Feds are coming for the Metaverse – from Axie Infinity to Bored Apes

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

But the lofty valuations come with scrutiny from increasingly tech-savvy financial regulators. Unlike traditional tech products, which often spend years prioritizing growth over revenue, some metaverse projects impose questionable monetization schemes on 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 generally does not intervene unless retail investors face a predatory claim to their dollars without full disclosure of what they are investing in. The line for what classifies as a title is often blurred – but in the case of Into the Metaverse, the practice of land sales should generally be considered a security under US law.

GameFi platforms like Axie Infinity demonstrate the speed at which metaverse projects can spawn multi-billion dollar savings. Their magnitude requires internal controls and monetary policies similar to those of multinational banks or even small countries. They should be required to staff 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 linked to financialization. While no bodily harm can (yet) be inflicted in the metaverse, a lot of financial damage has already been done. The company behind the Bored Apes Yacht Club non-fungible tokens (NFTs) was hacked this year after a community manager’s Discord was compromised. Hackers walked away with NFTs worth 200 Ether (ETH).

A gang of Wall Street banks was recently fined $1.8 billion for using “banned” messaging apps. Metaverse projects like Yuga Labs should face similar proactive fines for not implementing secure monetary and technical controls.

Related: Throw your Bored Apes in the trash

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

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

Finding the right balance is crucial. Too much regulation could stifle innovation and adoption, but too little could lead to widespread abuse. It will be up to policymakers to work with founders to find that sweet spot.

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

Risks Associated with Mining in the Metaverse

Cybercriminals are continually discovering new tactics to exploit metaverse users, i.e. through hacking or spoofing schemes. Because the AR and VR wearables associated with these ecosystems generate huge volumes of personal data – including biometric information from eye and body tracking technology – the metaverse is a tantalizing playground 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 privacy laws that have required technology platforms to hire data protection officers and data protection officers. data privacy compliance. Metaverse platforms will need to fulfill similar roles and could face even greater regulatory scrutiny, given the sensitivity of the data they might collect.

Related: Biden’s anemic crypto framework offered nothing new

As the demand for the metaverse continues to grow, so too will the need for better internet services, as the former requires a lot of bandwidth (estimated to be several orders of magnitude above current internet traffic levels). As a result, it is entirely possible that many telecommunications networks and their existing data delivery infrastructures will be overloaded.

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

Finally, aside from all the technical risks, one aspect of the Metaverse to consider is the negative impact it can potentially have on one’s mental health. Since the ecosystem is not encumbered by criminal law, there can be no avenue of redress when users face online abuse (like racism).

Regulatory challenges

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

This is best illustrated by the fact that many of the social media platforms we use today, including Twitter and Facebook, are not based in the United States, but instead operate from countries like Ireland and Singapore. , where data protection laws are much more relaxed.

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

Therefore, unless every participant in the metaverse aligns and agrees with the vision of establishing a uniform code of governance, there is no way to prevent a third-party entity (such as an offshore investment firm) to create its own unregulated pocket within the metaverse, which users from other digital ecosystems can then access without any apparent restrictions.

Towards a decentralized future

The metaverse is ready to reshape our lives, whether we like it or not. Ultimately, the “move fast and break things” philosophy of technology development 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 action to allow innovation to thrive without causing catastrophic financial damage to retail investors. After all, the choices we make today will determine how this technology will shape our future.

Huy Nguyen is the co-founder of KardiaChain, Southeast Asia’s first interoperable blockchain infrastructure. Since May 2022, he has served as vice-president of the Vietnam Blockchain Association, the official government body tasked with pushing for mass adoption in Vietnam. He previously served as Chief Technology Officer at Google and has over 10 years of experience building large-scale distributed infrastructure, including Google Access Wireless Platform and Google Fiber Network Infrastructure. .

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

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