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Metaverse regulation: lessons from the past and the need for regulatory innovation

Given Metaverse’s link with decentralised technologies like cryptocurrencies, the author argues for an ethics-based ex-ante approach to regulating the platform

By Saudamini Sharma

While social media regulations are still playing catch up, a new disruptive technology – the metaverse, has already amassed the market focus. Despite innumerable use cases and an obvious capacity for impact, metaverse regulation seems to be on the back burner for most governments.

The industry, on the other hand, is moving at an alarming pace. Last year Meta said that it will devote 20% of its revenue to Reality Labs, its research and development project that focuses on developing virtual and augmented reality products, and Disney Star announced its launch of the ‘Starverse’ in India. Recently, the Ministry of Electronics and Information Technology funded four start-ups focusing on XR technologies. With this pace, nearly thirty global tech companies and standards organisations have also banded together and formed the metaverse standards forum aimed at developing open interoperability standards.

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Why regulate the metaverse? 

Though metaverse products will soon hit the commercial streets, attempts to regulate it are few and far between. The European Union, while still far from active regulation, has undertaken a keen interest in adopting an innovative regulatory approach to the governance of the metaverse. This month, the European Commission opened its initiative on virtual worlds for public consultation. The South Korean and Japanese governments are also keen on providing an early push for this highly lucrative technology. India, on the other hand, has not woken up to the perils of ignoring the metaverse. While the Ministry of Electronics and Information Technology (MEITY) claims that the proposed Digital India Act will effectively regulate emerging technologies, it brings little newness to the regulatory process and leaves much to be desired.

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Metaverse needs to be regulated simply because the technology gives rise to harms with disastrous consequences. Its link with ungoverned decentralised technologies like cryptocurrencies and potential over-tracking of user data, among other things, make regulatory intervention a necessity. Despite the obvious risks, the metaverse’s potential to add socio-economic value to society at large cannot be ignored. For instance, metaverse platforms are increasingly being used for providing low-cost and effective services in e-learning, healthcare, remote work, advertising, banking, and finance. Effective regulation is also essential for effectively tapping these benefits.

Lessons from the past

It is well-established that technology precedes regulation. Two great inflection points in technological history, i.e., the advent of the internet and the rise of social media platforms took regulators worldwide by surprise. This resulted in reactive regulation aimed at penalising harmful conduct instead of weeding out the harms – thus setting a regulatory pattern that has not been re-examined since. The rise of the metaverse allows an opportunity to do just that.

Being a convergence technology, the metaverse is all-encompassing and will transform digital interaction, entertainment, and finance. Like the internet, it is a large network of many websites, apps, and platforms. However, unlike the internet, it doubles up as a tech product and a global network. Its governance, therefore, poses a unique regulatory challenge. Potentially, it needs an interdisciplinary regulatory solution that addresses a range of concerns like privacy, data protection, financial security, user addiction, and interaction with link technologies. Given that this was somewhat the case with social media platform governance, some regulatory lessons ensue.

Understand the need for regulation: MEITY missed the bus in understanding the potential of social media companies to alter markets. Due to global connectivity, free access, and customized advertising, social media companies grew unchecked in India (and the world over) and eventually assumed the role of key public institutions. While jurisdictions like the USA and EU recognized that checks and balances are needed to regulate their growth, the inability of the Indian regulators to understand the need for regulation of online social interaction led to a reactive, penalty-driven framework. For the longest time, social media platforms were only governed under the basic tenets of the Information Technology Act, 2000 (IT Act). It was only in 2021 that the government enacted the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (Intermediary Rules) to govern such platforms. The penalty-centric and reactive nature of the Intermediary Rules evidences the lack of a timely, clear, and well-reasoned regulatory objective. For effective regulation of emerging technologies, including the metaverse, it is critical that regulatory frameworks are not penalty-driven afterthoughts.

Regulate with incentives and ethics: One of the main deficiencies of the current social media governance frameworks is that there are no incentives and corrective mechanisms for the platforms to act as trustworthy institutions. Platforms creating a new digital public sphere like the metaverse are largely driven by economic incentives. In their current form, these platforms make money through digital surveillance that drives targeted advertising – popularly referred to as ‘surveillance capitalism’. With such platforms minting money, payment of fines and penalties is an often-budgeted business cost – rendering penal provisions moot.

