Conflict of Laws and the Metaverse

This post was written by Cécile Pellegrini who is Associate Professor at Lyon Catholic University (UCLy). It summarises a contribution to Metaverse and the Law, edited by L. Di Mateo and M. Cannarsa, Edward Elgar Publishing, forthcoming.

The Metaverse Beyond Real Life

Beyond the world as we know it, often referred to by the acronym “IRL” (for “In Real Life”, stands the so-called “Metaverse”, a concept that private international lawyers are only beginning to embrace.

Coined 30 years ago in the prophetic “Snow Crash” dystopic novel by Neil Stephenson, this Janus, both fearsome and full of promises, was described as a “form of human life and communication in a virtual three-dimensional space through a digital avatar”. Since the digital twins of Second Life (i.e. a free access software allowing users to embody virtual characters in a world created by the residents themselves) Metaverse has taken many shapes. Beyond its known main use as an online multiplayer 3D game (such as Fortnite and Roblox) empowered by virtual and augmented reality (“VR” and “AR”), it has already found numerous applications evolving from being “a place” to shop, work, advertise, buy virtual land, be educated or trained, get a doctor’s appointment, get married, attend a court hearing, travel, be entertained, trade and use cryptocurrencies, sell real-world goods virtually or create and use nonfungible tokens (“NFTs”). The list could go on.

Despite its growing importance, highlighted with the recent rebranding of Meta, the Metaverse is neither defined nor  regulated. Attempts to streamline common features differ from one expert to another (for e.g., see here, here and here). However, all retain the persistence of identity and objects, a shared environment, the use of avatars, synchronization, being three-dimensional, interoperability, and a user experience that is interactive, immersive, and social. For now, the word “Metaverse” itself appears as a catchall term for advanced technologies that point to these types of immersive virtual experiences accessible from anywhere in the world. In consequence, it calls for a more precise and common definition, especially in the perspective of its regulation.

The Metaverse Beyond Borders

Considering the international intrinsic nature of Metaverse litteraly located “beyond the universe”, conflict of laws questions are necessarily in order. Especially considering that such a transnational cyberspace is destined to become the privileged place of many international transactions bringing ineluctably their lots of conflicts. In the absence of international substantial regime, conflict of laws rules are called upon to play a decisive part in the identification of the applicable legal regime to those transactions.

The Metaverse or Several Metaverses?

Yet, when trying to consider the applicable law, there is no certainty on whether to address the Metaverse as a whole, the metaverses’ operators (many metaverses’ iterations exist, such as Decentraland, Sandbox, Roblox, or Horizon World) or the various situations arising from, or in the Metaverse. Indeed, a metaverse could either be seen as an online platform or as the future generation of our internet, i.e. the forthcoming Web3, following Web1 (accessing static webpages) and Web2 (interactive social experiences). Web3, which is a work in progress, will be about digital ownership within an open, decentralized environment and orchestrated with tokens. Whether we are looking at one single Metaverse (with a capital letter like “the Internet”) or at several metaverses (with a lower case as it refers to the technology) depends essentially on the metaverses’ interoperability. Several projects are working in that direction (such as Open Metaverse Interoperability Group, the web standardization body W3C, or Metaverse Standards Forum). If the various existing metaverses become interoperable in a close future, it will inter alia  allow for any transaction taking place in a given virtual world to be transferred in another. Enabling users to switch between multiple virtual reality platforms while “carrying” online properties together will become important, as users will be able to seamlessly switch between various platforms. This will facilitate users to engage in various projects that are taking place on multiple platforms. For instance, a user buying virtual items in the form of NFTs and obtaining titles in one virtual world will technically hold the same items in another virtual world. An avatar with a digital identity in one place would be the same in the other, and he/she could go from a work meeting in one virtual place to another.

