March 29, 2023
Is the hype ‘real’?
The sale and purchase of virtual plots of land has skyrocketed. Over US$2 billion was spent in 2022 alone on the acquisition of space on metaverse platforms such as Sandbox, Otherside and Decentraland. Recent studies anticipate that this expenditure will double or even triple over the next 3-5 years.
Clearly this is a ‘boom market’, but at the same time it can be very difficult to anticipate and navigate the legal challenges of investing in, owning and developing virtual land. The basic idea of the ‘metaverse’ itself is still in its infancy and there’s limited cohesion over what the term even means beyond the basic concept of ‘virtual’ worlds or augmented environments in which people can interact.
Can the process of purchasing space in such a volatile and novel market realistically have anything in common with the purchase of real-world space, or the practice of real-world property law? Will the same basic principles and documentation soon apply, or will such transactions evolve in an entirely novel way? What jurisdictional expertise, if any, will be relevant?
The similarities between virtual land and ‘real’ land
Land in the metaverse certainly shares some similarities with land in the real world. The real world is obviously finite and controlled by the laws of supply and demand. Similarly most virtual worlds have been (or are being) set up so that the amount of land in it is finite and the laws of supply and demand can take effect.
The principle of ‘location-location-location’ also applies. Putting aside the fact that a user can usually travel instantly to any part of a metaverse at any time, the more popular the particular space within the metaverse, the higher the demand will be and the greater value that virtual land will be able to generate. Earlier this year a private buyer paid over US$450,000 to acquire a plot of land next to rap artist, Snoop Dogg’s virtual house in The Sandbox. Similar transactions of prime digital real estate will surely follow in the coming years.
The differences between virtual land and ‘real’ land
Superficial similarities aside, it’s the differences between land in the metaverse and land in the real world that feel more deep-rooted. First and foremost, the metaverse market is undoubtedly tumultuous. A purchase of space in a metaverse, at any value, is banking on both mass adoption of the metaverse itself as well as the relevant platform where the virtual land is located. That is by no means certain.
Also, whilst most metaverses are finite, there is nothing stopping site owners from expanding their platforms indefinitely, or from anyone else from building a competing virtual world. It’s difficult to imagine a platform owner not simply coding more space if they’ve successfully sold all the ‘land’ they originally created. While this may be good news for site owners, the potential for unlimited supply will quickly unbalance the principle of ‘supply and demand’, which should otherwise drive-up prices for subsequent purchasers.
In addition, differing visions and direction for the metaverse may present a novel obstacle. What if parallel competing metaverses are ultimately never fully interconnected, but are stand-alone and isolated digital spaces? A fragmented metaverse is likely to be a less compelling proposition for users and will impact interest, value and utility.
How does it work for now?
NFTs – non-fungible tokens – are central to how virtual land ‘ownership’ currently works. An NFT is a digital asset which is uniquely identifiable within the technological framework in which it exists. Unlike other tokens, NFTs are not interchangeable (fungible) with each other. If an NFT is linked to a digital asset, such as art or media, it can be used to evidence the transfer of the underlying digital asset from an initial minter to subsequent holders of the NFT. Virtual land transactions have been made possible by linking the right to control and (partially) modify virtual spaces in the metaverse to an NFT.
Perhaps most relevant for a virtual land NFT holder will be the status of the legal rights linked to its NFT and whether the NFT actually provides any sort of ownership rights to the underlying virtual plot of land itself or the buildings thereon. Arguably, the rights linked to the plot of virtual land will only be rights to control and use the land in a particular way (such as by developing a building on it), not necessarily ownership rights to that plot itself.
Will Real Estate laws start to have an impact?
The conflation of property law terminology for ‘real’ and ‘digital’ space can be confusing, but users are ultimately purchasing an NFT (or NFTs) with rights in respect of a virtual land- not land itself. As is clear, real estate laws do not currently apply to the sale and purchase of such assets and it’s difficult to imagine that changing in any material way. Contract law will likely be relevant, as the terms and conditions of the relevant platform will be key. Trust law may also play a role, depending on whether a relevant NFT for a particular digital world is held directly by the user or by the metaverse platform on their behalf. Some limited real estate law may ultimately work its way into sale and purchase contracts, in the form of easements, overage, use restrictions, etc, but this is by no means certain.
Above all else, it should be kept in mind that, unlike physical real estate, virtual land depends wholly on the platform owner for its continued existence. Users must therefore understand that ownership of a virtual land NFT brings far more risk than ownership of real estate in the physical world which is permanent, finite and controlled by long established laws. Metaverse real estate is the wild digital west, in a very real sense, and carries great risk as well as great potential rewards.