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This is where an incentive and ethics-driven regulatory approach becomes critical. It should prescribe standards, allow incubation, sandboxing, and an ethics-based code of conduct to facilitate the growth of technology within set ethical guardrails. Many touchpoints such as preventing the misuse of data, addressing economic inequalities, ensuring accessibility, identity control, and the ability of such technologies to alter behaviour all require such platforms to act responsibly and ethically. Recently, South Korea released ethics-based guidelines for metaverse platforms, based on three objectives: sincerity of identity, safety of experience, and sustainable prosperity.

Given the current scenario, there is a need for a new approach by MEITY – one, it should re-evaluate the regulatory strategy for disruptive technologies. Social media governance (and its failures) has taught us many valuable lessons and platform regulation can no longer be a knee-jerk reaction to rising harms. Two, it should create and employ an ex-ante and ethics-based framework.

Ex-ante regulation might be the new answer

The governance of emerging technologies needs to be driven by normative policies, informed by market economics, technology, and ex-ante principles of harm minimisation. After the social media governance experience, more jurisdictions are subscribing to an ethics-based ex-ante regulatory approach for the metaverse. This is because, within the metaverse, the risks to personal, social, and financial security are almost non-quantifiable. It is also because the ex-post approach has failed to address the harms. In the metaverse, these harms will be exacerbated due to the promise of user anonymity, borderless interactions, and the inability of the regulatory mechanisms to keep up with the changing technology.

Private ownership of the metaverse will lead to private control of a public space – and an ex-post facto governance mechanism will not address the problem of unchecked growth, market distortion, and consumer harms. In the past, private control by social media platforms has led to the spread of misinformation, polarization of political views and an increased risk of anti-establishment movements, user harms, and an oligopolistic market structure. With large-scale global dissemination of information, virtual gatherings, and political campaigns, this is more likely to take place in the metaverse.

Other reasons to prefer ex-ante regulation over an ex-post approach are: (i) to control the use of unregulated decentralised technologies like cryptocurrency; (ii) to minimise over-tracking of user data; (iii) to ensure accessibility and prevent discrimination. Last year, the EU launched a virtual and augmented reality industrial coalition. The coalition recommended ex-ante regulatory measures in its proposal for industry and policy initiatives for immersive technologies. Some of these include setting up of: (i) a policy framework to ensure common EU values are followed; (ii) defining guidelines for data protection and privacy; (iii) adoption of standardisation; (iv) altering business models to provide low cost and more accessible platforms; (v) establishing AR/VR ethics councils among others.

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For the adoption of Web 3.0 technologies including the metaverse, NFTs, and cryptocurrencies, Japan, last year announced a digital transformation plan. Pursuant to this, the Japanese Ministry of Economy, Trade and Industry established a ‘Web 3.0 policy office’. This office has been tasked to act as an interaction platform for various stakeholders ranging from the industry, lawmakers, policy professionals, relevant ministries, and engineers.

Predictably, the rise of the metaverse will follow the social media trajectory, only at a much greater scale. Lessons from past regulatory misses — facilitated through the reactive ex-post facto regulatory approach — should be regarded as the new starting points instead of being the gaps that need to be plugged.

MEITY’s proposal for a new digital governance legislation – the Digital India Act (DIA) is meant to be broad in scope, principles-based, and enforced through delegated legislation. However, it lacks the elements of preventive ex-ante regulation and subscribes to the outdated idea of a rules-based governance, where most provisions are penalty focused and not driven by incentives and course correction.

What should an innovative regulatory framework look like? 

Governance of digital media poses one of the greatest regulatory challenges of our time. However, instead of innovative governance, its regulation has taken on a templated quality over the past decade. The nature of metaverse ecosystems complicates the regulatory process and raises many hard questions.

To tackle challenges such as user anonymity, inadequate privacy safeguards and the like, futuristic regulatory solutions are likely to rely on product design and technological solutions. Given that the metaverse is designed to operate without any jurisdictional bounds, is a global super-regulator the answer? It may be so. A work-in-progress precedent may be found in the regulatory response to cryptocurrencies. Financial regulators across the world are increasingly in favour of global crypto regulation. Globally streamlined technical standards, laws, and enforcement mechanisms are likely to bring much-needed uniformity to adjudication and enforcement.

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Saudamini is the founding partner of Saarlegal, a technology and media-focused law practice. She regularly advises clients on digital transformation, information technology, data protection, content regulation, and e-commerce.

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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