For now, the single “Metaverse”, called for by all the prophetic dystopias and the Silicon Valley behemoths has given way to many growing virtual worlds unconnected one to another. There might still be a long way to go to develop the necessary access technologies before we can affirm the existence of a global Metaverse but its future existence seems ineluctable. Hence, the applicable legal framework to Metaverse depends on whether we consider the actual various existing metaverses as online platforms or if we take a prospective view, and already consider the upcoming unique “Metaverse”.  Based on those two scenarios, the conflict of laws solutions differ.

Metaverse as a Platform: The Growing Importance of the “Directed Activity Criterion” and its Inadequacy

Most of the metaverses behave like online platforms. As such, they feature a contract-based architecture where accepting general terms and conditions (“GTCs”) is most of the time a prerequisite to access their services. Far from being an extraterritorial creation with its private own rules – as called for by proponents of Lawrence Lessig – such terms and conditions, whenever the contract is concluded with a European user-consumer, may trigger the application of EU protective rules for consumers, regardless of the defendant’s domicile outside the Union.

This scenario is increasingly frequent since the exchange of personal data is deemed equivalent to a price and constitutes consideration (in particular based on Directive (EU) 2019/770 regarding the supply of digital content and digital services, Art. 3.1). As a consequence, the contractual relationship between the services’ provider and the user answers to the European definition of a B2C contract. It will especially be the case when the activity of the platform is directed toward European consumers-users. Such rules are far from being ignored by large players.

For example, Meta’s T&C’s choice of jurisdiction clause conforms with EU consumer protection as it cares to distinguish conditions for businesses from conditions for consumers  especially when they are in the EU. The Brussels I Recast Regulation helds the protective forum of the consumers domicile competent, whenever the contract has been concluded with a person who pursues commercial or professional activities in the Member State of the consumer’s domicile or, by any means, directs such activities to that Member State or to several States including that Member State, (Brussels I Recast, Art. 17 & 18). In the same time, any choice of jurisdiction clause is strictly regulated (Brussels I Recast, Art. 19). A choice of law in Metaverse’s T&C is also limited by the protective rules of Rome I Regulation and especially, Article 6 on Consumer contracts, which also resorts to the “directed activity” criterion as interpreted by the Pammer and Alpenhof case law (see Rome I Reg., Recital 24).

With this view, all the difficulties already encountered to define connecting factors regarding applicable law to online service operators are not new. As an example (outside the B2C legal sphere), we can just think of the difficulty to establish the place of performance of an immaterial service in a metaverse. The “directed activity” criterion can be criticised for its imprecision and growing inadequacy with the development of worldwide websites intended for a global audience. Pushed to the extreme, this criterion becomes completely irrelevant in the case of a unique interoperable Metaverse, that, contrary to a website which can answer to indications as to whether it addresses to a specific national audience, addresses a worldwide audience with no distinction. We can observe that the inadequacy of this “directed activity” criterion is progressively leading to a shift toward “unilateral extraterritorial European protection” (as already noticed on this blog in the context of the Digital Services Act).

EU Regulation of Metaverses’ Platforms Operators

Depending on the metaverse in question and the way it operates, the definition of platform could well be retained for the purposes of applying European Regulations. When they answer the definition, platforms operators are facing growing EU substantial-law regulations with extraterritorial effects, whether it is the P2B platform (see esp. Recital 9), the GDPR (Art. 3), the recent “European constitution for the Internet” combining the DSA (Art. 2.1) and DMA (Art. 1.2), the proposed ePrivacy Regulation (Art. 3.1) or the proposed Data Act (Art 1.2).

These EU instruments follow a strict “marketplace” approach  subjecting every service aimed at people located within EU territory to their provisions, independently of where the service operator is established or administered. This clearly reflects the will of the European legislator to ensure the primacy of EU internal market law and the protection of EU fundamental rights, underpinned by the European values in the digital space. Worldwide service providers aiming at the European market should be held under high European standards such as a high level of consumer protection and personal data protection. But in the future, metaverses’ operators could well be merged into a unique Metaverse and in that case, the question of applicable law will appear somehow differently.

