The concept of an avatar-based metaverse is becoming increasingly popular and is adding a new dimension to the world of social media. Businesses can benefit by using digital avatars as part of their brand identity and for delivering a more personal user experience to their customers. However, digital avatars should be used cautiously as they come with a range of legal and regulatory issues. This article will examine regulatory concerns associated with using digital avatars in the metaverse and some potential legal solutions to minimize legal liability.
Avatars: The Way of Web3
In web3, avatars are virtual representations of persons or entities in computer-generated 3D worlds, commonly used in chat and entertainment websites. AI-powered virtual assistants designed to facilitate intelligent interactions with customers are one type and application of avatar. These avatars, especially 3D ones, can be employed for various purposes, including building trust and making communication with users more direct and easier. By offering a familiar, human-like face to users, companies can communicate their values in a more personal, specific, and engaging way, potentially building brand equity and customer loyalty.
When interacting with digital avatars, many users report feeling more at ease and even experiencing a release of dopamine. As such, digital avatars can be a valuable marketing tool for engaging with end users. However, it must be noted that avatars are not without their limitations. While they can evoke a genuine sense of familiarity and even empathy, they of course do not possess a human level of understanding or emotional intelligence. As such, they may not always be the most effective means of communication, particularly in more complex or emotionally charged scenarios.
Despite these limitations, the use of avatars and digital assistants is becoming increasingly common in a range of applications, from the service industry to healthcare. As such, it is important for companies to carefully consider the legal and regulatory implications of their use, and to ensure that they are compliant with relevant laws and regulations. By doing so, they can take full advantage of the benefits offered by digital avatars, while minimizing associated risks.
Potential Legal Solutions
In addition to legal solutions mentioned in the previous section, emerging technologies companies that intend to use digital avatars can consider adopting the following legal strategies to minimize legal liability arising from introducing avatars.
Terms of Service
Having appropriate terms of service can help mitigate legal liability. Perhaps, just like Massively multiplayer online role-playing games (MMORPGs), emerging technologies companies can have terms of service that govern the conduct of avatars contractually. It can also include remedies for violations such as banning the avatar from the platform and confiscating virtual assets. Confiscation of virtual assets could potentially be a solid remedy for violations as these in-world assets may be traded with other users (or avatars) and can ultimately be cashed out.
It has been suggested that all avatars in the metaverse should be subjected to registration akin to the incorporation of a company. This would allow the rights and liabilities of parties in the metaverse to be better managed, with each individual only entitled to possessing a single avatar in a decentralized metaverse. Specific rules can then be imposed on the avatar to govern its rights and liabilities in the metaverse. For this to work, a minimum capitalization requirement must be introduced for avatars in the metaverse. This is discussed in the next section.
Metaverse companies can introduce some form of minimum capitalization requirement as it would allow some form of compensation to be paid to aggrieved victims. Avatars would have to deposit a certain amount of money at the point of incorporation to contract with a third party in the metaverse. Third parties, including companies, can then assess if the avatar is creditworthy enough before deciding to enter into a contract. Without this minimum capitalization requirement, it is going to be cumbersome to obtain recourse for any harm committed in the metaverse without assessing the registration details to identify the individual behind the avatar.
One of the primary legal issues related to digital avatars is their legal status as autonomous and anonymous entities. Avatars allow visitors to digital realms to separate their real-life identities from their online personas. This way, an avatar can behave in ways that could be deemed antisocial, rude, or even criminal in real life without facing legal consequences. In other words, by introducing avatars, emerging technologies companies could make it possible for individuals to communicate and act in ways that would not be possible in the offline world. Businesses that allow metaverse users to use anonymous avatars may encounter legal problems if the actions of those users violate laws or regulations. The business hosting the metaverse platform could be held liable for failing to prevent the user’s behavior. Similarly, if a user engages in copyright infringement or other illegal activities while using an anonymous avatar, the business could be held responsible for facilitating those activities. To mitigate these risks, businesses can implement measures to identify and track users, such as requiring users to provide some form of identification or implementing a system of user verification. They can also establish clear policies and guidelines for user behavior and take prompt action to enforce those policies when necessary.
Identity Deception and Identity Theft
Identity deception and identity theft are other regulatory issues closely related to the use of avatars. The anonymity provided by avatars poses a threat to the metaverse community, making it essential to combat identity deception and associated harms. Businesses could suffer financial losses if a customer uses an avatar to represent themselves as someone else and uses a stolen credit card to make purchases on the business’s platform. If that purchase takes place on a peer-to-peer marketplace, the platform could be ordered to reimburse the defrauded party. And if the person behind an avatar obtains other users’ financial or personal information, the company could face fines and other regulatory sanctions. One way to address this is through mandatory registration, requiring individuals operating through an avatar to comply with a personal identification process. In some states, internet companies are mandated to introduce an identification process to prevent identity theft and its associated harm. Additionally, the Red Flags Rule requires companies to develop, implement, and administer an identity theft prevention program. This regulation can help prevent identity theft and reduce the risks associated with anonymity and deception in using avatars.
Digital avatars are the future of the metaverse. Existing businesses that intend to foray into the metaverse would have to eventually introduce avatars if they want to be relevant in this space. Nonetheless, introducing a digital avatar comes with its set of legal challenges. Not having a prior legal understanding of legal knowledge could attract huge legal liability and be a recipe for disaster. It is best to speak to an emerging technologies attorney or law firm before introducing a digital avatar.
Gamma Law is a San Francisco-based Web3 firm supporting select clients in complex and cutting-edge business sectors. We provide our clients with the legal counsel and representation they need to succeed in dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.