The Metaverse operates as Decentralized Autonomous Organizations (DAO), a blockchain-based form of governance that simplifies decision-making and transaction processes through smart contracts. A smart contract represents the rules of the DAO and any edits made to the smart contract would be recorded and transparent.
Save on rental costs, no more traffic jams every morning, work comfortably at home in your pajamas. That sounds heavenly to most people. However, there are some legal concerns with the DAO that we need to consider.
The first problem that comes to mind would probably be: How are we supposed to deal with the legal status of a virtual DAO? Companies registered with a physical office have a separate legal personality made up of directors and shareholders. A separate legal entity implies that the company itself can be sued or prosecuted, can enter into contracts on its behalf, and companies are incorporated in a defined jurisdiction. It’s hard to imagine how this will happen for DAOs! Can you sue a bunch of 3D avatars or an “office” that only exists on the internet? DAOs are not incorporated without directors or shareholders as DAO token holders do not own shares. We probably cannot sue a DAO alone, only the members within the DAO if DAOs are considered partnerships. It is still unclear how DAOs will incorporate into jurisdictions or how (if at all) DAOs will be able to sign contracts. So until we have clear rules for DAOs, we can only go so far as to contract with avatars.
Aside from legality, the risk of infringement is a headache for most intellectual property rights owners. How are copyright and trademark rights regulated in the virtual world? It is uncertain whether copyrights and trademarks for virtual products or services can be used in the Metaverse. Do trademarks registered in real life also cover the metaverse? Or are brands separate from the metaverse in real life? Imagine what happens when they get separated. Example clothing: Nike has registered trademarks for the iconic brands “Nike”, the “Swoosh” logo or the slogan “Just Do It”. No other companies in real life are allowed to use Nike’s logos on their products. However, if trademarks are protected separately in the virtual world, the “Nike” athletic shoes worn by an avatar should not be considered an infringement of the real-life registered trademark “Nike”. This is not only problematic for existing brand owners, but also confusing for us as consumers.
Not to mention that cybersecurity remains an unresolved issue in the Metaverse. Cybercrime never stops as it brings ridiculous profits to hackers. The metaverse is expected to attract more and new cyberattacks in addition to the current tactics of phishing, malware and hacks. External digital devices used with the Metaverse, such as headsets or glasses, would be vulnerable to hackers if not properly protected. In addition, if the hackers are mere avatars, real victims may not be able to seek redress since the legal personality of the avatar is unclear and questionable. To what extent should an avatar be accountable for their actions in the Metaverse? What standards should be in place to distinguish between a “legal” avatar and the person running it?
In this regard, the Personal Data (Privacy) Ordinance (Cap. 486) (“PDPO”) is the primary piece of legislation in Hong Kong to protect the personal information of individuals by regulating the collection, processing or use of personal information. PDPO applies to the collection and processing of personal data where the personal data is controlled by a data user in Hong Kong. A “data user” is an individual who alone or jointly or jointly with other individuals controls the collection, processing or use of the personal data. However, due to the decentralized and untrammeled nature of DAOs, it would become difficult to determine who the data consumer is and the location of the data consumer. Additionally, the aforementioned issues of DAOs’ unidentified jurisdiction and lack of legal status also complicate the enforcement of privacy laws.
Indeed, the Metaverse is a significant leap in technological development. However, there are many areas that current policies and laws cannot address. New policies and laws would be needed to accommodate the characteristics of a fully virtual and decentralized realm, or if your next office moves to the Metaverse, there seems to be more to worry about than just your avatar’s outfit.
Published in the May 2022 issue of Hong Kong Lawyer.
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