Do you spend time in “the metaverse?” Have you invested in virtual land or avatar accessories in the metaverse? Do you create artistic NFTs or other user generated content in the metaverse? Does your company advertise or sell products in the metaverse? If you answered “yes” to any of those questions, well good for you! You are among the brave pioneers venturing into an exciting new world.
Just one question: Have you read the fine print?
When we log on to a website, we are often asked to click a box to signify our agreement to a document called the “Terms of Service.” For metaverses, the Terms of Service can extend to 30 pages or more of text—some of it literally in fine print. The Terms of Service provide the rules that will govern your participation in each metaverse project. When you click “Yes” in that box, indicating that you agree to the Terms of Service, you enter into a contract with the metaverse operator. But who is going to read all those lengthy Terms of Service? Well, we did. And what we found just might surprise you.
We just completed an in-depth study of the Terms of Service of major metaverse projects. Our review was confined to metaverses that have their Terms of Service available in English. We used a broad definition of “metaverse” that includes immersive gaming platforms that describe themselves as “metaverses.” We built a searchable database of these Terms of Service to facilitate our analysis. We undoubtedly missed projects that may be keeping a low profile or are exclusive to a non-English speaking country. Just based on the metaverse projects that we know are in development right now, we expect the number of launched metaverse projects to skyrocket to well over 1,000 within two years. Of the more than 140 metaverses we looked at for this report, we found that 82 of them had Terms of Service available for review when you log in. In this report, we refer to all these separate metaverses collectively as “the metaverse.”
So, you think you own that virtual asset in the metaverse? Maybe not.
There are, in general, two kinds of assets a user of a metaverse may own. The first category are assets you can buy, like avatar accessories, game playing tools (swords and the like) or virtual land, buildings, billboards etc. These virtual assets are typically bought and sold in the form of non-fungible tokens or NFTs. You use real money (or Ethereum or a currency native to the particular metaverse) to buy these assets. The second category of assets are things you, the user, create or build yourself within the metaverse. This second category is generally called User Generated Content or UGC. You can buy virtual land (first category) and then build a virtual home or art gallery on your piece of land (UGC).
The most critical thing to consider before investing substantial capital in virtual assets within a metaverse is whether you will acquire legal property rights when you buy these assets--like you would if you bought land in the physical world. The answer to that critical question often lies in the Terms of Service of the metaverse project. They are not all the same. Of the 82 metaverses we looked at, only 42 make it clear that the user actually acquires ownership rights to the assets that they buy or build in the metaverse. Many are silent on this point, and some reserve the right to take away your access to all of your virtual assets if you violate the rules of their metaverse.
A few metaverses say you just plain don’t own anything, period. Take the virtual world for kids called Animal Jam, for instance. The Terms of Service for Animal Jam state as follows:
The virtual items that you purchase, create, or acquire in Animal Jam—including memberships, avatar accessories, den items and in game currency—are not property owned by you. As a result, you do not have the right to modify, share, transfer or sell this stuff. (Emphasis added)
And here is a portion of the Terms of Service for Wizard101, another metaverse gaming platform for kids:
YOU DO NOT OWN THE ACCOUNT YOU USE TO ACCESS THE SITE, AND YOU DO NOT OWN ANY DATA OR VITURAL ASSETS/CURRENCY THE COMPANY STORES ON ITS SERVERS RELATED TO THE ACCOUNT. You have no ownership interest in any virtual items or virtual currency that may be associated with the account from time-to- time. (Emphasis added)
Both Animal Jam and Wizard101 invite kids to “purchase” virtual assets to enhance their gaming experience on their platforms. But the kids don’t actually own the virtual assets they buy. This is not necessarily a big concern when you are dealing with low stakes purchases of virtual assets.
A popular metaverse called Decentraland, by contrast, makes clear that you (the User) do own anything you build or create in the Decentraland metaverse. The Terms of Service state:
All title, ownership and Intellectual Property Rights over the Content created by users belongs to the users who created said Content.
