Industry the July/August 2022 issue

Self-Sovereignty in the Metaverse

Lawyers and regulators are playing catch-up with advanced technology, and risk managers should be in the know.
By Jody Westby Posted on July 19, 2022

Consider self-driving cars. Did the companies that developed these cars ask whether their inventions could be put on the roads without a licensed driver? Consider drones. Did developers of drones worry about whether their inventions would violate laws governing air space? Consider artificial intelligence (AI). Did technologists ponder whether certain uses of AI would violate legal rights? The answer is no or not much if the technology would make money or had a chance of being disruptive.

AI and metaverse are just two examples of advanced technologies that raise a host of legal and risk issues.

The Biden administration’s Office of Science and Technology Policy is currently working on an AI Bill of Rights.

The metaverse’s potential use of decentralized ownership using blockchain, nonfungible tokens and other technologies could cause political and technical changes to how we perceive and use the internet.

Technology continues to impact all facets of life and alters how we live, work, learn and play. The difference today is that many of these advanced technologies are no longer one-off applications. They are now being widely deployed; integrated into systems, business processes, and supply chains; and offered through platforms with an array of features to choose from. Thus, companies may not be aware of their use or understand the risks they may present.

Artificial Intelligence

All of this complicates our understanding of how advanced technologies affect risk management and create new legal issues that existing laws might not apply to. AI is one of the most complex of these technologies, and governments are struggling with how to regulate its use without overreaching or missing the mark altogether.

The Brookings Institute recently noted that at least 60 countries have adopted some sort of AI policy, and action within the EU-U.S. Trade and Technology Council indicates the United States and the European Union may be moving toward alignment on AI regulation. The European Union has the lead, however, with its AI Act, now under consideration. The United States is less organized, with the Food & Drug Administration, the Department of Transportation, the Federal Trade Commission, the Department of Housing and Urban Development, the Equal Employment Opportunity Commission, financial regulators, and the National Institute of Standards and Technology all weighing in on some form of AI regulation or framework for risk management. The Biden administration’s Office of Science and Technology Policy is working on an AI Bill of Rights. China, meanwhile, has already implemented regulations on the use of AI in algorithms.

One can readily understand how the use of advanced technologies can create significant compliance challenges.

Metaverse

AI seems simple compared to metaverse and the issues it raises. While some may have shrugged off the massive rebranding of Facebook and its shift to Meta as a way to divert attention, make no mistake: Mark Zuckerberg considers this the future of technology.

Back in 2003, the online multimedia platform Second Life was launched. Second Life enabled users to create avatars and engage in activities such as interacting with other users, participating in both individual and group activities, and building, creating, shopping, and trading virtual property and services with one another. The legal community had an interesting time analyzing legal issues in Second Life and trying to apply existing laws to a created virtual reality that had property values and personal identities.

Stephen Wu, a shareholder at Silicon Valley Law Group and former chair of the American Bar Association’s Science and Technology Law Section, notes, “In many ways, Second Life was the precursor to the metaverse; in a way it seems the metaverse is a rebranding of what Second Life was all about.” Wu observes that the core of Zuckerberg’s metaverse is “nothing new, but technology has advanced, we have more computing power and the ability to have finer visualization. But many of the issues will be similar to those we wrestled with in Second Life.”

So significant were the Second Life legal issues that the legal community created a new bar association, the SL Bar Association, to explore the intersection between law and virtual worlds. According to Wu, sometimes existing laws would help guide how to handle virtual issues, but other times new laws and doctrines were needed. “The metaverse has actually revived interest in the SL Bar Association,” which had become dormant, Wu says.

Diami Virgilio, a doctoral student at the University of Pennsylvania, recently noted in a Slate article that Second Life was a created virtual world that users could choose to visit or escape to, but the metaverse blends both real life and virtual worlds. Zuckerberg envisions the metaverse’s use of decentralized ownership using blockchain, nonfungible tokens and other technologies. That is a big difference, which could cause political and technical changes to how we perceive and use the internet.

AI is one of the most complex of these technologies, and governments are struggling with how to regulate its use without overreaching or missing the mark altogether.

“The same issues we encountered in Second Life will apply to metaverse,” Wu says, “but there also will be new ones because metaverse is leveraging AI, the internet of things, cryptocurrency and decentralized finance, and other advanced technologies.” Wu has taught law school courses on virtual-worlds law and notes the concepts of virtual spaces obtaining self-sovereignty and virtual jurisdiction were especially intriguing to the students as long-term possibilities. People establishing presences in the metaverse may someday pursue sovereignty and virtual jurisdiction in the way envisioned at the beginning of the Second Life era.

While some concepts of sovereignty would require changes in law, other aspects of virtual worlds—and, now, metaverse governance—do not. Current law may be sufficient to create the rights envisioned by metaverse users. For instance, in lieu of a legal framework for virtual worlds, Wu says, attorneys turned to contracts to create rights within virtual worlds. His view is that metaverse governance will be a mixture of new laws, potentially narrow statutory or regulatory enactments, and long-established laws and doctrines.

Virgilio says the concept “requires an economic and regulatory system that is favorable to the enclosure of virtual spaces in order to create property.” Explaining that Zuckerberg’s vision could create a new internet or “maybe even a new mutation of capitalism as we know it,” Virgilio warns that Meta will be able to capture details of actions or activities by people within the metaverse that will result in a new world of marketing data for Meta to exploit.

Virgilio notes that Seoul, South Korea, is creating a virtual version of the city called “Metaverse Seoul.” Meanwhile, Barbados is creating a virtual embassy.

There will necessarily need to be laws and mechanisms to regulate virtual economies and societies that coexist with real ones. Lawyers who specialize in Second Life legal issues will be able to offer some guidance, but this is new terrain on a global scale. Jurisdictional issues will present interesting challenges, and solutions will not be able to be derived from one country’s laws and regulations. Wu notes that the synergy among technologies used simultaneously, such as metaverse plus AI, IoT, blockchain, etc., will create new legal challenges and increase the complexity of legal work exponentially.

So significant were the Second Life legal issues that the legal community created a new bar association, the SL Bar Association, to explore the intersection between law and virtual worlds.

Forward Thinking for Risk Managers and Insurers

AI and metaverse are just two examples of advanced technologies that raise a host of legal and risk issues. Forward-looking technologies require risk managers and insurance agents and brokers to be forward-thinking in their risk-transfer strategies. Analyzing potential risks, legal liabilities, business interruptions and reputational impacts—and assessing their coverage under existing policies—may be pushing the envelope with carriers, but smart companies will begin to factor these risks into their policy reviews and risk management strategies.

This process will necessarily begin with an internal assessment of the advanced technologies being used by an organization. Just determining the use of AI within an organization’s operations could be a daunting task, since many companies do not even have a starting point to contemplate such a question. A first good step would be to identify which advanced technologies the organization is using now or will be using in the near future and then determine how they are being applied within operations and their potential impact. This will also require analyzing what key vendors and software-as-a-service platforms they are using.

Gartner’s “Top Strategic Technology Trends for 2022” is a good place for risk managers, agents and brokers to start learning about advanced technologies that could affect their enterprise. This background will enable them to converse with business unit personnel about their potential use. Whether it’s self-driving vehicles, drones, AI, metaverse, data analytics, autonomic systems, hyper-automation, or other forward-looking technologies, companies need to keep their technology risk management focused on the horizon. These discussions may help drive new lines of coverage or identify specific policy wording needed in current coverage. At a minimum, they will help organizations be better prepared for managing risks associated with advanced technologies.

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