May 3, 2023
As virtual and physical worlds become increasingly linked, the concept of the metaverse brings exciting new opportunities for businesses to connect and engage with customers. While we’re yet to see what a fully-formed, single metaverse will look like, we can already find aspects of the metaverse in some of the latest blockchain-based video games – digital economies and identities, decentralised governance, and virtual collectibles such as NFTs are all features we expect to see in the metaverse.
Mass adoption will, in part, be reliant on this virtual environment offering the same protections to consumers as they are afforded in the physical world. However, the application of existing and upcoming regulation in the metaverse won’t always be straightforward. In this article, we focus on some of the potential challenges within consumer protection and advertising law that businesses looking to operate in the metaverse should bear in mind.
The regulators and their powers
The regulators for consumer protection and advertising law in the UK (the CMA and ASA respectively) have already made clear that the metaverse is on their radar. Whilst both regulators appear keen to support this next stage of digital innovation, consumers’ interests will be their priority.
An adverse ruling from the ASA can cause significant damage to a business’s reputation. Amongst other sanctions, the ASA can place its own paid-search ads online to point out an advertiser’s non-compliance and, where advertisers persistently breach the rules, refer cases to Trading Standards as a legal backstop.
UK consumer law already carries several sanctions for breach (in addition to the inevitable reputational consequences) but under the now-accelerated consumer law reforms in the UK, the CMA will be able to take direct enforcement action for breaches of consumer law, including the ability to impose fines of up to 10% of global turnover. The risk of this significant financial sanction will see businesses placing greater emphasis on their compliance with consumer law, and doing so in the metaverse will bring additional challenges.
Recognising ads in the metaverse
Advertising in the metaverse has the potential to take on many forms due to the interactive nature of this virtual world. As an unfamiliar territory to many, it may not always be easy to identify what is and what isn’t an ad. The metaverse presents various ways for companies to advertise their brands, from ad placements on virtual billboards to sponsored experiences designed by brands within third party games or events in the metaverse. Brands can advertise on virtual products or even on avatars themselves. However, in the UK, marketing communications must be obviously identifiable as such. Brands must be careful not to blur the lines between advertising and entertainment or educational content. Sponsored experiences where brands have partnered with third party events or games in the metaverse could fall foul of this rule, as the sponsored nature of the event or game may not always be made clear. Brands should consider how they can make disclosures sufficiently prominent for users to identify.
The virtual influencer
When it comes to influencers in the metaverse, it should be made clear who is in control of the avatar representing that influencer. Brands may create their own avatars to promote their products and services, partner with famous digital or “non-human” influencers such as Lil Miquela (who has now appeared in ads for several major fashion labels) or collaborate with the avatars of popular human influencers. These possibilities are all likely to further blur the boundaries between what is and isn’t a marketing communication, and also present a risk of misleading advertising. Advertisers must be careful not to give the impression that their products have been endorsed by another without their permission.
For influencers working with brands in the metaverse, it may be difficult to make this disclosure prominently on the relevant interface or avatar. For example, if an influencer’s avatar hosts a virtual event where they have received compensation to wear a brand’s virtual clothing or promote a brand’s content, the influencer would need to find a way to make this known to users in that space. Unlike labelling of ads on social media, there is no obvious space for such disclosure. Influencers will likely need to show that they’ve made a significant effort to make their audience aware of a commercial collaboration. Both brands and influencers will need to explore how they can adequately label their advertisements in the metaverse to avoid an unfavourable ruling from the ASA.
Consumer terms and conditions in the metaverse
Businesses providing goods, digital content, and services to their customers in the metaverse will need to adopt the same consumer law principles as they do in the physical world, including establishing a fair and transparent set of contractual terms and conditions. Whilst this is more easily achievable in a centralised metaverse, where a central authority governs a controlled space, decentralised metaverses present a much greater challenge.
Contract terms relating to the sale of virtual assets may be unclear within a decentralised metaverse or may become disconnected from the accompanying asset, where there are multiple metaverses with limited interoperability between them. To ensure that contract terms are properly incorporated into an enforceable contract under English consumer law, they must (among other things) be adequately brought to the consumer’s attention. Failing this, terms can be deemed unincorporated and therefore unenforceable. Businesses may therefore need to consider a metaverse-friendly mechanism which follows a virtual asset, requiring customers to certify that they have read and accepted the terms of sale before purchase.
Terms can also be deemed unenforceable where they are not sufficiently transparent, i.e., written in plain and intelligible language. Virtual assets within the metaverse such as NFTs should therefore be accompanied by a natural language contract – a smart contract alone, setting out the terms in code, would be highly unlikely to meet the standard of transparency required under consumer law.
Interoperability and liability
In the context of the metaverse, businesses should tread carefully when making claims about their products, digital content and services, particularly where use of that product, content or service requires interaction with other elements within the metaverse or other external metaverses.
UK law implies a number of terms into contracts of sale to consumers, including that the relevant goods/digital content/services will be of satisfactory quality, fit for purpose, and compliant with any description provided. Where these implied terms are not satisfied, the consumer has statutory rights and remedies including (depending on the context) the right to a repair, replacement, or a price reduction. Businesses should consider what they can realistically deliver in a decentralised metaverse, which will operate mostly outside of its control.
An undoubtedly larger challenge, specific to the metaverse, will be in establishing who carries liability – does fault lie with the business selling the product, content or service, the creator of the metaverse, or third party that developed the product, content or service? Does liability shift from one party to another during the lifecycle of a transaction (or chain of transactions) in the metaverse and, if so, when and how does this shift take place? Businesses should think about how they can mitigate their liability by putting in place appropriate contractual limitations on liability within their consumer terms, whilst noting that limitations of liability in business-to-consumer contracts must be very carefully navigated in order to be fair.
Whilst the metaverse brings a multitude of commercial opportunities, for businesses to really adapt to life in the metaverse and bring consumers with them it’s essential they consider how current and future law will impact their ability to operate successfully and fairly in this new virtual world.