It makes sense. You should own what you create. But beyond the question of ownership, there is also the question of whether you can be sure you will have continuing, uninterrupted access to your metaverse assets. The Decentraland Terms of Service have a provision that states:
You agree that the DAO [Decentralized Autonomous Organization], in is sole discretion and for any or no reason, may terminate these Terms and suspend your Account(s) for the Tools. You agree that any suspension of your access to the Site or the Tools may be without prior notice, and that the DAO and/or the Foundation (and its officers and employees) will not be liable to you or to any third party for any such suspension. (Emphasis added)
But Decentraland is not alone. Here are the Terms of Service of another metaverse called Upland:
We may close your account, suspend your ability to use certain portions of the Services, and/or ban you altogether from the Services for any or no reason, and without notice or liability of any kind.
So Decentraland and Upland both have the contractual right to cut off your access to your account for “no reason” with “no notice” to you--and they may have no liability to you if they do. Wow! Think of the analogy to the physical world. How much would you pay for a really nice house, your Dream Home, if a third party had the legal right to stop you from entering your home at any time, without giving you prior notice and for no reason?
Spending a few dollars to accessorize your avatar is one thing. But before you invest significant capital you should think through these issues carefully. Will you legally own, and have uninterrupted access to, the virtual property you buy or create in the metaverse? Look for answers to these important questions in the Terms of Service of the metaverse project you are considering.
You have a dispute in the metaverse? Don’t count on collecting much in damages.
Investment in the metaverse is taking off in a big way. In addition to the money, people all over the world are investing huge amounts of their valuable time in creating User Generated Content on metaverse platforms. With these massive investments of time and money have come disputes about things like breach of contracts, infringement of trademarks, defamation, sales of fraudulent or forged NFTs, outright thefts, cyber hacks and even virtual assaults in the metaverse.
Of the 82 metaverses we examined, 32 include in the Terms of Service specific limitations on the damages that a user can recover from the operator of the metaverse if there is a dispute. We found that these limits on recoverable damages range from $1,000 to a low of just $5.
Here’s an example, again from Animal Jam, the children’s gaming metaverse:
IN NO EVENT SHALL OUR TOTAL LIABILITY TO YOU FOR ALL DAMAGES, LOSSES, CLAIMS AND CAUSES OF ACTION INCLUDING, WITHOUT LIMITATION, IN CONTRACT, TORT, NEGLIGENCE OR OTHERWISE, EXCEED A TOTAL OF FIVE DOLLARS ($5.00) . . .
Imagine if you bought a collection of NFTs in a metaverse for $5,000 (or $5 million!) and, due to misappropriation by an employee of the metaverse operator, your NFTs are stolen and resold. You might find your recovery against the metaverse operator limited to just a few hundred dollars.
Or imagine if an anonymous hacker gained access to your account due to a cyber breach within your metaverse and the hacker steals all your virtual assets. Ouch, that would hurt! And we are not talking about insignificant amounts of capital at stake. There are hedge funds that have raised hundreds of millions of dollars from investors specifically to invest in virtual assets in the metaverse. Some estimates put the total amount invested in virtual assets within the metaverse as high as $100 Billion in 2021 alone. Some of the more sophisticated investors may have entered into bespoke arrangements with the metaverse operators establishing clear ownership, unrestricted access and other legal rights with respect to their virtual asset investments. Other investors may have simply clicked the box agreeing to Terms of Service that potentially leave them with little legal recourse if something bad happens. And, unfortunately, there are bad people lurking in the metaverse, just like in the physical world, trying to figure out creative ways to steal your stuff.
You have a dispute in the metaverse (take two)? Better grab your passport.
Out of the 82 metaverses we studied, seven require the user to litigate disputes in a foreign (non-U.S.) country. For instance, if you are spending time or money in the popular play-to-earn platform, Axie Infinity, you should be prepared to travel to the Cayman Islands to litigate any dispute. It is a wonderful place, but kind of expensive. And if you participate in the Alphaverse, you will need to litigate any copyright or trademark infringement claims exclusively in the British Territory of Gibraltar.
