Virtual Land in the metaverse

We’re witnessing a boom in virtual land in the metaverse. Since Facebook changed its name to META at the end of 2021, clearly focusing its business strategy on the metaverse, there’s been an unprecedented increase in the sale of real estate in the metaverse. The metaverse is seen as one of the next big turning points in Web 3.0, aimed at replacing social networks.

Major brands and some investors are rushing to acquire a share of virtual real estate while it’s still accessible, but mostly to not miss out if the metaverse becomes mainstream in the coming years.

In December 2021, a shopping mall – called Metajuku – in The Sandbox metaverse was sold for over USD4.3 million to Republic Realm. In the same month, PwC's Hong Kong subsidiary bought a large virtual plot of land in The Sandbox.

Virtual real estate is a combination of real-world services in the blockchain world. As the world becomes more digital and embraces blockchain technology across a wide range of sectors, it’s hardly surprising that the real estate market is following the trend.

Real estate, a key element of the metaverse

The metaverse is meant to allow users to find friends and meet people of all kinds, but the world is above all designed for spending money. Everyone’s a consumer in this universe and the same economic rules and habits of our real environment can be found.

Like in the real world, buying virtual land in the metaverse allows you to erect a building on it. Strictly speaking, these are not homes, but places to represent a brand or create experiences – which will of course be monetized – for visitors/users.

At this early stage, it’s mainly a matter of buyers occupying the virtual land and calling attention to their brand. Many also invest in the hope they will be able to rent out the land or sell it at a higher price once the metaverse has grown and there are more users.The use of virtual properties by brands allows them to market services, host virtual product launches, organize events and provide unique experiences for users. These digital properties represent a profitable investment opportunity for real estate investors. Virtual world properties can be built, transformed or rented in virtual worlds, just like in the real world. Like in the tangible, physical world, a broker industry is starting to grow in the metaverse, proposing a range of services including the usual purchase-sales agreement, development, leasing, tenant representation, property management, and advertisement services.

Virtual real estate is the first brick in the construction of this world. To ensure that the shops in which consumers will spend their money exist, it’s necessary to find land on which to build buildings and shops.

This means that without real estate, without land, without construction and without buildings, the very essence of this virtual world collapses. This is why real estate is so central in the metaverse and why it’s attracting the interest of a growing number of investors.

Investing in metaverse estate

Location is the priority

As with a real estate purchase, you have to think about resale.

Like physical real estate, metaverse real estate is more or less expensive depending on where it’s located. The fundamentals of real estate apply, starting with location, which is a crucial point.

Metaverse maps resemble those of a physical territory, which means that if you buy today in the middle of nowhere, the price of land will not be the same as in Ibiza (for example) because of the density of users, shops and amenities. In the metaverse, the rule is the same and it’s better to bet on a trendy location that generates traffic. The price will be higher.

Risky investments

Where real and virtual real estate clash is that a long-term home loan is possible in the real world because the property is still supposed to be there in 30 years. In the metaverse, which is still very new, it’s difficult to predict what this trend will become in the coming years. If a platform closes, the land will be lost. This would explain why plots of land on The Sandbox are selling well even though they are more expensive: it’s seen as the metaverse least likely to disappear.

Moreover, the scarcity of land is artificially manufactured by the platforms. There’s nothing to stop them, technically, from adding as much as they want if one day the metaverse becomes popular. Obviously, this would have an impact on prices.

A transition from "e-commerce" to "v-commerce" (virtual commerce) using NFTs

The metaverse and Non Fungible Tokens (NFT) are inextricably linked.

According to the CEO of Republic Realm, Janine Yorio: “When you buy metaverse ‘real estate,’ you are actually buying a dedicated block of code inside a video game. It’s software, not real estate. It’s something like a banner ad on a website in that it has a fixed location, a dedicated space.”

In law, the particularity of NFTs (blockchain) is to allocate a singularity to digital goods. When purchasing a property in the metaverse, the deed to the property is represented by a unique blockchain code. Basically, NFTs use blockchain technology to provide a digital asset to individuals as owners. Through blockchain technology, the buyer can trace the chain of ownership and know who bought, sold or owned that digital parcel.

In addition, it’s worth mentioning that a real estate investment in the metaverse requires the use of the specific cryptocurrency imposed by the metaverse operator and thus the acquisition of this cryptocurrency based on blockchain technology.

