Blockchain, Web3

What You Should Know About Regulations in a Web 3.0 World


As a new computing revolution starts, we are building an interactive, virtual world where humans appear and function in the form of digital avatars. We reside in this virtual space just as we inhabit the reality of our lives. We work, play, shop and interact socially in the metaverse.

Several up and coming technologies such as blockchain, cryptocurrencies, augmented reality, virtual reality, and non-fungible tokens are responsible for the next iteration of the internet, Web3 or Web 3.0, a version of the decentralized internet also called the metaverse.

Gartner predicts that 25% of consumers will spend over one hour each day in the metaverse by 2026, and 30% of organizations globally will ready their products and services for the metaverse around the same time.

Naturally, the evolution of the internet doesn’t come without risks. Therefore, regulatory bodies are getting up and ready to lay down necessary laws and regulations to ensure the next version of the internet is safe and accessible.

Related Reading: The Current State of DeFi and Potential for Startups

Is Metaverse Regulation Different From Social Media Regulation?

The arguments made to regulate social media can act as a foundation for the legal and philosophical regulatory bases for the metaverse, as detailed in the research titled “Regulation of the Metaverse: A Roadmap” by Louis B. Rosenberg, Chief Scientist, Unanimous AI, San Francisco.

The research mentions a study of the adverse effects of social media conducted by the Commission on Information Disorder formed by the Aspen Institute. For six months in 2021, a diverse group of experts from academia, industry and government summarized the harmful effects of social media in an 80-page report. 

They found that “social media contributes greatly to misinformation and disinformation which have become a force multiplier for exacerbating our worst problems as a society.” While there may be many ways of tackling the issue, regulations are a part of the action.

Yale Law professor Jack Balkin says social media companies act as key institutions in this century’s digital public sphere and that it may not work properly without trustworthy institutions.

Clearly, the metaverse will be a successor to the public sphere created by social media today, making it all the more immersive and critical to safeguard.

Dangers to Users in the Metaverse

The aforementioned research outlines three M’s of the key dangers facing users in the virtual world-

  • Monitoring users in the metaverse – In recent years, technology companies have made it an objective to study and track user behavior on the two-dimensional internet to influence it. Influence is made by advertising and marketing to different consumer segments with personalized products and services. Unfortunately, we are still barely balancing personalization with the privacy of data and user information. In the metaverse, clicks and scrolls become in-depth, critical data points such as the avatar’s location, actions and moves in the metaverse. There is little limit to what organizations can track in the metaverse. Having users’ vital signs and emotional states figured out, companies can manipulate users to a frightening extent.

Related Reading: Personalization Vs. Privacy: Where’s the Fine Line

  • Manipulating users in the metaverse – Advertisers and marketers make it their full-time job to skillfully influence users on a broad scale as well as drive personal wants and needs on an individual scale. This pervasiveness of messages strategically placed to manipulate human emotions puts users in the metaverse in a vulnerable state. As corporations gather intimate emotional and psychological data from each user’s movement in the metaverse, their potential for manipulation increases. Instead of seeing pop-up videos and advertisements in the two-dimensional world, digital avatars will be targeted by life-like people, products and activities that blend into their virtual reality. Agenda-driven conversational bots and AI-powered algorithms will be extremely persuasive in the metaverse due to the vast amount of information they will hold around each user’s beliefs, inclinations, tendencies and interests.
  • Monetizing users in the metaverse – Every platform provider and player in the metaverse perceives a return on investment high enough to drive substantially expensive innovation and disruption today. If the attention of the users is the real currency, without proper regulations, we could be looking at a far worse state of advertising and monetizing in the metaverse than in Web 2.0 today. One possible solution to this issue is for users to be willing to pay for access to the metaverse instead of selling their attention to third-party advertisers.

Related Reading: Web 3.0 & Metaverse: Key Challenges

Regulatory Challenges and First Steps in Web3.0 

Investor protection

Blockchain technology, virtual tokens, cryptocurrencies and virtual real estate are only a few lucrative investment avenues that have raised concerns among regulators. Preventing fraud and protecting investors has evidently become a priority for organizations in the U.S., such as the SEC and CFTC. Recent actions by these organizations suggest that they may incline on the side of too much regulation, hindering the development of the metaverse. These bodies want to force the metaverse into compliance with known legal structures, no matter how little resemblance they bear.

According to SEC member Hester Pierce in a recent speech, “Regulators…tend to be skeptical of change because its consequences are difficult to foresee and figuring out how it fits into existing regulatory frameworks is difficult”.

The SEC’s litigation against Ripple has made it apparent that it will continue to wage war on innovators. However, we do need regulations in the metaverse because the currencies exchanged in the virtual world are not traditional. Meaning, that there are accounts and wallets to store these new-age currencies but no government-backed protection from fraudulent behavior or loss.

