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As the metaverse continues to welcome new retailers and users into its virtual communities – one news report estimates it “could be a US$13 trillion industry by the end of the decade” – the need to have some mechanism in place to resolve disputes is becoming more apparent.
That is because this online world created by Meta’s Mark Zuckerberg is much more than a playground for gamers wearing virtual reality headsets. It is also becoming a major centre of economic activity with high-end retailers such as Louis Vuitton and Gucci setting up virtual stores in the hope of attracting avatars (characters created by users) eager to spend their virtual currency.
“At present, it’s similar to the wild west, with no rules of law in place,” I wrote in a previous post. I suggested that one way to reduce economic transgressions in this virtual world would be through smart contracts.
Smart contracts make outcomes certain
IBM defines smart contracts as “programs stored on a blockchain that run when predetermined conditions are met. They are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.”
Everyone agrees that smart contracts are one way to bring some order to business relationships within the metaverse. Before avatars are allowed to take part in a virtual community and economic transactions within it, they would have to agree to set terms of use. These agreements would spell out, among other things, how users interact with a company’s products or services, including how payments are to be made, and how they interact with other members of the community.
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Similar terms of use are already in place on any e-commerce website in the real world. It’s an accepted fact that most of us just click “yes” when asked if we agree to abide by the myriad of stipulations detailed in the fine print in these agreements, though the courts have found that they are for the most part enforceable when disputes arise.
Disputes should automatically go to binding arbitration
Modern e-commerce would not be able to operate without our passive acceptance of these rules. This same concept could work in the metaverse, allowing for a declaration as to rights and the automatic transfers of virtual currency between avatars.
If there is a dispute within the virtual community, I would like to see the matter automatically taken to an expedited arbitration. As part of the terms of use, both parties would have agreed in advance to respect the binding decision that would be rendered at the end of that process.
The tricky part comes with enforcement. I have two thoughts on that one. The first solution could be to attach a flag to the at-fault avatar, notifying others that their conduct has been the subject of an arbitration ruling and a link to the decision. People will then be forewarned before entering into any transaction with that avatar.
The value of terms-of-use agreements
The second solution goes back to the terms-of-use agreements. It should be a mandatory condition that in order to join a metaverse community, members must agree through a smart contract that their avatar will automatically have to pay whatever fine is handed down by a virtual arbitration panel.
That may sound draconian, but I think most people in the metaverse would welcome this structure. By imposing these terms of use, avatars controlled by people who are intending to take advantage of others will avoid virtual communities where they are in place. Conversely, law-abiding members will have the protection of these rules. Those who are not prepared to be governed by those rules will go elsewhere, with their departure resulting a community of people who intend to operate in good faith. This also opens up the opportunity for insurance to protect against claims.
Legal acceptance of smart contracts growing
South of the border, Arizona and Nevada have amended their electronic transactions legislation to incorporate blockchains and smart contracts. “The fact that these states have adopted decidedly different definitions of those critical terms suggests that as more states follow their lead, there may be increasing pressure to adopt unified definitions to reflect blockchain and smart contract developments,” an article from the Harvard Law School Forum on Corporate Governance notes.
It adds, “it is quite likely that a court today would recognize the validity of code that executes provisions of a smart contract … the challenge to widespread smart contract adoption may therefore have less to do with the limits of the law than with potential clashes between how smart contract code operates and how parties transact business.”
Applied rigorously yet fairly, I believe smart contracts could be the ideal way to bring order and fairness to the “wild west” of the metaverse. This would mimic the real world. In both domains, legal issues arise as communities grow and prosper.
Like it or not, this new world is coming. We must prepare for the challenges it brings.
• Howard Winkler is the founder and principal of Winkler Law. For more than 35 years, his areas of practice have included media law, libel and slander and reputation management.
