No country has jurisdiction over the metaverse (yet)

Nadim Bardawil Partner nadim.bardawil@bsabh.com

The metaverse. It’s literally, virtually impossible not to have heard about it. Have you really not yet worn your VR haptic gloves and headset and gone e-cruising? Partner, Nadim Bardawil, speaks to Middle East Economy about the risks the metaverse carries.

From hanging out with your avatar friends, buying avatar wearables at e-shopping malls, or even purchasing a home, property, or setting up a business, it’s all starting to take place via a computer-simulated reality on the metaverse.

And so far, it has kept governments’ prying eyes at bay.

“The UAE hasn’t yet recognized the metaverse as a separate or different jurisdiction or as a standalone jurisdiction, or even, a jurisdiction where current UAE laws would apply,” Nadim Bardawil, partner at DIFC headquartered law firm BSA Ahmad Bin Hezeem & Associates LLP, told Economy Middle East in an exclusive interview.

“That’s one of the major legal issues with the concept of the metaverse, which is jurisdiction and where it lies.”

If it hasn’t yet clicked, it means that the UAE, or anywhere that a metaverse operates, has no control over sales, trades, or commercial activities on this newest e-market.

It means no taxes or VAT applies, a reason to rejoice, but it also means you’re there to fend for yourself in case something goes wrong, and a lot can go wrong.

But officials are watching, from afar so far, waiting for the one thing that gets them involved: Money, the fiat kind, not crypto.

Buying and selling on the metaverse

The metaverse concept works the same as that of the internet or social media platforms, in the sense that those realms are disconnected from countries’ jurisdictions.

“Should one commit a financial action deemed illegal or criminal, no one knows where the perpetrator is located or where the crime occurred. As such, enforcing a country’s laws on such actions is hard or very unlikely to happen,” Nadim explained.

The metaverse is also where payments are made in cryptocurrencies as opposed to fiat. That, in and of itself, creates another issue for government authorities.

For example, a transaction made on Decentraland would require that metaverse’s own currency, MANA coins. If you’re in the Sandbox metaverse, one would need SAND tokens to transact, and with Facebook’s metaverse Meta, you’d need a FACEMETA token, and so on.

“If you are in the UAE and logging into Decentraland and using MANA, someone could potentially hack your digital wallet and steal those coins. And assuming you live in the UAE, can you file a claim in the country?” asked Nadim

Good question, with no easy answer. One may or may not consider cryptos as digital assets, but one thing they are for sure is data, and data theft is punishable. But how to punish a party to a transaction that happened anonymously in a decentralized and encrypted fashion over the blockchain, with no ties to banks?

Who’s there to protect you on the metaverse?

Today, metaverse believers are out in force, setting up digital wallets and crypto buying digital properties, building businesses, leasing virtual lands, and creating fashion and technology districts, among others.

“That’s what’s unique and exciting about the metaverse. But if you are a UAE business and want to set up a metaverse store, you have to understand that the store will not be regulated by local UAE authorities,” Nadim explained.

“And just as laws like VAT won’t apply to you, the same laws can’t protect you as well, since authorities don’t (yet) issue licenses for businesses on the metaverse,” Nadim explained.

Nonetheless, a UAE store on metaverse becomes an asset that belongs to you (the investor), personally, or via a corporation that you are running. And since all the transactions are virtual, anonymous, and encrypted, then no tax, vat, or government authority can come in armed with the ability to audit this business.

Authorities are staying on the sidelines until this happens…

When new technologies are introduced, governments typically provide them room to breathe, space to grow, before jumping in early on in the game and constricting their growth.

In the case of the metaverse, the same applies.

“This is true until auditing officials start to notice drastic changes in the volumes being transacted on the metaverse,” Nadim indicated.

Here’s a potential scenario.

Let’s say a business on the metaverse engages in several transactions and is able to generate large amounts of cryptos, then one day decides to exchange those tokens into fiat and deposit them at a local bank.

“I’m sure at that point in time, questions will be asked about the source of those monies, and that’s the stage when an audit might take place, or at least banks start to question the source of funds,” Nadim assures.

“People might already be doing business in crypto and only converting small amounts of it at a time in order to avoid attracting unwanted attention.”

Consumer protection issues

When it comes to the metaverse, there are inherent risks. Aside from the unregulated environment, a virtual store without a real-life counterpart is a recipe for trouble.

“If I buy something on the metaverse and I have a complaint but no one shows up for days, weeks, and months to address my complaint, it only makes sense for there to be a brick-and-mortar store to fix that,” Nadim said.

Not having a real counterpart for the business could be asking for trouble.

Another issue is identity. Just like social media account holders choose how much info to share, having data protection laws allowing people to remain anonymous, the same applies to Avatars, be it for merchants or consumers.

“You don’t know who you are doing business with. You could be dealing with a drug lord sitting at his mansion, or a 12-year-old selling from his parent’s home,” Nadim quips.

“You need to be able to vet the party you are transacting with. Smart contracts, drafted properly, and that are publicly viewable and understandable, can help address that problem,” he advises.

e-import/export?

What happens when metaverse transactions turn into trades involving imports and exports between affiliated or non-associated metaverses?

“There will need to be a way to link all these metaverses together. A battle for the most optimal platform can take place, and where tokens become somehow interchangeable to facilitate trade,” Nadim opined.

So go ahead have fun out there on the metaverse. The key thing today is to make sure that your data on the metaverse is safe and secure.

As for the transactions you make there, well like the old adage says: buyer beware.

Read the full article by Middle East Economy.