The feds are coming for the metaverse — from Axie Infinity to Bored Apes

The metaverse is a futuristic iteration of the Internet, featuring a digital economy and an immersive virtual environment along with other interactive features. This relatively nascent space has gained so much traction in recent years that conservative estimates suggest that by 2024, its total valuation could top $800 billion. Meta (the main body behind Facebook and Instagram), Google, Microsoft, Nvidia, Nike and others have made fortune 100-sized metaverse splashes.

But with high valuations comes high scrutiny from increasingly tech-savvy financial regulators. Unlike traditional tech products, which often spend years putting growth over revenue, some metaverse projects push questionable monetization schemes to their users before launching a live experience. Metaverse real estate is a prime example of this practice, with platforms like Big Time Games selling land in their metaverse before opening access to the game.

The U.S. Securities and Exchange Commission typically doesn’t step in unless retail investors face predatory courting of their dollars without full disclosure of what they’re investing. The line of what qualifies as value is often blurred, but in the case of In the metaverse, the practice of selling land should generally be considered a security under American law.

GameFi platforms like Axie Infinity demonstrate the speed with which metaverse projects can generate multibillion-dollar economies. Its large scale requires internal controls and monetary policies similar to multinational banks or even small countries. They should be required to work with compliance officers who coordinate with government regulators and even perform Know Your Customer for large transactions.

Number of active Axie Infinity users, Jan. 2021-Sept. 2022. Source: DappRadar

The metaverse is intrinsically related to financialization. While no bodily harm can be inflicted on the metaverse (yet), a lot of financial damage has already been done. The company behind Bored Apes Yacht Club’s non-fungible tokens (NFTs) saw a hack this year after a community manager’s Discord was compromised. Hackers walked away with NFT worth 200 Ether (ETH).

Recently, a group of Wall Street banks were fined $1.8 billion for using “prohibited” messaging apps. Metaverse projects like Yuga Labs should face similar proactive fines for not implementing secure technical and monetary controls.

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A key first step for any metaverse project will be to classify what type of asset(s) they are issuing. For example, is it a security? A helpful token? Or something else? This may seem like a daunting task, but the groundwork has already been laid for the initial coin offering era in 2017, and regulators and protocols should do more to provide clarity and protect consumers.

Once the classification process is complete, the next step will be to develop a normative framework that can be applied to the metaverse. This will likely include rules and regulations on things like securities offerings, anti-money laundering and consumer protection.

It is essential to achieve the right balance. Too much regulation could stifle innovation and adoption, but too little could lead to widespread abuse. It’s up to policymakers to work with founders to find that sweet spot.

Despite the concerns, the metaverse brings together a set of emerging technologies: virtual reality (VR), augmented reality (AR) and NFT. They all come together to propel the space with increasing momentum in the short to medium term.

Risks associated with operating in the metaverse

Cybercriminals are continually discovering new tactics to exploit users of the metaverse, namely through hacking or identity theft schemes. As AR and VR wearables associated with these ecosystems generate massive volumes of personal data, including biometric information from eye-tracking and body-tracking technology, the metaverse is an attractive playing field for bad actors.

Outside of financial theft, privacy concerns abound as three-dimensional datasets will reveal increasingly sensitive personal information. The General Data Protection Regulation in Europe and the California Consumer Protection Act are comprehensive measures of privacy legislation that have forced technology platforms to hire data protection officers and data privacy compliance officers. Metaverse platforms will have to fill similar roles and could face even greater regulatory scrutiny given the sensitivity of the data they could collect.

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As the demand for the metaverse continues to increase, so will the need for better Internet services, as the former requires a large amount of bandwidth (estimated to be several orders of magnitude higher than the traffic levels of ‘Current Internet). As a result, it is quite possible that many telecommunications networks and their existing data broadcasting infrastructures will become overloaded.

One way to solve this problem is by investing in 5G technology and building a stronger infrastructure. But this takes time, money and resources. The other solution is to develop more efficient data compression algorithms that can help reduce the amount of bandwidth required to transmit data within the metaverse.

Finally, aside from all the technical risks, one aspect of the metaverse to consider is the negative impact it can have on one’s mental health. Since the ecosystem is not affected by criminal law, there can be no recourse when users face online abuse (such as racism).

Challenges to regulation

Because any network operator, business or enterprise can, on paper, exist outside of a proposed regulatory framework if it chooses to do so, any country’s regulatory efforts will have limited impact.

This is perfectly illustrated by the fact that many of the social media platforms we use today, such as Twitter and Facebook, are not based in the US, but operate from countries such as Ireland and Singapore, where protection laws of data are much more relaxed.

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The same logic applies to the metaverse. Even if a country were to pass a law that tries to regulate this space, it is doubtful that all companies would agree to comply with it.

Therefore, unless all participants in the metaverse align and agree to the vision of establishing a uniform code of governance, there is no way to prevent a third-party entity (such as an offshore investment company ) create their own unregulated pocket within the metaverse, which users of other digital ecosystems can access without any apparent restrictions.

Looking ahead to a decentralized future

The metaverse is poised to reshape our lives, whether we like it or not. Ultimately, the technology development ethos of “move fast and break things” is alive and well, and history has shown that founders move much faster than regulators can keep up. But it will be crucial for regulators to step up and take proactive steps to allow innovation to flourish without causing catastrophic financial damage to retail investors. After all, the choices we make today will determine how this technology will shape our tomorrow.

Huy Nguyen is the co-founder of KardiaChain, the first interoperable blockchain infrastructure in Southeast Asia. Since May 2022, he has served as the vice president of the Vietnam Blockchain Association, the official government body to drive mass adoption in Vietnam. He previously served as a Senior Principal Technology Manager at Google and has more than 10 years of experience building large-scale distributed infrastructure, such as Google’s wireless access platform and the network infrastructure of google fiber

This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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