And, the value of a non-fungible token or real estate is less tangible than in the real world. These products may appear to have an inherent value, but they don’t. There are no laws protecting a consumer’s right to a refund or other protections laid out in the real world. The key will be to regulate without hampering progress.

Privacy and disclosure laws

One of blockchain’s lucrative characteristics is that it empowers people’s privacy and security regarding their personal information. However, that comes at the cost of complicating tracking criminals and fraudulent activities.

Many potential privacy issues relating to biometric data such as facial expressions, voice recordings and fingerprint images pose another major security risk.

Furthermore, how much disclosure governments require will affect individual privacy and how the technology takes shape in the coming years. Heavy regulations could hamper development, and fewer than needed regulations would increase the risk of criminal activity.

Regulatory action may involve restricting the storage of low-level data for more than short periods of time, including data that’s necessary for users to navigate the virtual world and notifying the user of a platform’s monitoring of the duration and direction of a user’s gaze, for instance.

Jurisdictional concerns

Finally, regulators are worried about jurisdictional concerns that raise the question of who has control in a decentralized internet, how individual laws are applied and to whom, if the new internet evolution will become its own jurisdiction and more.

The Need for an Open and Accessible Metaverse

A handful of companies rule the internet of today- Google, Meta, Apple and Microsoft. These companies grew increasingly powerful, and the U.S. government only recently started antitrust proceedings against technological giants.

It’s ripe time to ensure that we don’t repeat our mistakes in the new version of the metaverse. These giant corporations again possess the potential to tip the metaverse in their favor. Therefore, the metaverse must be regulated to some extent.

According to Don Heider, Executive Director, Markkula Center for Applied Ethics at Santa Clara University, “…open source and open access is always best because it facilitates more people creating, and doing so largely for the common good and social justice. Technology should generally be as widespread and accessible as humanly possible”.

Heider added that metaverse governance would exhibit the same openness, consisting of a joint collective where governing bodies work alongside industry groups and citizens to form a collective that lays down principles and standards.

Accessibility would be a critical factor in building the metaverse for fairness and inclusion. Still, 98% of websites in the 2D internet version are inaccessible to the disability community. This can change if the metaverse is designed for accessibility starting now.

Safety and ethical design standards hold special value in the metaverse that aims to emulate life as we know it as a digital reality. Individuals with mental health issues also stand at the risk of being traumatized in the metaverse through many possible risks.

Organizations such as the Open Source Initiative, Oasis Consortium and many others are focused on discussing the implications, research and principles that apply to the metaverse and how it enables openness and sharing of information in ethical ways. Such dialog can open up avenues for ideation and execution.

Related Reading: How the Metaverse Will Transform the Way We Work

Three Steps to a Metacode of Conduct

A recent Forbes article lays down three steps to creating the principles of operating in the metaverse, which may require trial and error but serve as a starting point-

  • Set standards – The most active players in the metaverse could create an independent industry body and build codes of conduct permitted in the metaverse. Four critical elements of the metaverse would include- KYC requirements to authenticate the identity of users in the metaverse, safe spaces that boost mental wellbeing and AI tools to monitor PTSD and addictive behaviors, the ability to opt into and frequently consent to certain levels of content and maintaining a cross-industry database of malicious actors and their real-world identities.
  • Drive financial best practice – The financial risks in the metaverse should be well managed by publishing exchange fees when stablecoins are transferred in and out of meta wallets, posting real-world collateral for significant trades and loans, outsourcing ID verification to third parties and providing insurance against personal losses and third-party injuries.
  • Give consumers clear choices – An industry body could stamp virtual worlds that are self-regulating and adhere to prescribed standards to show that they are safe places to visit. The key to self-regulation in the metaverse could be improving transparency, accountability, credibility and best practices. Moreover, users should be made aware of the consequences of the absence of certain safeguards.

Regulations Might Shape the Metaverse

At the recent Osborne Clarke’s Metaverse Week event, a case study of a live concert in the metaverse spotlighted the new regulations and legislations bound to affect creators and users in the metaverse. These included Media and IP, Data and AI, Content and interaction and action against toxic behavior.

Despite the best intentions and positive outlooks of Web2.0, social media has significantly contributed to social and political issues globally. We now stand at the cusp of another breakthrough moving from flat internet to an immersive, 3D internet.

Legal shifts and actions have the potential to shape Web3’s development in the years to come. However, a balance is required in ensuring the privacy, safety and security of users in the metaverse and keeping the virtual world open and decentralized as it is supposed to be.

Necessary regulations must be rolled out promptly in the metaverse before the problems become an ingrained part of the metaverse infrastructure. We need to make sure business models don’t come around before regulations so that they are rendered impossible to unwind.

If you’re a startup on a lookout for a trusted Web3 service provider, get in touch with our experts today.

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