtual tourism (shopping, sightseeing, entertainment et al) from the comfort of one’s living room. There is huge interest in metaverse property and real estate; over a billion dollars of virtual real estate is estimated to have been bought and sold in 2022 alone.

There is also lot of buzz around the convergence of TradFi (traditional finance) and DeFi (decentralised finance), with traditional firms looking for a presence in the cryptocurrency or blockchain space and service providers bringing digital innovation to the traditional, regulated, financial marketplace.

Joel Coren, Verseprop is building a real estate agency in the metaverse. As he explains: “The metaverse is evolving along two lines – centralised, Facebook/Meta, Web 3.0 vision and decentralised. In terms of metaverse and NFT evolution, it will become more about connectivity and interoperability, a more decentralised model with multiple metaverses and fungible NFTs (that is, not linked to a specific metaverse or ‘club’) and with digital asset liquidity spread across multiple venues and platforms”.

NFTs, tokenization and fractionalisation (splitting an ‘asset’ into multiple tiny portions) are investment opportunities aimed at non-traditional financial markets participants. Gaming companies, for example, are looking at how NFTs can be offered as incentives to engender greater customer loyalty; rewarding customers with NFTs (or crypto tokens) that can be traded between different meta marketplaces is an interesting opportunity.

Fashion is another interesting area for NFTs. Names like Burberry are already looking at how Web 3.0 and the metaverse can be used to reach new marketplaces and customer demographics. People that might never be able to afford to purchase a physical Chanel bag, for example, might be more than happy to own one (or a fraction of one) as an NFT.

Owning and protecting digital assets

As Michael Burke, Fireblocks explains: “NFTs have a number of different use cases – with art being perhaps the best-known by the general public – but also embracing property, music, fashion collectibles, gaming etc. Given all these different types of potential digital ownership, it is very important that people have confidence that their assets are safe – both in terms of security of ownership and protection of the asset itself”.

With respect to safekeeping, people increasingly understand the concept of crypto wallets. These can be custodial (a third party manages the asset owner’s private access keys)- or non-custodial, where asset owners manage their own keys (in this case, there is a risk that if these are lost, so too are the assets).

While certain elements of these types of transactions can be standardised, for example the type of smart contract each requires, there is still a huge amount of nitty gritty detail particular to each use case that needs to be taken into account. The other aspect of standardisation is popularity. Size matters; those with the biggest user bases will inevitably set the standards.

Emerging market segments driving the need for standards

Markets also tend to be specialised and it is no different for meta-markets. Different sectors, like property, will develop proprietary platforms. Consumers will also likely ‘specialise’ in terms of the meta-sectors in which they are interested.

Commercial, IP and Technology partner Chris Pulham, Memery Crystal, comments: “From a legal perspective, a key challenge is creating common standards for multiple metaverses that may each operate slightly differently. Lack of standardisation comes down to the nuts and bolts of the associated terms with respect to entities, tokens, assets etc. It is very difficult to standardise these when there are so many disparate use cases – fashion, music, sports, entertainment et al.”

Clarifying, establishing and enforcing ownership in law

Disputes partner Laura Clatworthy, Rosenblatt explains that there is support in the legal community and the required flex in our common law system with developing laws creating a trusted environment for consumers and businesses in this jurisdiction. In December 2019, the UK Jurisdiction Taskforce issued a legal statement on crypto assets and smart contracts that recommended that crypto should be capable of being recognised as personal property. This is important because ownership of ‘property’ is asserted against the world at large; building consumer trust in these new assets requires legal certainty over ownership, and appropriate protections.

UK courts have relied previously on the Jurisdictional Task Force’s legal statement on crypto assets and smart contracts in determining that crypto could be considered to be ‘property’ and therefore a protectable asset capable of being the subject of injunctive relief and held on trust. The statement has been cited in courts in other jurisdictions (Singapore and NZ). And earlier this year an injunction was granted over 2 ‘stolen’ NFTs. However, there is a legal tension as the definition of ‘personal property’ is not suitable for digital assets and the Taskforce has undertaken another consultation looking in more detail at digital assets (which concluded on 4 November).

In summary, the Taskforce is proposing to recommend a new species of personal property called “data objects” and crypto tokens would fall into this category. Importantly, whilst the definition of ‘data objects’ would include NFTs (as ‘crypto tokens’), it does not include the underlying smart contracts or the linked, underlying asset (virtual or real). These elements and terms are governed by established laws. As such, it is fundamental that consumers understand the contractual terms (including those contained in the associated smart contract) with respect to what has (or has not) been sold or assigned to them at the time of purchase.

Generating a return on your investment

Even if law allows that NFTs and/or other digital assets are property for the purpose of owner rights and protections, it is not clear whether they are – or could be – subject to regulation (and criminal sanction and penalty) as collective investment schemes subject to prevailing financial services regulation (and consumer protections). Asset fractionalisation might be considered a collective investment scheme, in the sense that the ownership, worth and value of fractionalised assets in a specific metaverse bubble are linked inextricably to the whole ‘asset’. Businesses should take legal advice if this is relevant to them.

Beyond defining ownership, the consumer may want to monetise or leverage owned assets, for example, staking, ‘market making’ (contributing to liquidity pools), lending, borrowing and so on. What rights they and the originator have will be contained in the associated smart and legal contracts.

Consumer control of data?

It is fair to say that Web 3.0 has had its dot.com moment with some much-needed market rationalisation and is moving now into an incredible development and growth phase, but again, data sits at the heart of the debate. One of the major arguments in the blockchain world is the way that Big Data companies like Facebook (now “Meta”) use customer-contributed data, and ownership and exploitation of that valuable data. Will Big Data be returned to the consumer – which is possible with blockchain technology – or will global business take steps to retain it? It is interesting that Facebook for example is investing billions on developing its Meta concept and on blockchain related projects.

Summing up the roundtable discussion, Laura Clatworthy, Rosenblatt, says: “UK Government and regulators have been criticised for failing to create a suitable environment for digital asset industry’s growth. However, the Web 3.0 community IS supported by the legal community in England and Wales. Common law exists and is being developed in this jurisdiction to provide trusted legal frameworks for consumers and business.”

Our thanks to our roundtable participants: Michael Burke, Sales Director, Fireblocks, Laura Clatworthy, Partner, Rosenblatt, Joel Coren, CEO and Founder, VerseProp, Helen Disney, Director, The Realization Group, Chris Pulham, Partner, Tech, Data, Commercial, Memery Crystal