Even if you are permitted to pursue a claim in courts within the U.S., there is another complicating factor. Thirty of the metaverses we examined specify that any dispute arising out of transactions or conduct in the metaverse would be governed by the law of a foreign country. If you were to have a dispute arising out of your participation in the Voxels metaverse, for instance, your dispute would be adjudicated under the laws of New Zealand. So, good luck finding a lawyer in your local community who is well-versed in the nuances of New Zealand law.
Moreover, you might not be able to litigate your claim against a metaverse operator in court at all. Out of the 82 metaverses we examined, 46 require most disputes with the metaverse operator to be adjudicated in private arbitration. Under the Terms of Service of these metaverses, the user foregoes the right to litigate in any court anywhere. In Decentraland, for instance, the user agrees to arbitrate most disputes, and the arbitration proceeding must take place in Panama City, Panama. You could opt out of the arbitration provision by sending a written opt out notice to Decentraland within 30 days of your first use of the platform. But, in order to opt out, you would have had to have read through to page 29 of the Decentraland Terms of Service to discover that you had the right to opt out.
Have a dispute in the metaverse (take three)? Oops, too late.
Most states in the U.S. and foreign countries have “statutes of limitations” that spell out how much time you have to bring a legal claim against another party. If you miss the deadline in a statute of limitations, your claim is most likely barred. In New York, the statute of limitations for breach of a written contract is six years. Well surprise, things are a little different in the metaverse. Several of the metaverses we studied drastically shorten the time period within which a user can bring a claim. In general, contracts that shorten limitations periods are enforceable in the U.S. Of the 82 metaverses we looked at, 25 have shortened the time period for bringing a claim. The shortest limitations period we found was just three months. So, think about it, instead of having six years (like in New York) to discover that you might have a claim, then try to resolve the claim short of going to court, then find a lawyer to handle your case, you may have only a few months to do all that and submit your claim before the deadline. Miss the deadline and you are out of luck--no recourse.
Wait, I owe the metaverse operator “indemnification” if They get sued?
Of the 82 metaverses we looked at, 59 contain indemnification provisions that require the user to indemnify the metaverse operator if they get sued. The indemnification obligation typically kicks in if the metaverse operator gets sued due to the user’s actions or misconduct on the metaverse platform. The indemnity would kick in, for example, if a user infringes a trademark or defames a person and the metaverse operator gets sued as a result. To “indemnify” means that the user must pay the attorneys’ fees that the metaverse operator incurs in defending the lawsuit as well as pay any judgment or settlement in the case. This could easily add up to a whole lot of money.
Here is a typical indemnification provision found in the Terms of Service for Stageverse, a self-described “social metaverse”:
You hereby agree to indemnify, defend, and hold us.... harmless from and against any and all losses, damages, liabilities and costs (including settlement costs and any legal or other fees and expense for investigating or defending any actions or threatened actions) incurred by the Indemnified Parties in connection with any claim arising out of any breach by you of these Terms or claims arising from your use of the App, the Events and/or your account.
If you ever find yourself in a situation where you owe indemnification for a lawsuit, you could be looking at significant expenses just for the legal fees--even if the case has no merit at all. But remember, you agreed to this when you checked that little box saying you agree to the Terms of Service.
You want to sell that NFT? Time to pay the piper.
Out of the 82 metaverses we studied, 11 spell out the commissions you must pay to the metaverse operator when you sell virtual assets (like NFTs) within that metaverse. It is likely that other metaverses also charge commissions, but the commission rate is just not disclosed in the Terms of Service. Of the 11 that spell it out, the range of commissions on sales of assets run from 2.5% of the sales price to an astounding 30%.
