In this multi-part series, The InsurTech Lawyer shares some thoughts on the opportunities for insurers in the Metaverse. Originally presented at the Association Internationale de Driot des Assurances (AIDA) conference in Zurich, 6-7 October 2022.
Metaverse will act as a virtual space beyond (meta) our fractured and hurtful reality… the catch is that we will get a commons which is privately owned, with a private feudal lord overseeing and regulating our interaction.
— Slavoj Žižek “Boringly postmodern and an ideological fantasy”, The Spectator, January 2022
This is not good. Worlds are colliding!
— George Costanza, Seinfeld Season 7, The Pool Guy
Introduction
In 1995 Microsoft co‑founder Bill Gates went on the CBS program “The Late Show with David Letterman” to promote Microsoft’s newly launched Internet Explorer.[1] There was much laughter during the episode in which Gates sought to persuade an incredulous Letterman that the internet was the way of the future and that one day people would be sending e-mails to each other and watching baseball games through the internet. Gates did not have much success in convincing Letterman during the show but fast forward to 2022 and Gates’ vision has proved true.
The recent investment in Web 3.0 technology is nothing short of phenomenal. In 2021, a record $30 billion was invested across blockchain and cryptocurrency projects.[2] However, despite these astounding figures, much is yet to be developed, explored and applied in a range of contexts across the economy. Notwithstanding it is early days, a number of global companies have already embraced Web 3.0 and have either launched or are planning to launch in the Metaverse. These include Disney,[3] Nike,[4] Gucci[5] and JP Morgan.[6] Whether these major companies’ investments in the Metaverse will be sustained in the long term is yet to be seen. However the initial forays into Web 3.0 technology should not be ignored. Much like Bill Gates’ vision back in 1995, it is possible that in just a few years’ time Web 3.0 technology will be more commonplace than we had ever imagined.
While technological advances in Web 3.0 technology continue at great pace, so do the legal ramifications. Securities class actions involving crypto are overtaking traditional actions in both magnitude and frequency,[7] and more companies are seeking cover for their crypto exposures. Such liability not only relates to loss/theft of digital assets,[8] but increasingly liability arising out of Web 3.0 operations.[9] The United States has emerged as fertile ground for such legal proceedings. However, not many cases have proceeded to judgment and there remains limited judicial guidance. It is likely that litigation will also increase in the rest of the world as Web 3.0 companies mature, losses emerge and regulatory scrutiny increases.
This paper explores some of the liability issues that may arise when companies seek to use Web 3.0 technologies and how financial lines insurers, as centralised financial institutions (CeFi), might prepare for, and respond to, these novel risks. Web 3.0 concepts such as cryptocurrency and NFTs support some fundamental operations in the Metaverse, so in exploring these liability issues insurers can better understand how they might insure their client’s Metaverse exposures.
While these risks are new, they have their roots in traditional risks and financial lines insurers should not shy away from insuring them just because they involve new technologies. We will also explore the limited but evolving case law in this area and consider the potential impact of recent proposals for law reform.
There are also other risks that may arise including public liability risks and first party cover for loss/theft of digital assets. Furthermore, Web 3.0 and the Metaverse can provide opportunities for insurers to promote and sell their products virtually, and has also led to some decentralised finance (DeFi) risk transfer products. However, our focus in this paper is on opportunities for financial lines insurers and it is beyond the scope of this paper to explore these other concepts that deserve a separate paper in their own right.
What is Web 3.0? What is the Metaverse?
There is no universally accepted definition for Web 3.0 however most definitions generally accept that Web 3.0 is the third generation of web technology.[1] Web 2.0 is the internet as we know it today where users can publish information on their own website, interact with others and collaborate with each other using an online interface.[2] A key feature of Web 2.0 is that websites and other online applications must have some form of centralised database in order to retain and serve data to customers. This means that Web 2.0 relies on the principle of a central authority/repository of information. In contrast, Web 3.0 is decentralised and has been described as the ‘third iteration’ of the internet, where the internet’s structure is blockchain oriented.[3] Instead of a centralised database, there is a distributed ledger that stores information and that can be used as a single source of truth. The technology is known as Decentralised Ledger Technology (DLT). Accordingly Web 3.0 is based on the principle of self‑governance where the participants operate in the decentralised realm. Intertwined with this is the use of cryptocurrency. Cryptocurrency is a key feature of Web 3.0 applications.
