Metaverse, Blockchain and Digital Assets: 10 Legal Challenges Businesses Will Face in 2023 | ArentFox Schiff

As we kick off the new year, the ArentFox Schiff Metaverse Industry team reviews the 10 most pressing legal issues for businesses in 2023.

1. A long cipher winter. With the crypto bear market approaching its 15th month and a flurry of crypto bankruptcies, some predict that the metaverse and blockchain will also collapse. But the metaverse and blockchain are bigger than crypto. Companies like Starbucks, L’Oreal, and Nike are creating powerful new tools that go beyond buzzwords to engage consumers and generate revenue. Through blockchain-based loyalty programs, communities of digital creators, or new e-commerce platforms, these companies are demonstrating the value and usefulness of these technologies. Will crypto winter keep all web3 frozen, or will 2023 be the year that companies rise above the hype and start building practical applications that boost revenue?
2. securities issueThe U.S. Securities and Exchange Commission (SEC) has adopted a strategy of developing laws applicable to NFTs and other tokens through active judicial enforcement efforts rather than through rulemaking or issuing guidance. SEC Chairman Gary Gensler has consistently argued that many tokens traded on the platform meet the definition of a “securities” and are therefore within the scope of SEC regulation. This position was recently upheld in the United States District Court for the District of New Hampshire on a summary judgment motion by the SEC alleging that LBRY, Inc. violated and sold its native digital token, LBRY Credit (LBC). I made a conclusion. Provisions of Section 5 of the Securities Act of 1933. The SEC’s aggressive stance, combined with great regulatory uncertainty, appears to have discouraged many big brands from entering the market. The outcome of the pending litigation, which includes the lawsuit against NFT developer Dapper Labs, and future enforcement settlements between the SEC and token issuers and/or issuers facilitating token trading, is a much-needed It can bring clarity.
3. Intellectual Property Rights Enforcement and Brand ProtectionMetaverse, blockchain and augmented reality (AR)/virtual reality (VR) make brand protection even more complex. Brand owners are beginning to find themselves at risk due to the limitations of their formerly go-to online IP enforcement tools, such as the DMCA and ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP). 2019 could be pivotal for these technologies to have clear standards and policies in place to protect intellectual property rights and reduce consumer fraud and deception if they are to succeed. there is. Additionally, brand owners should actively complement their IP registrations and portfolios to establish their rights in virtual platforms and web3 ecosystems and harden against new types of infringements that may arise. . The AFS IP Enforcement Task Force is helping lead the way to a working web3 for creators, developers, brands, consumers and platforms, and will continue to monitor key developments and best practices.
4. Taxing the MetaverseEven if the transaction takes place in the Metaverse, businesses can face real-world tax and compliance obligations, and businesses are increasingly forced to pay taxes as states and countries around the world seek to tax Metaverse transactions. Navigating an increasingly complex tax landscape. Businesses will need to consider various unanswered tax implications. For example, in which jurisdictions are concerts in the Metaverse taxable, such as where the concert took place and where the audience saw it? Can I be subject to sales tax or VAT in the Metaverse? Does the answer depend on whether the sale is a first sale or a resale? You may face additional challenges when trying to navigate regulations, compliance issues, and information reporting requirements. Although the tax authorities have been slow to issue guidance, businesses should not ignore these pressing tax issues when establishing a presence in the metaverse.
5. Whose DAO is it, anyway? DAOs (Decentralized Autonomous Organizations) are ubiquitous on web3, but significant questions remain about their legal nature and the responsibilities of DAO members. His recent CFTC enforcement action against the Ooki DAO appears to have settled whether and how the DAO can be sued and served, but the DAO cannot be held liable under the Federal Commodities Act. I don’t know yet if it is possible. The Ooki DAO enforcement action has seen many DAOs formed without a formal legal structure (“unwrapped” DAOs) relying on decentralization instead of legal wrappers, so DAO members may be concerned that they may be held accountable for the actions of the DAO.
6. What is fair use? StockX’s pivotal legal challenges to Vault NFTs (by Nike) and METABIRKINS NFTs (by Hermès) challenge important legal principles such as the first sale doctrine, First Amendment freedom of speech, and fair use. NFTs and web3. Are NFTs merely a means of authenticating and tracking underlying metadata content? Certain uses of NFTs or other applications of blockchain technology transform the underlying metadata/content into , can support a finding of infringement? Will traditional legal principles apply to this new technology ecosystem, or will the new technology ecosystem require reconsideration of traditional legal principles? Clarification may be coming soon to a jurisdiction near you.
7. Data privacy complianceTime is running out to make sure your privacy policy complies with the latest laws. California and Virginia laws will take effect on his January 1, 2023, with Colorado and Connecticut next. Click here for an overview of these new requirements.
8. dark pattern. The Federal Trade Commission (FTC) recently announced a $520 million settlement against Epic Games related to Fortnite’s design and privacy practices. The complaint alleges, among other things, that Epic employed deceptive or misleading design tactics (what the FTC calls “dark patterns”) to drive revenue. Using credit cards for subsequent purchases or employing confusing and inconsistent payment processes. Expect the FTC to continue to pay close attention to the design practices of other metaverse platforms and applications.
9. Chatbox class actionThe second half of 2022 saw a wave of class action lawsuits under state wiretap laws against website operators using widely deployed online technologies such as chat boxes and session replay software. Websites or platforms with chatboxes or chat functionality may be at risk. Click here for more information.
10. Transforming education and professional developmentThe COVID-19 pandemic has had a profound impact on our classrooms and workplaces, with many students and employees still learning and working remotely three years after the outbreak began. As we continue to evaluate remote learning, AR/VR devices and applications offer significant advantages over desktop or laptop-based remote learning experiences and the back-to-back Zoom calls that have come to define work in the pandemic era. can. It can also open doors to experiences that are otherwise impossible. For example, instead of a Teams meeting with colleagues around the world, imagine putting on a VR headset and meeting in a virtual conference center. Imagine a group of students taking a virtual tour of the Acropolis instead of reading about Athenian democracy. Such use cases can prove to be extremely important in metaverse development, but issues such as accessibility, data security, and fairness become important.
11. Bonus!Chatbots and the metaverseMany of the Metaverse’s most ambitious visions depict seamless interactions between consumers, their wearable devices, and augmented reality software programs, often via voice-activated digital assistants. The release of ChatGPT, a generative artificial intelligence program in late 2022, shows how close we are to realizing such a vision. ChatGPT and similar platforms can turbocharge voice assistants like Siri and Alexa, make hands-free interaction with software and electronics seamless, and make the metaverse more accessible.

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