Metaverse1 emerged into the public spotlight during the last years as an “alternate universe” that invites the masses to interact, trade and invest in it. The Metaverse can be defined as the emerging 3D-enabled digital realm that harnesses the capabilities of virtual reality, augmented reality, and other cutting-edge technologies, providing individuals with lifelike personal and business encounters in the online realm.2 It is a rapidly evolving virtual world constructed upon the pillars of blockchain technology and virtual reality. IT giants such as Meta (formerly Facebook), Microsoft and Google,3 along with analysts, envision it not as anything less than the future of the Internet, but as a transformative revolution shaping how we will coexist and collaborate in both our personal and professional lives.
It is important to emphasize that there is not just one metaverse. Instead, this virtual world is supported by dozens of platforms, each providing its own unique digital environment.4 Digital land is available on various competing 3D virtual platforms, all leveraging blockchain technology. Examples include Sandbox, Decentraland, Axie Infinity, Cryptovoxels (already renamed ‘Voxels’), Somnium Space, and more. The four largest real estate worlds in the Metaverse alone (Decentraland, Sandbox, Cryptovoxels and Somnium Space) covered a total market value of USD 4.5 billion in 2021 with their 269,446 land parcels.5 The various metaverse platforms can be accessible via a browser (such as Decentraland at the moment) or by means of virtual reality glasses.6
The fascination with the Metaverse, and by extension, investments in its “real estate,” has undergone a remarkable surge in recent years. This trend was particularly pronounced during the lockdowns necessitated by the Covid-19 pandemic and was further amplified after Facebook’s rebranding as ‘Meta’ in October 2021.7 Since then, an escalating number of investors and corporations have been eagerly acquiring digital land within this virtual realm. In the span of just four digital domains – Decentraland, Somnium Space, Cryptovoxels, and Sandbox – the turnover for virtual real estate reached a substantial €440 million in 2021.8 The year 2022 witnessed a staggering leap in investments in digital real estate, soaring to a remarkable $1.9 billion.9 Projections indicate that by 2025, the Metaverse could command a market volume ranging from USD 250 billion to USD 400 billion.10
The primary incentive driving the acquisition of digital real estate is the anticipated profit from its resale at an increased price11 or otherwise beneficial exploitation, as a result of the public’s shift towards digital engagement. In the majority of cases, metaverse platforms’ virtual land offers the opportunity for diverse virtual experiences, including advertising, social interaction, marketing, entertainment, and more. Concerts, business meetings, trade shows, art exhibitions and brand launches have all taken place on plots of digital land.12 Thus, metaverse real estate emerges as a profoundly influential instrument for social interaction and marketing endeavors, garnering notable interest from prominent brands. Numerous enterprises have ventured into the acquisition of virtual land plots within Metaverse platforms, strategically utilizing them for both promotional and investment motives.
The terms “metaverse real estate” or “virtual real estate” might initially appear paradoxical, since the concept of real estate conventionally pertains to physical properties. This article delves into critical legal considerations concerning metaverse real estate investments and virtual land ownership. The main issue explored in the article is whether it is possible to establish property rights over virtual land and digital assets, akin to the ownership rights that pertain to physical items.
A piece of metaverse real estate is represented by a Non-Fungible Token (NFT) that provides the holder with digital proof of ownership. NFTs are a cryptography tool defined and operated by smart contracts.13 They are assigned unique identification codes and metadata that distinguish them from other tokens. Unlike cryptocurrencies such as Bitcoin and Ethereum, categorized as fungible tokens due to their interchangeability, each NFT embodies a unique asset that cannot be equated with any other asset or token.
The use of blockchain technology and cryptocurrencies based on it, as well as NFTs, enable the creation and tradability of virtual assets in the Metaverse.14 Technologically, NFTs offer verifiable digital evidence of ownership, which holds great value in a world where copying files without any noticeable distinction has become effortless. The trading transactions related to virtual land are managed by smart contracts, recorded on a blockchain, guaranteeing the security and immutability of the transactions.15 Ownership of the purchased virtual land is essentially represented by the corresponding NFT, securely stored within the user’s digital cryptocurrency wallet. Given the public nature of these transactions, they are accessible for anyone to observe. In essence, NFTs fulfill a role akin to tangible real-world title deeds, encapsulating a detailed description of the asset they represent.16
Smart contracts play a crucial role in the purchase of real estate on metaverse platforms. These contracts function as self-executing protocols (programs) that automate predetermined rules and encode them into the blockchain network.17 Once the payment is made, the platform seamlessly transfers control of the NFT to the buyer.18 It’s worth noting that certain online financial institutions are willing to provide funding for virtual real estate acquisitions, employing the acquired virtual land as collateral in a manner similar to a mortgage.19
The landowner’s purchase is securely recorded in the blockchain network, functioning autonomously without centralized oversight. This mechanism safeguards the recorded transactions and land ownership from any external interference, reaffirming that third parties, beyond the landowner, possess no capability to modify land ownership or eliminate any transaction history. Upon purchase, landlords receive ownership of a unique bit string in the form of an NFT, which they store in their crypto wallet. As the NFT is held within the wallet, access to the wallet’s password becomes crucial in order to transfer NFT-supported virtual properties. Additional advantages of virtual real estate transactions include lower transaction costs and fast closings due to the absence of requirements for title due diligence, escrows, or property taxes.