The key properties of blockchain, a type of DLT are that it is:
distributed, meaning all network participants have a copy of the ledger;
immutable, meaning records are irreversible;
time stamped, so that all transactions are recorded with a time stamp;
anonymous, such that the identity of participants does not have to be known;
encrypted, meaning records are secure; and
programmable, so smart contracts can be used to facilitate transactions.[4]
Related to Web 3.0 technology is the concept of the Metaverse. Similar to the term ‘Web 3.0’ there is no universal definition on what is the ‘Metaverse’ and attempts to find one prove elusive. The Metaverse is, at this stage, just a concept but there is no shortage of futuristic terms used to describe it. The Metaverse has been described as a ‘computer generated universe’ where the physical and the digital are intertwined.[5] It has also been described as a ‘post reality universe, a perpetual and persistent multiuser environment merging physical reality with digital virtuality’,[6] or in another case a ‘mirror world’.[7]
The most tangible representation of the Metaverse is a video game where people are represented by avatars. To access the Metaverse, users may use a virtual reality (VR) headset that immerses the user into the 3D virtual world. The Metaverse is related to Web 3.0 because it is developed on a blockchain, for example, the Ethereum blockchain. Ownership of virtual assets that are purchased in the Metaverse are also recorded on the blockchain through non-fungible tokens (NFTs) so that there is a single source of truth for all the assets held by any particular person.
The Metaverse can be used for a wide range of activities, including:
buying and spending digital currency;[8]
buying and selling NFTs;[9]
gaming;[10]
concerts and entertainment events;[11]
online shopping;[12] or
as a workplace.[13]
The Metaverse cannot exist without some Web 3.0 fundamentals, including cryptocurrencies and NFTs. Without cryptocurrencies, users will not be able to transact in the Metaverse. Furthermore, NFTs have multiple uses in the Metaverse including to denote ownership (for example in Metaverse land or art) or to gain access to exclusive experiences in the Metaverse or the real world.[14] A number of Metaverse worlds are also governed as decentralised autonomous organisations (DAOs).[15] Accordingly, financial lines insurers have an opportunity to protect entities in the Metaverse by insuring the liability arising from these new concepts.
Liability issues for insurers
Financial lines insurers are understandably wary of the potential liability issues they face from insuring companies that have Web 3.0 and Metaverse exposures.[16] It is hard to ignore the large number of legal proceedings launched against crypto companies.[17] Liability issues can be classified into two categories and, taking a closer look, we can see that many of these risks have their roots in the real world, in matters that may appear less alien to financial lines insurers.
The first category, where most litigation activity has taken place to-date, relates to the intersection of the virtual world with the real world. At this point, organisations bridge the gap between the real world and the Web 3.0 universe. The types of liability that arise in this area includes directors’ and officers’ liability associated with companies exposed to Web 3.0, securities class actions against such companies relating to disclosure, conduct and/or asset classification litigation, cyber liability and professional liability arising from providing Web 3.0 services such as code development and custodianship.
The second category relates to disputes that arise when using Web 3.0 technologies where the dispute relates entirely to things within the Web 3.0 universe. These might include copyright infringement claims in the Metaverse, actions against platforms and developers, and claims between users that might be settled on the platform.
Go to Part 2 – Legal Proceedings relating to Crypto Assets
Tim Chan is an insurance & insurtech lawyer at global law firm Norton Rose Fulbright and Founder of The InsurTech Lawyer blog. He regularly advises insurers and startups on emerging legal issues affecting the industry. Follow Tim on Twitter: @timinsydney
[1] Usman Chohan, ‘Web 3.0: The Future Architecture of the Internet?’ (2022) Critical Blockchain Research Initiatve, Discussion Paper Series.
[2] Ibid.
[3] Ibid.
[4] Nivetdita Day et al, ‘Quantum Solutions to Possible Challenges of Blockchain Technology’ <https://www.researchgate.net/publication/355223429_Quantum_solutions_to_possible_challenges_of_Blockchain_technology>.
[5] Lik Hang Lee et al, ‘All One Needs to Know about Metaverse: A Complete Survey on Technological Singularity, Virtual Ecosystem, and Research Agenda’ <https://www.researchgate.net/publication/355172308_All_One_Needs_to_Know_about_Metaverse_A_Complete_Survey_on_Technological_Singularity_Virtual_Ecosystem_and_Research_Agenda>.
[6] Ibid.
[7] NFT News Today, ‘Mirror Worlds: Merging the Metaverse with the Real World’ (Web Page, 17 August 2022) < https://nftnewstoday.com/2022/08/17/mirror-worlds-merging-the-metaverse-with-the-real-world/>.