In Superworld, for instance, you will pay a commission of 3.75% to Superworld for every transaction in virtual real estate on that site. And Steve Aoki (a famous DJ, for you Boomers) has a metaverse called AOK1VERSE where he receives a commission of 7.5% on every transaction. These commissions are generally in addition to what you may pay in gas fees to have transactions processed on the Ethereum blockchain. And virtually all the Terms of Service we looked at make clear that the seller of a virtual asset is responsible for paying any sales tax that might be due on the transaction.
My metaverse is Web3 decentralized, right? Probably not.
Of the 82 metaverses we looked at, very few appear to be truly decentralized. Characterizing something as truly decentralized or not, can be a judgment call. We analyzed whether each metaverse on our list was operated by a truly decentralized community or DAO. In nearly every case, when you do a little digging, you find that the metaverse is actually owned and operated by a centralized entity. These entities might have plans to become decentralized one day. But it looks like realizing the vision of a truly decentralized, Web3 metaverse (or group of metaverses) is still a long way off.
Metaverse is all about free speech, right? Not so much.
Of the 82 metaverses we looked at, 64 had explicit content moderation policies that prohibit certain categories of speech. If you violate the speech code, the metaverse operator generally has the right to suspend or terminate your account. It is not always clear what exactly is prohibited by these content policies. Roblox, for example, prohibits creators of User Generated Content from using their creations in “a manner that is offensive” or “otherwise objectionable.” But concepts like “objectionable” and “offensive” can sometimes be in the eye of the beholder. The metaverse RecRoom prohibits any activity that promotes “harmful activities or substances.” This language, if taken literally, could prohibit a user from creating a game where avatars are killed or injured while engaged in dangerous activities—the definition of most games. We might assume that this is not the intent of this kind of language. But how do you, the user, know for sure where your metaverse operator will draw the line?
How these content policies will be enforced in practice is an open question. We could see some metaverses develop censorship practices similar to those we have seen emerge within traditional social media platforms. The censorship practices of metaverses could become a significant differentiator as millions of users choose which metaverse best suits their preferences. Parents might prefer that their eight year-old child only participate in metaverses with rigorously enforced content restriction policies. Whereas you could imagine some adults would prefer to participate in a more libertarian kind of metaverse where almost anything goes. But, as of now, many metaverses have somewhat vague content policies that could get you (or your business) banned if you violate them. These policies are something to consider before you invest significant capital to buy or build virtual assets or set up your company to do business in a particular metaverse.
Well, at least I know the rules of the Metaverse when I sign up. Or maybe not.
As noted at the outset of this report, some of the metaverses we looked at had Terms of Service that go on for 30 pages or more. Many of us (even lawyers) just click the “Agree” box and move on. But let’s say you are one of the super-diligent few. You actually read the entire set of Terms of Service before you sign up for a metaverse and create your account. Then you know the rules of the game, right? Unfortunately, no. When you read the Terms of Service, all you really know is the rules of that metaverse as they exist at that moment.
Of the 82 metaverses we looked at, nearly all of them (77) permit the metaverse operator to change the Terms of Service at any time. Most of them allow changes to the Terms of Service to be made with no practical notice to the users. They mostly say that, if you continue to use your metaverse account once changes to the Terms of Service have been posted, you are deemed to have agreed to the revised Terms. So, if you really want to stay up to speed on the operating rules, you would need to look for changes to the Terms of Service constantly. Who is going to do that? There are strict laws in the U.S. that govern how banks, insurance companies and other regulated industries can go about changing the terms of agreements with their customers. We know of no such rules in the U.S. specifically dealing with the Wild West that is the metaverse of 2022.
Concluding thoughts.
MetaLawMan is absolutely pro-metaverse. We believe the development of the metaverse is going to be profoundly important to humanity. We believe that, in addition to just being a fun place to explore, the metaverse will open up new avenues to solve long-standing societal challenges like quality education and health care for everyone and yes, maybe even climate change.