Metaverse Considered as the Future Web3: A Methodology Shift?

No unique legal category applies to Internet as such. EU Private International Law rules rather approach each legal situation/relationship arising out of this “cyberterritory” (see eg here). In that view, it could be considered that determining the law applicable to online situations in the Metaverse merely bring the same difficulties already met with Internet’s situations ‘immateriality’. For example, it is difficult to resort to the “place of provision of service” connecting factor to determine the applicable law to an online contract of provision of service or the use of the “place of the harmful event” connecting factor in order to locate the law of the damage when a tortious situation is committed online that is everywhere at the same time on the globe.

These difficulties are known of PIL experts and sometimes found solutions. In order to answer these new digital situations, conflict of laws rules adapted progressively. In the absence of tangible material elements, the classic solutions have consisted in detaching localisation from material reality. Fictitious location have been favored considering that it remains possible to give a territorial account of immaterial phenomena still marked by some tangible elements. For instance, the difficulties of locating harmful situations in digital spaces has led to shift toward more personal connections as fictional localisations to identify the seat of digital situations. These connections often favor thevictim’s or plaintiff’s center of interests and such a tendency is particularly spreading in the area of cybertorts (see the Roundtable on the method of localisation in digital space). However, such adaptation is reaching its limits. With the upcoming Metaverse, even the few existing tangible connections disappear,with the new underlying use of the blockchain technology, often seen as the bedrock on which Metaverse will rest.

Blockchain as the Metaverse’s Bedrock

The question of how the different blockchains will be able to become technically interoperable is not yet settled, but blockchain technology will contribute to the interoperable development of the Metaverse and to generate a virtual economy where nonfungible tokens (NFTs) are traded. For all the new possibilities it bring, blockchain technology will be the privileged way within metaverses to make all type of transactions, using cryptocurrencies, tokens and associate the later with smart contracts.

The use of crypto-currencies has already given rise to questions about the identification of the applicable law and resulted in Europe in the recent “MICA” Regulation. For crypto assets left out of the text, and in expectation for some States to adopt the recent Unidroit Principles on Digital Assets and Private Law, it is it far from clear how they are acquired and transferred and what law governs such transactions in a transnational Metaverse. Characterisation and transfer of property still need to be addressed and raise many concerns (see the upcoming joint Project between UNIDROIT and HCCH here and the work of the EAPIL Working Group here).

Real conflict of laws difficulty lies with decentralized public blockchains (i.e. open and permissionless as opposed to consortium or private blockchains) that will mostly be in use in the Metaverse. With blockchain, the extensive degree of immateriality undermines the ability to resort to connecting factors actually in use. Seemingly insurmountable problems occur because decentralized ledgers with no physical connecting factors are reluctant to any localisation exercise. Blockchain offers few useful connection points in PIL either through traditional connecting factors or even through the use of fictitious connections. There are no first place of distribution or place of registration. There are also no intermediaries or account providers.

Although, that last affirmation could be nuanced.  Even if it is often claimed that blockchain ‘disintermediates’ the economy, this remains to be seen as, for the time being, more intermediaries (the cryptos and NFTs’ platforms are multipying) have been created by the technology than replaced. Here, one solution would maybe lie in setting obligations on the intermediary secondary platforms creating and exchanging NFTs and giving access to metaverses. However, even this would only partially bring solutions as the usual links to the territory of a State, however tenuous, do not even exist in the case of blockchain where transactions are anonymous.  This is why, behind the avatars, digital civil identity is becoming a major stake for the national sovereignty of States (on that question, see here). Hence, from known difficulties encountered to locate the seat of a situation in the Metaverse as a cyberspace, we move forward to major difficulties regarding the identification of parties to Metaverses’ transactions. With user’s anonymity in public blockchains, the lack of any grip between the situation and any national legal system, seat location becomes completely fictitious. The unseen immateriality, decentralization and anonymity characteristics of blockchain in the Metaverse are therefore calling for a change of regulatory approach.