The metaverse and its use-cases

There are many ways to describe the ‘metaverse’: a post-reality universe that allows several users to participate in a shared virtual environment, an immersive 3-D extension of the internet itself, or even as the next frontier of the digital economy. In due course, the metaverse may align itself with its initial usage, as described in Neal Stephenson’s 1992 sci-fi novel Snow Crash, as a vast digital environment where users could interact with each other. While the Metaverse may escape the contours of a universally accepted definition (for some time at least), it will, by present trends, continue to capture popular culture, imagination and increasingly, various aspects of life. As early as 2005, the metaverse had begun to be considered as something more than simply being centered around MMORPGs (or massively multiplayer online role-playing games). Today, the Indian market already bears witness to the proliferation of augmented reality, virtual reality, and elements of the ‘metaverse’ across several B2B, B2C and C2C applications. Indian tech firms and start-ups have been quick to respond.

Developments in the B2B, B2C and C2C

In February 2022, Infosys launched a metaverse foundry to help firms create a unique metaverse environment, or to integrate user experiences with an existing one, to support their businesses. Several start-ups and incumbents in the IT sector have identified other potential B2B applications that are immediately adoptable: for example, the development of ‘digital twins’ – where a digital replica of a physical space, processes, and behaviour of its participants, allows companies to make predictions and decisions with accuracy. TCS was reported to have helped the Pune Municipal Corporation with the construction of a digital twin to improve its COVID management. Infosys has assisted a European pharmaceutical company in creating a digital twin of their vaccine lab, which allows quality engineers to access critical polio vaccine culture data for operational analysis. Research and industrial processes have been using digital twinning for various purposes over the past several decades, especially in aerospace, automotive and exploration of natural resources, yet the increased attention, channeling of resources and alignment of business strategies towards the metaverse is likely to give a substantial boost to developments.

The B2C use-cases are also witnessing rapid progress: virtual reality stores now allow retail shopping to mimic store experiences in a manner that is as close to real life. NFT (or non-fungible tokens) marketplaces may allow consumers to purchase, access and experience NFTs in the virtual world. Several start-ups are focusing on allowing consumers to build their digital ‘avatars’ that they can control to navigate the metaverse(s). The Australian Open recently partnered with Decentraland to host the event in the Metaverse, by virtually recreating key areas, including the iconic Rod Laver Area and Grand Slam Park. The Warner Music Group has announced its intent to host concerts in the metaverse. The C2C market is likely to be underpinned by a growing level of decentralisation of marketplaces. As unique NFTs and metaverse items emerge, there is likely to be a marketplace where users might be able to trade goods, through a digital token native to the metaverse (or several metaverses), without specific interference from an intermediary. The metaverse will also allow users to collaborate, work, and otherwise interact in the virtual world, and in its basic form, these activities are likely to mimic physical interactions in the real world.

These developments have led to the emergence of a new kind of economy, the Direct-to-Avatar (DTA) economy, which focuses on digital products and services for the avatar – companies and marketplaces have developed for the ‘skins’, real estate in the metaverse, and other customizable and unique items. Due to its entirely digital nature, several supply chain issues for typical businesses: logistics, delivery, packaging etc., are completely bypassed, as well as giving rise to new opportunities for creators and digital gig economy work. One particular sector where such DTA products and services have been increasing in transactional value and volume is in the gaming industry, with tokens that lead to in-game upgrades being especially lucrative in the past few years for video game developers. The digital human avatar market already had a market size of USD 10.03 billion in 2020, and is expected to reach USD 527 billion in 2030.

Legal considerations

The creation of an alternative virtual environment that will mimic a wide range of interactions between people in the physical world is undoubtedly expected to raise several important legal considerations that jurisdictions may not yet be fully ready to address. For the developers and creators of the metaverse, intellectual property remains a key priority – in an environment where multiple users and creators interact to change the surroundings and create new content, authorship and ownership of particular objects may be difficult to establish under certain circumstances. If the avatars are, by design, pseudonymous, this may also lead to challenges in enforcement, especially without the cooperation of the administrator of the metaverse or if the infringer of an intellectual property is outside a particular jurisdiction. Metaverse-related intellectual property issues have already been brought before courts: previous instances of digital replicas of Swiss watches, including Cartier, and shopping bags by Hermès on platforms like Second Life have been well-documented and have been the subject matter of intellectual property infringement suits. In the Indian context, however, such challenges have not yet been judicially tested.