Dependence on the metaverse service provider

Basic contractual considerations

The peculiarity of land on the metaverse is that it only exists to the extent that the metaverse service provider is still able to operate the metaverse.

Regardless of the nature of the right granted when a user buys a plot of virtual land on the metaverse, there is, in fact, a dependence on the metaverse service provider that is not found in real-world.

Metaverses are primarily products or services set up by private operators. Therefore, as in the case of social networks, it will be the metaverse's terms of use (or the metaverse's community rules), which form the contractual framework, that will apply.

It’s wise for users to protect themselves against this dependency and to check in the terms of use of the metaverse service provider whether the issues of availability, performance and reliability of the acquired rights are addressed.

Practical experience with IT outsourcing contracts can be decisive here.

For example, it’s common practice in IT contracts to have formal service level agreements to define the expected level of service. In any case, it’s sensible to look at the following aspects:

• guaranteed availability of the metaverse to the user (at least on fixed time slot);
• modalities of suspension of the service in case of maintenance. It’s customary to foresee a maximum duration for the suspension for maintenance and a reasonable timeframe to inform the user of such maintenance;
• guarantee concerning the level of performance of the metaverse (eg graphics, processing speed).

End of a metaverse

A crucial question should be: what happens to the virtual land if the metaverse service provider stops its activities, goes bankrupt, or any other event leads to the disappearance of the metaverse?

There’s no straightforward answer since the right acquired by the user remains, at least as the law stands, a personal right, ie a right of claim against the metaverse service provider.

Outside the contractual scheme of the metaverse (ie the community of metaverse users and the metaverse provider), the acquired right on the virtual land is, in principle, not enforceable against anyone.

In such case, one could imagine a collaboration between metaverse service providers, providing that the right of a user could be transferred, in the event of the failure of one, to the metaverse of the other. But how could this be applied to a virtual parcel which intrinsically depends on a virtual land specific to each metaverse?

Necessary interoperability between the different metaverse operators

While it’s true that the metaverse is a virtual space, similar to that of our real world, the first limit will be collaboration and interoperability between the different metaverse operators. If the aim of the metaverse is to enable people to interact in a digital world, each metaverse must be accessible from all devices. Furthermore, the question arises as to whether the standards will be laid down by the various operators or whether it will be necessary for national legislators or the European legislator to impose standards to enable interoperability between the various operators in view of the protection of the consumers-users of the metaverse.

The legal framework for the social and economic interactions generated by the metaverse

With the rise of a parallel universe which is intended to be similar to the real world, the associated legal issues are inevitably as numerous as those in the real world. However, the legal questions or issues raised by the metaverse are not truly new.

While it’s true that the metaverse creates a new virtual world, it would be wrong to believe that no laws or regulations apply to the events that take place there. Most of the existing legal rules apply a fortiori to the metaverse, as it’s a derivative of our physical world and the operators and users remain subject to the legal constraints of the real world.

The debate is certainly not clear-cut as to whether a virtual world presupposes a specific virtual law. But since the metaverse is essentially about social and economic interactions, the need for law and regulation is indisputable.

In the absence of (unlikely) precise and complete international regulations governing the internet, blockchain and metaverse, lawyers will have to refer to the rules of private international law and all the national texts – sometimes by analogy while waiting for new standards – to find the legal response to each situation.

In Summary

The development of blockchain technologies and NFTs should accompany the deployment of the metaverse. However, this raises a difficulty: an avatar will be able to acquire virtual goods, but it’s not certain that it has full ownership of these goods. The metaverse belongs to a certain operator, while the rights to the NFTs are vested in the user, who is subject to the terms of use of the metaverse platform. How can full ownership of an asset be obtained if access can be blocked at the operator's discretion?Rules applicable to real estate law and the practice derived from this law and the real estate market will undoubtedly influence the players in the metaverse. But this is limited by the property right in the metaverse: a personal right to one's virtual property and not a real right to a building in the real world.

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¹How to Buy Metaverse Real Estate… and what to pay for it. Written By Janine Yorio, CEO of Republic Realm
²“Real estate is property in the form of land and buildings, rather than personal possessions” (COBUILD Advanced English Dictionary, Copyright © HarperCollins Publishers)