[8] Bernard Marr, ‘How the Metaverse will change cryptocurrency’, (Web Page, 25 April 2022) < https://www.forbes.com/sites/bernardmarr/2022/04/25/how-the-metaverse-will-change-cryptocurrency/?sh=58fba4054fe4>.
[9] For example, NFTs may be used to authenticate ownership of metaverse land. See Financial Times, ‘NFTs: The metaverse economy’ (Web Page) <https://www.ft.com/partnercontent/crypto-com/nfts-the-metaverse-economy.html>.
[10] There are already many gaming sites in the Metaverse including Decentraland and Sandbox. For example, see Geri Mileva, ‘Top 10 Metaverse Games to Immerse Yourself Into (2022)’ (Web Page, 16 August 2022) <https://influencermarketinghub.com/top-metaverse-games/>.
[11] Artists who have performed in the Metaverse already include DJ Marshmello (See Tom Gerken, ‘Fortnite: Millions Attend Virtual Marshmello Concert’ (Web Page, 4 February 2019) <https://www.bbc.com/news/blogs-trending-47116429>, Foo Fighters (See Carys Anderson, ‘Foo Fighers’ World Domination Expands to Metaverse with Super Bowl Sunday VR Concert’ (Web Page, 8 February 2022) <https://consequence.net/2022/02/foo-fighters-meta-vr-concert/> and Post Malone (See Oculus, ‘Post Malone Kicks Off Horizon Block Party with VR Concert on July 16’ (Web Page, 6 July 2022) <https://www.oculus.com/blog/post-malone-kicks-off-horizon-block-party-with-vr-concert-on-july-15/>.
[12] Andrea Murad and Will Smale, ‘The retailers setting up shop in the metaverse’ (Web Page, 4 July 2022) < https://www.bbc.com/news/business-61979150>.
[13] Mark Purdy, ‘How the Metaverse could change work’ (Web Page, 5 April 2022) <https://hbr.org/2022/04/how-the-metaverse-could-change-work>.
[14] For example, see Voraprapa Nakavachara and Kanis Saengchote, ‘Is Metaverse LAND a good investment? It depends on your unit of account!’ (Paper for Chulalongkorn University, 7 February 2022) <https://www.researchgate.net/publication/358422585_Is_Metaverse_LAND_a_good_investment_It_depends_on_your_unit_of_account>.
[15] For example, see The Sandbox Metaverse Explained (Web Page) <https://www.kraken.com/en-gb/learn/what-is-sandbox-sand>.
[16] For discussion on the types of risks, see Tim Chan, ‘Blockchain in Insurance – gold mine or land mine?’ (Web Page, 11 August 2021) <https://theinsurtechlawyer.com/2021/08/11/blockchain-in-insurance-gold-mine-or-land-mine/>.
[17] Securities Class Action Clearing House, ‘Current Trends in Securities Class Action Filings’ (Web Page, Stanford Law School) <https://securities.stanford.edu/current-trends.html>.
[1] Letterman, ‘Bill Gates Explains the Internet to Dave’ (YouTube, 1 February 2022) <https://www.youtube.com/watch?v=fs-YpQj88ew>.
[2] Marco Quiroz-Gutierrez, ‘Investors poured a record $30 billion into crypto in 2021’ (Web Page, 21 December 2021) <https://fortune.com/2021/12/20/invstors-pour-record-money-cryptocurrency/>.
[3] Tim Alper, ‘Disney Launches Specialized Metaverse Team to Explore ‘New Storytelling Frontier’ (Web Page, 16 February 2022) <https://cryptonews.com/news/disney-launches-specialized-metaverse-team-explore-new-storytelling-frontier.htm>.
[4] Chris Sutcliffe, ‘Nearly 7 million people have visited Nike’s metaverse store’ (Web Page, 22 March 2022) <https://www.thedrum.com/news/2022/03/22/nearly-7-million-people-have-visited-nike-s-metaverse-store>.
[5] Gucci, ‘Vault Gucci’ (Web Page) <https://vault.gucci.com/en/story/metaverse>.
[6] Kate Birch, ‘JP Morgan is first leading bank to launch in the metaverse’ <Web Page, 17 February 2022) <https://fintechmagazine.com/banking/jp-morgan-becomes-the-first-bank-to-launch-in-the-metaverse>.
[7] Securities Class Action Clearing House, ‘Current Trends in Securities Class Action Filings’ (Web Page, Stanford Law School) <https://securities.stanford.edu/current-trends.html>.
[8] Tim Chan, ‘Can you insure an NFT?’ (Web Page, 15 July 2021) <https://theinsurtechlawyer.com/2021/07/15/can-you-insure-an-nft/>.
[9] Ibid.