Property rights within the Metaverse are still in their nascent stage. The very concept of ownership assumes an entirely novel perspective in this realm, presenting fresh challenges to the field of legal study. From a European law perspective, it goes without saying that purchasers of virtual land on the Metaverse cannot acquire rights in rem in intangible property, but only a license to use certain content of a database. In this respect, the “purchase” of a virtual plot of land from a metaverse platform constitutes a contract for the provision of digital content or a digital service, according to article 3 § 1 of the European Directive 2019/770 of the European Parliament and of the Council (known as the “Digital Content Directive”). Under the digital content or digital service contract, the supplier has an obligation to provide the recipient20 with digital content or digital service and the recipient has an obligation to pay the agreed consideration. In this case, the service involves the provision of an End User License Agreement (EULA) on software for accessing an online database. The Directive’s provisions center around the contractual relationship between the supplier and the end recipient of the digital content or service, focusing mainly on the rights and obligations of the parties in cases of abnormal developments in the performance of the contract. It should also be noted that the recently adopted “MiCA” Regulation (Regulation 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets) does not apply to NFts.21
Concerning the central issue of whether actual ownership can be established for digital objects, there is a consensus -regarding the legal systems affected by Roman law, such as German, French and Greek civil law - that it doesn’t align with the traditional concept of property rights, which relies on the presence of a tangible, corporeal object (a “thing”).22 Virtual assets are neither corporeal by nature nor according to (current) general opinion, although they are (at least today) controllable and perceptible by means of technical equipment. According to the traditional provisions of property law, the owner of a thing “may deal with the thing at his discretion and exclude others from every interference”.23 This rule cannot be directly applied to digital objects such as virtual parcels of land, because they do not fall within the legal concept of the “thing”. The question is, however, whether we can establish some kind of property rights over digital objects, similar to the right of ownership that applies to tangible things.
As previously mentioned, virtual real estate within the Metaverse is traded through and represented by NFTs. In that sense, it is argued that blockchain technology can provide equivalent -or even more robust- ownership rights over a parcel of digital land, despite its intangibility.24 This is because NFT-based virtual worlds using smart contracts can provide metaverse landowners with extensive powers of disposal over virtual land.25 The very concept of virtual land aims to grant the holder of a virtual land token a role akin to that of an owner.26 Through the use of NFTs the owner of the virtual real estate can deal with her land at her discretion (she may sell it, lease it, or “build” in it) and exclude others from every possible interference. Owing to its technical framework, damage to the virtual property by third parties is not possible. Nonetheless, the NFT holder can exclude third parties from accessing or using the virtual property and, irrespective of the specific metaverse platform, transfer the NFT on a secondary market (such as Opensea). Ultimately, through the use of blockchain technology, a person can dispose of virtual assets at will.
Despite, however, the presence of immutable and decentralized protective mechanisms inherent to the blockchain network, virtual property ownership remains a much more intricate issue than it might appear prima facie. First of all, the legal status of NFTs is an ongoing endeavor, subject to evolution and potentially divergent interpretations across various jurisdictions, consequently contributing to legal ambiguities. Particularly contentious is the degree of control that NFT holders possess over their virtual property. More specifically, questions arise regarding whether the possession of an asset-backed token equates to true ownership of the virtual asset or merely represents a license of use granted by the respective metaverse platform.
