Mark Zuckerberg famously announced that Facebook, the world’s largest social networking website, rebranded itself as Meta. He aims to shift the company’s focus to building the “metaverse,” which is “an immersive and constant virtual 3D world where people interact using an avatar to carry out a wide range of activities.” The prospective impact of the metaverse on the lifestyle of ordinary citizens and the economy is vast. By 2026, the Gartner business advising company expects 25% of people will spend a minimum of one hour a day in the metaverse for work, shopping, education, social media, and entertainment.
Although the concept of the metaverse isn’t completely new, the advancement of technology has allowed creating virtual properties to exist in these immersive worlds. Prices of such properties have increased by 500% after Zuckerberg’s remarks. As the Wall Street Journal reported, in the Sandbox Metaverse, the company Republic Realm made the largest virtual property sale publicized to date: a record-breaking $4.3 million. These newly created interests’ rising economic importance brought to the fore questions regarding their legal treatment.
Technologically, a virtual parcel’s deed of ownership accounts for a unique code certifying the owner’s rights over the digital land. This “deed” is stored by blockchain technology. Unlike how property law governs physical real estate transactions, contract law primarily regulates the metaverse. The user must agree to legally binding documents the platform prepares, defining rights and duties. Here, breaches result in remedies under contract law. However, given the similarities between virtual and physical real estate, one crucial question emerges: is such contractual regulation sufficient to govern the use of the virtual space, or should property law play a role in regulating the digital land?
Theoretically, once a thing or an interest obtains an economic value, such a thing or interest can be treated as property. This means the owned object’s materiality is less critical, and a more comprehensive range of interests fits easier in property, even those of ethereal nature. Based on the law and economic perspective, property is the liberty to give a resource its most beneficial use with the least social cost. Unlike the antique roman in rem conception of property, the understanding of the relation of a thing to its owner in the common law has changed to a more adaptable approach. More than that, this approach to property laws reveals that the rules allocating property rights can profoundly affect the speed and efficiency of economic exchanges of goods. An adequate legal treatment of interests produces more wealth than an inadequate one, allowing for more and better transactions.
Property rights should only be assigned when transactional costs are high enough to prevent bargaining; not all exchanges of virtual metaverse parcels should be protected by property law. We argue that property rights should be granted when such exchanges have financial consequences. Treating virtual parcels as property should be limited to when the virtual real estate (1) derives revenue from its practical use (mortgage, leases, etc.) and (2) is given as collateral in transactions aiming to provide inexpensive funding for commercial activities. This doesn’t include mere exchanges of virtual real estate. Indeed, credits from physical real estate are critical for financing through securitization. This is the process where banks can sell investors their monetary rights, like payments from mortgages or similar loan obligations, and the related credit risk after transforming them into tradable securities. As the metaverse technology expands and improves, more revenue is expected from virtual parcels. Titles backed by this newly created money would soon be offered to investors in the market.
Once the use of a virtual parcel fulfills the two requirements mentioned above, only then should it be recorded in the public filing system. The goal is to prevent the digital platform from unilaterally eliminating the parcel’s existence, as not all visual and functional aspects of the digital assets are stored on the immutable blockchain. The virtual space needs protection from such unduly interference from the platform. A violation of third-party property rights would account for tortuous and criminal consequences, which the offender would try to avoid. The relationship between the platform, the owner of the recorded parcel, and its user (possessor) would be under the protection of property rules, not contractual law.
In conclusion, under a law and economic analysis, virtual real estate should be treated as property and publicly registered when deriving revenue and serving as collateral to finance. Otherwise, transactors would doubt the ability of a non-perennial asset to back securitization, diminishing its efficiency. This means that little or no economic exchanges would occur in the securities backed by these assets. To provide financing for wealth-creating projects in the metaverse, we must ensure a vital source of funding for entrepreneurs and create a well-functioning property system for virtual real estate.
Co-author: Celso Maziteli Neto
State District Judge in São Paulo, Brazil; S.J.D. Candidate at Indiana University Maurer School of Law
Co-author: Simon Sun
Research Fellow at The Digital Economist; Co-Founder of Law as Science; S.J.D. Candidate at Indiana University Maurer School of Law
