The Metaverse Real Estate Market: Freehold, Lease, No Restrictions?

The digital land rush has begun. Celebrities, venture capitalists, crypto millionaires, utopian dreamers, and average investors looking for more than average returns own “real estate” on metaverse platforms. According to a January 2022 report by the Center for Finance, Technology and Entrepreneurship, two of the most popular metaverse platforms (The Sandbox and Decentraland), have $ 350 million and $ 110 million in virtual land deals, in fact, in 2021.

So how does all this work? What are the risks associated with buying real estate in Metaverse?

Applying the processes developed for real -world real estate transactions to digital real estate transactions reveals some unique risk factors associated with metaverse real estate.

For example, how does an investor know that the seller of virtual land is the real owner of that land? How does the investor ensure that the acquired land is in the same desired neighborhood as Snoop Dogg’s mega mansion and not in a digital backwater?

For physical land, relief around these concerns can be obtained by reviewing title deeds, searching public records, purchasing title assurance, estimating based on comparisons, physical examination of land and long-standing land ownership regulations. These forms of due diligence are not readily available in the metaverse and the legal framework is completely different, leaving investors to rely solely on representations and contractual tasks and related tort actions such as fraud. to urge.

Have you ever tried to restart your building?

Virtual real estate is a digital visualization of the ground on an online platform, which means that physical inspection is not possible. The title is usually represented by a non-fungible token (NFT) in a blockchain, which is not registered in a public land registry. For this reason, the due diligence required to assess the value of digital real estate is not yet familiar to many.

In addition, while NFTs are typically immune to hacking, the digital terrain represented by NFTs has value as part of a larger group of schemes that comprise the visualization of a building, a neighborhood or city in the metaverse. Virtual land is just as secure and reliable as the metaverse platform that hosts the systems that provide access to it. What if the platform is hacked, destroys user access, or simply stops supporting the required software?

We reviewed the Terms of Service for Decentraland and The Sandbox, to address some of these issues.

Decentraland’s terms of use define that no guarantee is given of the stability of its virtual world, and therefore of the digital territory it captures. Similarly, the Sandbox Terms reserves the right to remove assets from the platform “without notice, for any reason or without cause”.

This means that the Sandbox can modify or remove anything built into the digital terrain. A real world equivalent is the forced demolition of a building without notice or recourse.

Both platforms also reserve the unilateral right to change their terms of use. In the worst case, depending on the change, the owner of the digital territory may be deprived of its usefulness and value. In the real world, many jurisdictions require governments to go through legal procedures before implementing such changes for real estate.

‘This land is your land, this land is my land….’

Digital territory can easily be doubled at marginal cost. Physical land, by its very nature, is finite. As Mark Twain once said, “Buy land, they will no longer bear fruit.”

So is it safe for the buyer of a digital duplex on Park Avenue to assume there is only one apartment when making an investment? What does a buyer have if the Metaverse platform promotes Manhattan 2.0 or floods the market with new, similar land on Park Avenue?

The terms of use do not provide much comfort on this topic, although they do include references to the creation of decentralized autonomous organizations, which in theory could include landowners in the future regulatory process. or zoning. However, any such process will still be subject to the metaverse platform provider’s primary rights to amend or modify the Terms of Service, which may render the management rights largely unreasonable.

As stated above, the operators of The Sandbox and Decentraland have no commitment to continuously update, maintain and support the platform or make a vague promise not to create more digital land. But what if they did? What are the remedies in case of violation of these commitments (completely hypothetical)?

In the assumption outlined above, there may be a claim for breach of contract where the value of the assets is reduced or damaged. But damages for users of The Sandbox and Decentraland platforms are limited to a surprisingly low $ 100.

There may be, even if not already tried, fair remedies available for violations or claims of class action, but these are much more difficult to state and in any event an order compelling an operator on the platform to update software they do not want to update is unlikely to result in. the latest, most featured technology.

Conclusion on real estate risk

There is no risk -free investment. However, digital real estate investors enjoy some of the protections afforded by real-world real estate owners, and limited contractual remedies that are ignored in the terms of use may ’ g is not sufficient to ensure long -term investor confidence. As such, operators don’t want to arbitrarily damage the value of their own platforms, so there’s some non -contractual convenience there.

It will be interesting to see how investments in digital land have evolved and whether eventually there will be a need for greater security in the same way as physical land.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publishers of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Geraldine Pigot is a special counselor at Covington in London and leads the practice of corporate property in London.

Stuart Irvin is a consultant at Covington in Washington, DC, and founded the company’s Video Games and Esports practice.

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