For the users, since almost all activities in the metaverse will be in environments owned and controlled by specific entities (including decentralised organisations), data privacy and protection become particularly important. As the value of digital goods and services deepens, the issue of ownership will become important, similar to physical goods. In matters like virtual real estate, or even high-value items or NFTs, it becomes important to establish ownership and have an enforceable set of rights against such assets. Smart-contracts and decentralised ledgers acting as evidence of ownership could alleviate some of these concerns, by allowing for an on-chain authentication process and grievance redress mechanism. The proposed Indian legislation on data protection, including personal data, is awaited, and will cover the rights of the natural person to whom the personal data relates to (as per the definition of ‘Data Principal’ under the Data Protection Bill, 2021), but it remains to be seen to what extent such rights and protections may extend to digital avatars.

Unique legal and design challenges arise in the context of B2C and C2C metaverse applications: when there are a series of metaverses – each with their own controlled environments, rules, designs and ownership, the degree of independence and inter-dependence becomes an important point of consideration. In legal terms, this may require voluntary harmonisation of standards towards interoperability of environments to ensure that digital avatars, goods, services, and payment channels are mostly usable inter se without a drop in its functionality. Whether this is done almost entirely voluntarily, or through self-regulatory organisations remains to be seen.

Integrating the metaverse into the digital economy rails

To support a digital economy of the scale and nature of the metaverse, several key policy and regulatory actions are necessary. First, on-ramps and off-ramps that facilitate a bidirectional conversion between fiat money and digital tokens are key. Given that the metaverse is likely to host users domiciled across different economies and jurisdictions, a common digital ‘currency’ is likely to be essential. This in turn requires regulatory certainty about the treatment of digital tokens across various jurisdictions. Restrictions on purchase, use and transfer of tokens is likely to affect transactions that may be conducted on the metaverse, and may affect the functionality on offer. As an example, in jurisdictions where regulatory approaches towards crypto assets and digital tokens are highly restrictive or prohibitory, such as in China, the metaverse could look very different and carry restrictive functionalities. Against the backdrop of the Union Budget 2022-23 announcement on taxation of ‘virtual digital assets’ at 30%, conversion of digital tokens into Indian rupee and vice versa may face headwinds, even if there is no specific regulatory bar applying on such conversions at the moment.

Second, payment channels within the metaverse between users and businesses are important to sustain digital economic activities. Whether the payment systems are likely to be centralised (within the control of the administrator of the metaverse) or decentralised (similar to cryptocurrencies), remains to be seen, although it is likely to be the latter. In both cases, the metaverse may require legal rules pertaining to settlement, finality of transactions, reversing fraudulent transactions, traceability, and grievance redress.

It may also be important to consider measures to keep such payments and remittances within the boundaries of the Indian legal framework. As the ongoing conflict between Russia and Ukraine shows, economic sanctions in the real world were bypassed to a certain degree through the use of cryptocurrencies and stablecoins. The presence of a robust and widely accepted remittance system in the metaverse may allow bad actors to bypass limits on outward foreign currency remittances (under the Liberalized Remittance Scheme of the Reserve Bank of India or otherwise).

Third, positions on intellectual property rights associated with various aspects of the metaverse – including on ownership and enforceability remain important for users to have trust, and for companies to invest into the orderly development of the metaverse. Finally, data ownership and privacy concerns must be considered.

It will be interesting to await the integration of central bank digital currencies with metaverse applications. Although CBDCs between different jurisdictions may not be freely convertible (as is the case with the physical Indian rupee at present), channels for their acceptance may grow if they are capable of being remitted easily across borders (one of the issues that the Digital Rupee may aim to solve).

Way forward

While the metaverse and its applications are in nascency, their tremendous scope for growth requires that Indian regulators, including the Ministry of Electronics and Information Technology, the Reserve Bank of India, and the Securities and Exchange Board of India, give due regulatory consideration to support the new opportunities arising out of the many use-cases from the metaverse, especially to support fintech firms and workers in the digital gig economy space. Given India’s strong IT sector and workforce, the country may be able to position itself as service exporters, contributing towards the development of metaverse globally. However, this needs to be underpinned by robust policies on payments, remittances, conversion of the domestic currency into digital tokens, and a clear policy on digital assets.