After Facebook’s rebranding to focus on the “metaverse,” the last few months have seen a rapid increase in the number of players purchasing digital land—from celebrities, retail giants, banks, and even countries. Among some firsts: Barbados is poised to open the world’s first digital embassy, while JP Morgan has established the first banking service in the metaverse. Both entities have acquired plots in Decentraland, one of the biggest (and oldest) virtual reality platforms.
These deals are taking place against the backdrop of the metaverse, a term whose exact meaning is difficult to pin down, but has been grossly simplified as “a set of virtual spaces where you can create and explore with other people who aren’t in the same physical space as you.” One can also think of the metaverse as an evolved digital economy, with real estate fast becoming its most valuable asset.
To ensure that digital real estate has value, supply and prime location spots are limited. For example, Decentraland is currently made up of only 90,000 pieces or “parcels” of land, each around 50 feet by 50 feet.
In 2021, real estate sales on the top metaverse platforms (Sandbox, Decentraland, Cryptovoxels, and Somnium) reached a staggering $501 million. Analysts predict that the numbers will only continue to soar.
With virtual real estate attracting such significant investment, it inevitably raises questions about sustainability and regulation. From a legal standpoint, it appears digital real estate has upended traditional notions of real estate and, by extension, property law.
Or has it?
Property is a legal construct. More than a resource, property can be conceptualized as the concentration of power over such resources. In other words, the notion of property is tied to the control one has over a thing—among the most fundamental of which is the right to exclude others from possession or use.
The right to exclude, to have sole dominion in possession and use, is arguably essential to the survival of any system of property.
Digital real estate embodies this exclusionary right. Instead of a physical deed recorded in the registry of the place where the property is located, virtual landowners receive a non-fungible token (NFT) which basically represents the digital space. “Non-fungible” means an object is one-of-a-kind and cannot be replaced or replicated. An NFT, therefore, can be used to identify a unique item, both in the real-world and online.
Using NFTs, your virtual plot of land will be attached to a unique number stored on the blockchain (a decentralized, digital ledger distributed on a public network; think of Google Docs as one analogy). This token can then be sold to pass on ownership of the digital real estate, assuring provenance on a more secure and sophisticated scale than physical title. Because NFTs exist on blockchain technology, NFTs can keep real estate data reliable while allowing users to safely purchase and sell digital assets.
Once you buy a plot through an NFT, the transaction is recorded on the blockchain of the platform, and the land is yours. You therefore have the right to build anything within the zoning laws of the particular world. And as , virtual property owners have the right to exclude the rest of the metaverse from intruding on the land.
In this sense, and despite being a misnomer, virtual real estate maintains a key attribute of real property ownership that cannot be ignored.
Even more compelling than the issue of whether virtual real estate can be considered real estate, the phenomenon has opened a Pandora’s box of legal questions, particularly for basic homeowner concerns.
For instance, how will disputes in the metaverse be solved? When an American-style ranch house is built beside a somber Victorian monastery, who will adjudicate the homeowner dispute arising due to aesthetic differences or even encroachments into the other’s property?
While the metaverse has some are mainly confined to the most basic of rules such as land size, height, width, and depth restrictions. Meta-architects are not constrained by the laws of gravity (or artistic composition), and, as such, literally anything goes. But what if the value of your digital real estate depreciates due to a neighbor’s architectural choice?
No one seems to be rushing to set up housing boards or arbitral mechanisms in the various virtual platforms. However, if the property owners were to log-off from the virtual world and chose to bring their dispute before real-world courts, where would such a case be filed?
This is only the tip of the iceberg.
To be sure, the metaverse is pushing the bounds of traditional legal and regulatory thinking, and virtual real estate is but one aspect of it. As developments in the digital realm continue to unfold, it won’t be long before we see a fully-functioning, synchronous, and interoperable real estate economy online. Students and practitioners can throw their hats in the ring or wait for the virtual real estate bubble to burst. Either way, exciting times (and worlds) await.