The metaverse projects that we studied in this report obviously retained very capable lawyers. These lawyers, understandably, drafted Terms of Service that are favorable to their clients. But, their clients are the metaverse operators--not you, the user. What we hope to achieve with this report is to encourage a voluntary migration of these terms toward a more balanced approach that fairly takes into consideration the interests of both the metaverse operators and their users. We do not believe governments around the world should step in and impose rules governing every aspect of the metaverse. It is our hope that the metaverse community will do much of that work for itself.
James A. Murphy (MetaLawMan) October 4, 2022
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A big thank you to my outstanding director of research, Robert H. Murphy, for his able assistance in collecting and analyzing all the data upon which this report is based.
Summary of Key Findings.
To recap some of the most noteworthy discoveries of our research, we’ve compiled the following findings of our review of 82 English-language metaverses that make their terms of service available to those who log in:
Only about half (42) make it clear that the user owns the assets that they buy or build in the metaverse. Many are silent on this point, and some reserve the right to terminate a user’s account with no notice and for no reason.
Thirty-two metaverses include in their Terms of Service specific limitations on the damages a user can recover from the operator of the metaverse if there is a dispute. These limits on recoverable damages range from $1,000 to a low of just $5.
Seven metaverses require the user to litigate disputes in a foreign (non-U.S.) country, while 30 of the metaverses specify that any dispute arising out of transactions or conduct in the metaverse would be governed by the law of a foreign country.
More than half (46) require most disputes with the metaverse operator to be adjudicated in private arbitration.
Fifty-nine (72%) contain indemnification provisions that require the user to indemnify the metaverse operator if they get sued as a result of actions of the user. This means that the user must pay the legal fees that the metaverse operator incurs in defending the lawsuit as well as pay any judgment or settlement in the case.
At least 11, (and probably many more) require users to pay commissions to the metaverse operator when selling virtual assets (like NFTs) within that metaverse. Of those that disclose commission rates, the amounts ranged from 2.5% of the sales price to 30%.
Of the 82 metaverses examined, very few appear to be truly decentralized.
Sixty-four (78%) had explicit content moderation policies that prohibit certain categories of speech, carrying with them significant consequences for violations.
Nearly all (77) permit the metaverse operator to change the Terms of Service at any time.
Research Methodology:
We set out to research the Terms of Service of active metaverse projects over the first two weeks of August 2022 by running Google searches for active metaverse projects with English-language websites. We looked for projects that had fully launched, were currently active and were not in a test mode or suspension.
Included in our definition of “metaverse” are gaming platforms that provide an immersive experience and refer to themselves as “metaverses.” We found more than 140 metaverse projects that met our criteria. Of these, 82 had Terms of Service in English which were available when you attempted to open an account.
We collected 25 data points from the Terms of Service of the 82 metaverses and captured that information in a database. This data includes the following:
Name of owner/operator of the metaverse
Whether transactions in the metaverse were executed on a blockchain, and if so, which one Whether the metaverse appeared to be decentralized
Whether the purchaser of assets gained ownership rights with respect to the asset purchased Whether the builder of User Generated Content gained ownership rights over the content they built
Whether the owner/operator had the right to suspend or terminate the users account with or without notice
Whether users agree to indemnify the owner/operator in the event of litigation
Whether there was a limitations of damages provision limiting the dollar amount a user could recover from the owner/operator
Whether the metaverse used a local currency
Whether the metaverse had a content moderation policy
Whether the user was asked to represent their age when signing up
Whether the user agreed to mandatory binding arbitration
What country’s law governed the agreement and any disputes arising in the metaverse
Whether the applicable statute of limitations for claims was shortened
Whether users were required to pay a commission to the metaverse owner/operator for transactions in the metaverse
We did not include metaverse projects that are currently secret or restricted to closed communities as well as those that had their Terms of Service written in a language other than English. Metaverse projects that launched after our research period are also not included. It is possible we missed many other metaverse projects in this rapidly expanding area, but we did not intentionally exclude from the research set any project that met our criteria (If you are aware of additional metaverses we should consider for our next report, please let us know!). Those we reviewed with Terms of Service are:
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