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The EU’s Plans to Regulate Virtual Worlds & What It Means for Crypto

The EU’s Plans to Regulate Virtual Worlds & What It Means for Crypto

Learn all about the European Commission’s recent recommendations to regulate virtual worlds and Web4 – and what they mean for crypto.

The European Union has taken the lead in introducing crypto regulations. After signing its Markets in Crypto Assets (MiCA) framework into law in late May, the European Commission (EC) released its latest plans to govern virtual worlds and crypto-focused Web4 technologies. These policies could have a tremendous impact on the global crypto industry.

Let’s take a look at why the EU is concerned with virtual worlds, the EC’s latest recommendations, and what they mean for the future of crypto and the metaverse.

Why Virtual Worlds Matter

The European Commission believes virtual worlds could transform business and employment across the EU, creating more than 860,000 jobs by 2025 and generating €800 billion in value by 2030. As a result, the nascent ecosystem could become economically significant from a business competitiveness and employment standpoint.

The EC highlights several areas where virtual worlds could have a significant impact, including:

  • Education – Virtual worlds could increase training efficiency at a lower cost and produce better results. For instance, companies could train staff and enable them to practice using tools without the risk of injury using technologies like digital twins.
  • Art & Design – Virtual worlds could revolutionize art through immersive virtual museums, galleries, and archives where visitors can learn and explore from their homes, while promoting digital art and entertainment as a brand new medium.
  • Healthcare – Virtual worlds could open the door to faster and more accurate diagnoses by helping physicians understand patient concerns and better explain medical conditions using a more immersive planform to educate and explain.

At the same time, the rise of virtual worlds offers an opportunity to move away from the handful of U.S.-based entities controlling today’s internet. By staying ahead of the curve from a regulatory standpoint, EU entrepreneurs and companies could become market leaders in developing these virtual worlds – although there’s already ample competition.

For example, Microsoft aims to acquire Activision Blizzard (a massive gaming company), Apple introduced its Apple Vision Pro headset, and Facebook has been long-active in the metaverse since the acquisition of Oculus back in 2014. Meanwhile, many crypto projects have already launched metaverse concepts, including Sandbox and Decentraland.

Challenges for Regulators

Virtual worlds encompass many real-world elements, such as commerce, entertainment, and education. For example, you might buy a virtual item in the same way you’d purchase a physical object. Therefore, many of the same rules and regulations will likely apply to virtual worlds, such as payment security or data privacy requirements.

There are several challenges when applying legal concepts to virtual worlds:

  • Intellectual Property – The scope of intellectual property protection in virtual worlds is unclear, as evidenced by recent non-fungible token (NFT) related lawsuits. Moreover, it’s unclear how IP rights might apply to generative or AI-produced artwork.
  • Financial Regulations – The applicability of traditional financial regulations to virtual assets is unclear. For instance, does virtual real estate need to adhere to physical real estate rules? Do token sales constitute a securities offering?
  • Taxation – The taxation of many crypto assets has become clearer in recent years, but virtual worlds could introduce new challenges. For example, do different NFTs require different tax classifications depending on their use case?
  • Legal Conduct – The applicability of harassment or other misconduct rules remains uncertain in the metaverse. For example, novel laws may be required to handle virtual crimes that are similar but not analogous to physical crimes.
  • Gambling & Lottery – Many virtual worlds already have features like “loot boxes” that provide random virtual assets for a fixed price. These kinds of features may fall under gambling or lottery regulations or may require entirely new rules.
  • Privacy & SecurityCybersecurity could become a top priority in virtual worlds, particularly as more monetary value is stored in them. So, new regulations may need to create standards for security while also safeguarding user privacy.

The European Commission’s policy paper doesn’t go into specific details regarding these concerns, but the broad strokes could provide some hints about what the future holds. And ultimately, stakeholders will have to determine how new regulations impact their specific projects, such as those involved in NFTs or DeFi protocols.

What Are the Recommendations?

The European Commission issued 23 recommendations in its proposal, covering everything from employment opportunities to policing virtual worlds. While these aren’t legislative proposals, they offer valuable insights into potential future regulations and a glimpse into the mindset of regulators responsible for crafting them.

What Are the Recommendations?
Decentraland is an example of a virtual world where many of these regulations could play an active role. Source: Decentraland

Some of the most impactful recommendations include:

  • Open Standards – The EC’s metaverse strategy states that virtual worlds will not be “dominated by a few big players” and should be “driven by open technologies.” The recommendations aim to create openness by promoting data ownership and ensuring decentralized digital identities, among other things.
  • Privacy Rights – The recommendations suggest that users should have a right to be anonymous in some – but not all – environments. For example, when transferring money or buying specific goods when a license or age limit applies, you may be required to authenticate yourself with a digital identity.
  • Policing – The EC recommends establishing an international police institution for digital worlds rather than relying on private organizations. In addition, the institution recommends against consolidating power in the hands of one organization while leveraging artificial intelligence to support policing efforts.

These recommendations represent a mixed bag for many crypto enthusiasts. For example, open standards and data rights are welcome policies, but international policing and a lack of complete anonymity could create challenges. Of course, the devil is in the details, and only specific legislative proposals will spell them out.

What’s Next?

The European Commission continues to explore other facets of virtual worlds and Web4 technologies. For instance, it will look at the potential for new digital cooperation models, such as decentralized autonomous organizations (DAOs), that underpin many novel financial mechanisms in the Web4 ecosystem, such as decentralized finance (DeFi).

DAOs create unique challenges because they’re not governed by a single legal entity, limiting recourse if losses occur. As a result, the EC plans to carry out a study to identify legal, administrative, and economic barriers that could prevent their uptake. The legislative results of these efforts could have a widespread impact on the crypto ecosystem.

Early next year, the EC also plans to create “regulatory sandboxes” to test out short-term projects under a lighter regime while working with a diverse range of stakeholders. The results of these studies could impact the legislation arising from the policy paper as the regulatory body explores how regulations could impact the market.

The Bottom Line

The European Union continues to operate on the bleeding edge of crypto and crypto-adjacent regulations. After introducing MiCA earlier this year, regulators are actively crafting new rules to govern virtual worlds and other Web4 technologies. As first movers, crypto users, investors, and developers should keep a close eye on any developments.

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Justin Kuepper