Embracing the Metaverse

Technological developments have played an enormous part in the burgeoning of our industry in recent years, and rapid change continues to provide both challenge and opportunity, threat and possibility. NFTs and cryptocurrencies were the talking points in 2021 and early ‘22, but attention is increasingly turning to the Metaverse. For some, this amorphous cyberspace of avatars and virtual 3D spaces offers a life-enhancing chance to travel, experience and engage without unplugging the AR glasses. For others it is a world of cyber bullying, harassment, fake news and fraud. So is the Metaverse hype, hope or hell?

Whatever anyone’s personal view, the Metaverse is certain to become a big part of our digital world if only because of the sums committed to making it happen. The Metaverse (often dubbed Extended Reality or xR by insiders) is being backed by the major Silicon Valley tech companies who are investing $US billions in the project. This makes it effectively too big to fail and certainly too big for ambitious gaming lawyers to ignore.

The coming Metaverse is likely to be dominated by big tech, but they may not have things all their own way. Yes, the likes of Google, Meta, Microsoft, Disney and Sony are likely to shape the centralized version but many worry that current online problems may be magnified if Web3 development is led by those who built today’s dominant web platforms. As a possible counterbalance to corporate dominance, there will be a parallel decentralized Metaverse where peer-to-peer networking will dominate. Here we look at two very different products that offer a first glimpse into how the metaverse may be colonized by gaming and gambling.

Alien Worlds is a space-based Metaverse game based on digital assets, and one of the largest play-to-earn products on the market. Unlike games offering more interactive reality experiences, it is targeted at game card collectors and aims to move them on from the simple real-world trading experience to something more interesting. Players have the opportunity to own cards as unique digital assets; NFTs instead of cards. They gain influence and control through the performance of the characters they own with their tokens earning a share of the game’s currency, Trillium. The tokens can be held both within the game and outside it in the Metaverse where they can be traded with other people. Where most Metaverse games replicate experience of the real world – offering the chance to meet, travel etc. without leaving your room – Alien World is more of a fantasy-style product. That said, it does translate into real-world value based on the principle that, if you can exchange something, it can acquire value. It has some of the characteristics of gambling, namely something of value at stake, with an uncertain outcome, depending on the results of a game, but it is set up not to require regulation or to stray into the world of gambling.
To expect such a product to avoid regulation entirely may be naïve, however. Human nature being almost infinitely unpredictable, it is difficult to foresee everything that may happen when the creators relinquish control to players. They have built in certain democratic principles, but that carries risks too, as we see all too often in the real world. Trillium translates into votes in the game’s ecosystem but can be diluted by the creation of more. The creator’s ultimate sanction is to cut off the flow of Trillium to individuals who are abusing their influence, but it is a fine line to tread and highlights the challenges of freedom versus control in an environment which could become quite lawless.

Frontrunner is a peer-to-peer sports betting platform which took its inspiration from the many investment products that have proliferated in the market. It sits, unashamedly, in a world where gaming is becoming more like investing and vice versa, giving individuals who are members of the platform the opportunity to buy into binary options on the outcomes of a sporting event. They can bid up to 99 cents on win, lose or draw. Its users trade with cryptocurrency but the company stresses that this was just a solution to challenges which arose in the development of the product. Players can hold as many shares of the given value as they want, and these can be sold at any point during the game with the price going up or down as the game play develops. As there is no house, the ability to offload shares depends on the liquidity in the market and the willingness of a reciprocal partner to trade. Whilst this may give rise to an issue of confidence, crypto, where each transaction is shown on a public distributed ledger, should improve this. It introduces the concept of trustlessness whereby players are not required simply to trust that their counterparty will complete on the deal, although they do need to have confidence that the system will work. Money within the system is held in stablecoin, and is not the property at any time of Frontrunner itself. By placing a bet, players enter into a contract with their counterparty until the outcome is realised, at which point the contract redistributes the money to the account of the winner.

