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Metaverse, Blockchain & Digital Assets: 10 Legal Challenges for Businesses in 2023 | JD Supra

With the start of the new year, the ArentFox Schiff Metaverse Industry team reviews 10 of the most pressing legal issues facing businesses in 2023.

  1. The long crypto winter. As the crypto bear market nears its 15th month and crypto bankruptcies mount, some are predicting that the metaverse and blockchain will also decline. But the Metaverse and blockchain are bigger than crypto. Companies including Starbucks, L’Orealand Nike have gone beyond buzzwords to create powerful new tools to engage consumers and generate revenue. Whether through blockchain-based loyalty programs, digital creator communities, or new e-commerce platforms, these companies are demonstrating the value and usefulness of these technologies. Will the crypto winter keep all of Web3 in a deep freeze, or will 2023 be the year companies move beyond the hype and start building practical apps that improve their bottom line?
  2. The issue of securities. The U.S. Securities and Exchange Commission (SEC) has adopted a strategy of developing the law applicable to NFTs and other tokens through aggressive judicial activity versus making rules or issuing guidelines. SEC Chairman Gary Gensler has consistently asserted that many tokens traded on platforms meet the definition of “securities” and therefore fall within the scope of SEC regulation. The position recently found support in the U.S. District Court for the District of New Hampshire, which found on a motion for summary judgment brought by the SEC that LBRY, Inc. was offering and selling its native digital token, LBRY Credits (LBC), in violation of Section 5 of the Securities Act of 1933. The SEC’s aggressive posture, coupled with significant regulatory uncertainty, likely discouraged many big brands from entering the market. The outcome of ongoing litigation, including a lawsuit against NFT developer Dapper Labs, and future enforcement agreements between the SEC and token issuers and/or those facilitating token transactions, may provide clarity. much needed.
  3. Intellectual Property Enforcement and Trademark Protection. The metaverse, blockchain and augmented reality (AR)/virtual reality (VR) make brand protection increasingly complex. Brand owners find themselves at risk due to the limitations of older online intellectual property enforcement tools such as the DMCA and ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP). For these technologies to thrive, clear standards and policies need to be in place to protect intellectual property rights and reduce consumer fraud and deception, and this year will likely be crucial. Additionally, brand owners need to proactively complete their IP registrations and portfolios to establish rights in virtual platforms and Web3 ecosystems, as well as to guard against new types of infringements that may arise. The AFS Intellectual Property Enforcement Working Group helps pave the way to a web3 that works for creators, developers, brands, consumers and platforms, and will continue to monitor major developments and best practices.
  4. Tax the metaverse. Businesses may face real-world tax and compliance obligations even as transactions take place in the metaverse, and businesses will need to navigate an increasingly complex tax landscape as states and countries around the world are seeking to tax metaverse transactions. Businesses must consider a variety of unanswered tax consequences. For example, in what jurisdiction might a concert in the Metaverse be subject to tax – where the concert was played or where the audience watched? Or could a sale of NFT be subject to sales tax or value added tax in a jurisdiction where the NFT was sold or purchased, and should the answer depend on whether the sale is a sale initial or resale? Companies operating in the metaverse may face additional challenges as they seek to navigate complex withholding rules, compliance issues, and information reporting requirements. Although tax authorities have been slow to issue guidelines, companies should not ignore these looming tax issues while establishing a presence in the metaverse.
  5. Who owns the DAO, anyway? DAOs, or Decentralized Autonomous Organizations, are ubiquitous on the web3, but significant questions remain about their legal character and the liability of DAO members. While recent decisions related to the CFTC’s enforcement action against Ooki DAO have seemingly determined if and how DAOs can be sued and served, it remains to be seen whether a DAO can be held liable under federal commodity laws. basic. Law enforcement action Ooki DAO will likely have many DAOs that have formed without a formal legal structure (“Unpackaged DAOs”) fearing that relying on decentralization instead of legal packaging has left the members of the DAO liable to be held accountable for the actions of the DAOs.
  6. What is fair use? Crucial legal challenges against StockX’s NFT Vault (by Nike) and METABIRKINS’ NFT (by Hermès) may help clarify how key legal principles such as the first sale doctrine, freedom of expression under the first amendment and fair use apply in the context of NFTs and web3. Are NFTs simply a way to authenticate and trace the content of the underlying metadata? Can certain uses of NFTs or other applications of blockchain technology transform the underlying metadata/content to support a finding of infringement? Do traditional legal principles apply in this new tech ecosystem or does the new tech ecosystem require a re-examination of traditional legal principles? Clarification from the courts may soon be coming to a jurisdiction near you.
  7. Data Privacy Compliance. Time is running out to ensure that privacy policies comply with the latest laws. The California and Virginia laws went into effect on January 1, 2023, and states like Colorado and Connecticut are next. Click on here for an overview of these new requirements.
  8. Dark patterns. The Federal Trade Commission (FTC) recently announced a $520 million settlement against Epic Games related to Fortnite’s design and privacy practices. The complaint alleged, among other things, that Epic used deceptive or misleading design tactics — what the FTC calls “dark patterns” — to increase revenue, including, for example, failing to require licensees credit card companies confirming their identity before charging stored credit cards for subsequent purchases and employing confusing and inconsistent payment processes. Expect the FTC to continue to pay close attention to the design practices of other Metaverse platforms and applications.
  9. Chatbox Class Actions. The second half of 2022 has seen a wave of class action lawsuits under state wiretapping laws against website operators who use widely deployed online technologies, such as chat boxes and session replay software. . Any websites or platforms with chat boxes or chat features are potentially at risk. Click on here for more details.
  10. Transforming education and professional development. The COVID-19 pandemic has deeply affected our classrooms and workplaces and three years after its onset, many students and employees continue to learn and work remotely. As we continue to evaluate remote learning, AR/VR devices and apps can offer significant advantages over desktop or laptop remote learning experiences and the back-to-back Zoom calls that have come to define work. in the age of the pandemic. They can also open doors to experiences that might not otherwise be possible. Instead of a Teams meeting with a colleague across the world, for example, imagine putting on a VR headset and meet them in a virtual conference center. Instead of reading about Athenian democracy, imagine a group of students taking a virtual tour of the Acropolis. Such use cases can prove essential in the development of the metaverse, but problems such as accessibilitydata security and equity will be critical.
  11. PRIME! Chatbots and the Metaverse. Many of the metaverse’s most ambitious visions describe seamless interactions between consumers, their wearable devices, and augmented reality software programs, often via voice-activated digital assistants. The release of the generative artificial intelligence program, ChatGPT, at the end of 2022 shows how close we may be to making these visions a reality. ChatGPT and similar platforms could power voice assistants like Siri and Alexa, making hands-free interactions with software and electronic devices seamless, and making the metaverse more accessible.

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