In the first place, a distinction must be made between owning an asset and possessing a cryptographic key to a computer program on a blockchain that records the existence and ownership of the linked asset (for example a virtual land parcel) stored elsewhere.27 This distinction extends beyond mere semantics. From a technical point of view, the transfer of the NFT alone does not necessarily ensure that a right over the linked asset is transferred as well.28 The acquisition of an NFT initially represents only the acquisition of the power of disposal over the token.29 A link is therefore required between the NFT and the underlying right to be transferred. Unlike securities, the law does not provide for such a link between the NFT and the underlying right. There are currently no regulations under which a tokenized right follows the «right in the NFT” as a general principle, although many argue that such provisions should be introduced.30
Furthermore, assets produced within a metaverse platform are entrenched within the confines of this platform, de facto subjecting them to its unilateral control.31 Unlike NFTs that exist on the blockchain, the land and other virtual assets in metaverse platforms exist on private servers running proprietary code with secured, inaccessible databases. Essentially, ownership of all assets acquired from metaverse platforms is governed by the platform’s terms of service (ToS) and end-user license agreement (EULA) rather than conventional property law.32 These legal documents outline the rules, regulations, rights, and responsibilities that users must follow while participating in the platform’s virtual environment. It is within these extensive and sometimes convoluted documents that metaverse platforms elucidate the legal intricacies of virtual ownership. Unlike the decentralized nature of the blockchain, the terms of service governing each metaverse platform are centralized, resting in most cases within the authority of a single company.33 Following the land acquisition, landowners’ rights are confined within the contours of the pertinent platform’s terms of use and service. In this sense, the current framework for metaverse asset ownership operates not under property law, but rather in the realm of contract law.34 Due to their terms of service, most Metaverse platforms hold the legal capability to delete your items or even redistribute them by detaching the digital assets from their original NFT identification codes.35 In essence, from a strictly legal perspective, while you might possess the NFT linked to your virtual land parcels, ownership or possession of the digital assets per se does not reside with you. Instead, these platforms merely provide you with access to the digital assets (through a license of use), and this access is subject to their discretion.36 Thus, the essential characteristic of property, which is the ability to exercise full control over the asset, is not fully realized. It is important, however, to acknowledge that the enforceability of such terms might be constrained if they run counter to the consumer protection regulations of the European Union or other obligatory provisions that are applicable.37
Nonetheless, the above factors should not undermine the significance and utility of NFTs and blockchain technology for virtual land acquisitions. The blockchain preserves a comprehensive record of ownership for NFTs, spanning from the NFT’s inception by its creator to its current possessor, all documented within its transparent public ledger. In this respect, the entry on the blockchain implements the principle of publicity and the NFT is akin to a deed of ownership and a certificate of authenticity all in one.38 Furthermore, it could serve as a presumption of ownership in favor of the person who is entered as the entitled party. In this constellation, the blockchain is - to a limited extent - comparable to the land register.39
It is also interesting to stress out that, for some years now, there has been a debate about whether the introduction of a new form of “data ownership” (ownership rights over data, in a manner analogous to traditional property rights over tangible objects) could be useful and, if so, how it should be structured. However, the very concept of data ownership still remains fuzzy. Critical voices seem to dominate the literature, with most scholars arguing that data ownership is neither necessary nor desirable in view of the existing legal framework.40 On the other hand, according to the proponents of a new form of data ownership, the concerns raised by the majority of literature, although understandable, are rooted in an interpretation of data that predominantly focuses on facets of intellectual property and data protection law,41 such a constrained perspective fails – in their opinion – to keep pace with the strides made in technological advancements.42 As a fundamental proposition, the suggestion is to apply property law frameworks to virtual objects in a manner consistent with their virtual nature, as long as their intangibility doesn’t pose an obstacle to such an application.43
Data from case law on the matter in question is scarce. On March 10, 2022, the High Court of Justice in London ruled that NFTs could be treated as property under English law.44 However, the decision did not include a subsumption of NFTs under the facts that define ownership in English law, nor did it address the views held by legal scholars on the legal classification of NFTs.45
On October 21, 2022, the Singapore High Court published the grounds for a decision involving an interlocutory injunction that was issued earlier in May this year.46 The Judge held that NFTs can be regarded as property, considering that they satisfy the four criteria defining a property right as set out in the English judgment “Ainsworth”.47 The first Ainsworth requirement is that the right must be “definable” – essentially, the asset “must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified”. This requirement is easily fulfilled, as each NFT’s contained metadata distinguishes one NFT from another. The second requirement is that the “asset must have an owner being capable of being recognized as such by third parties”. Where NFTs are concerned, the presumptive owner would be whoever controls the wallet which is linked to the NFT. Excludability is achieved because one cannot deal with the NFT without the owner’s private key. The third requirement is that “the right must be capable of assumption by third parties, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable”. In the case of NFTs, the nature of the blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, which underscores the “right” of the owner. Secondly, such NFTs are clearly the subject of active trading in the relative markets. The fourth and final requirement is that the asset must have “some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property”.48 In the view of the Judge, NFTs have as much permanence and stability as money in bank accounts which, nowadays, exist mainly in the form of ledger entries rather than cold hard cash.
The explicit acknowledgment by the Singapore High Court of an NFT as property signifies that, in practical terms, these assets will be eligible to be targeted by freezing orders and proprietary injunctions. This will ultimately offer heightened protection to NFT owners, empowering them to more effectively assert their rights concerning their digital assets.49 Although this ruling cannot be directly applied to most continental European legal systems, it shows that there is obviously a practical need for reform.
As the Metaverse expands and gains more and more popularity, the demand for real estate within its confines is expected to escalate in parallel. This has led to a surge in investment in metaverse real estate, with certain investors committing millions of dollars for the acquisition of virtual land. Opinions differ. While for some investing in metaverse real estate today may be an opportunity similar to buying land in Manhattan in the early 19th century, for others it is simply a clear application of the “greater fool” theory.50 In this context, many believe that the metaverse real estate market might be perched upon a bubble destined to burst.51
Irrespective of the viewpoints aforementioned, one thing is certain: As the Metaverse continues to expand, ownership issues will become increasingly important, giving rise to the need for effective legal frameworks and dispute resolution mechanisms that can address such issues in a fair and efficient manner. After all, legal certainty favors investment security. n