How such a platform will ultimately be regulated is currently an open question. The contracts that the system develops for sports betting are not very different from a weather or commodity option. Aa such, they are not likely to be of any real concern to the Securities and Exchange Commission. There is however, a legal limbo where it is unclear whether they will view a football bet as a futures contract and regulate it as such. The alternative could be to allow the gambling industry to regulate and provide solutions for no resolution relief in case of disputes.
When it comes to AML and KYC, the platform has the ability to whitelist participants and carry out sufficient checks on players to be compliant with prevailing rules in the jurisdictions it operates. With all contracts sitting on a public blockchain, Frontrunner does not have ultimate control: individuals could simply trade those contracts away from your platform. Where users are dependent on proprietary technology, the developer is seen as an intermediary and so subject to regulation. This was one reason to go down the cryptocurrency route and perhaps a good reason why crypto sports betting may come to dominate the space.

 

Regulatory challenges in the metaverse

Proponents of the Metaverse and the development of more-advanced and immersive, 3D online worlds say its rapid evolution is likely to benefit all aspects of society – education, healthcare, social and civic life, as well as gaming and entertainment. As with all digital tech, these benefits have to be set alongside concerns about the health, safety, security, privacy and the economic implications of these new spaces. There has been a great deal of speculation about how an acceptable balance between these aspects will be reached, what the Metaverse will look like, what that means for society and, in particular, for those responsible for regulating it to protect consumers.

The legal challenges around the centralized Metaverse start as soon as the developers who created it launch it into the wild and relinquish control. If they have no control over the virtual environment, then they will be keen not to take responsibility for illegal activity that takes place within it. As it stands, developers of the centralized version of the Metaverse will be deemed to have some responsibility for activity like, for example, an unlicensed casino. In the decentralized Metaverse there is no one who can be held responsible. That is not to suggest criminality will go unrestrained. In the early days of the Internet, law enforcement quickly found ways to identify individuals behind criminal activity, and in time the same will happen for the Metaverse.

Even at this early stage there are some offerings which are completely novel, and these are unlikely to be the last. The challenge may be particularly acute where they have some but not all the characteristics of gambling. Price/value at stake of NFTs can be very hard to determine, but as regulatory frameworks talk about “money’s worth” then this should be captured. The growth of gamification will see stakes increasingly locked into outcomes which are not traditional risks making licensability questionable and dependant on national laws. Licensability should also be looked at from a financial services perspective. The European Union’s recent preliminary agreement on the regulation of Markets in Crypto Assets (MiCA) says that, if you allow people to deposit crypto in a wallet, then you are a custodian and that requires a license.

Liability may be an issue in the Metaverse, but so too is viability. Most companies operating gamblified products in the decentralized Metaverse do not make money in the same way as traditional gambling operators. Their income often comes from selling NFTs which could be done through an entirely separate legal entity. Spectacular collapses where investors lose most or all of their value have already been seen and will not increase consumer confidence. As well as financial failure there will be new security concerns. Blockchain is more secure and transparent, but there are elements around it which are much less so. There have already been some high profile frauds and cyberthefts, and as the tide continues to go out on many digital financial assets, more will no doubt be revealed.

When the markets were buoyant, cryptocurrenyc and NFTs seemed to be a one-way bet. However, holders of these assets have recently found to their cost that their value can go down as well as up: speculation is a big element even in so-called Stablecoin. Many projects are not providing a service like gambling. They are offering NFTs with other characteristics on which individuals can speculate. Gambling looks much more stable by contrast with standard payout percentages and mechanisms for resolving disputes. Metaverse products, whilst they may share characteristics with gambling, are often completely new and unrelated.

As to whether more traditional forms of gambling will migrate rapidly to the Metaverse, only time will tell. But there are reasons to suspect it will not. The gambling industry, especially the land-based element has evolved onto the Internet then mobile, driven by business realities and consumer demand for easier access. Arguably, Web 3 and the Metaverse is less accessible, so whereas the evolution to mobile was a natural development, it will not be convenience that drives the latest evolution. For gambling to thrive in this new virtual world will require something genuinely innovative which provide a consumer experience which is better than what is currently on offer.