Scope of Arbitration in Metaverse

This article has been authored by Shubham Sharma & Yashila Bansal, 2nd Year, B.B.A., LL.B. (Hons.) students at Chanakya National Law University, Patna.


The words cryptocurrency, NFTs, blockchain, metaverse, Web 3.0, digital assets, and virtual properties have become an inalienable part of our daily lives. We frequently hear about them on social media and news platforms, and they have become a hot topic of discussion lately. One such burgeoning and trending concept is metaverse. “Metaverse” is a broad term that refers to virtual reality, which is characterised by persistent virtual worlds that continue to exist at all times, as well as augmented reality that combines aspects of the digital and physical worlds. It is regarded as the next big phase of the internet, which allows individuals to interact with each other in real time, just like in the physical world. Given the immense economic opportunities associated with the metaverse, many online game-makers, social networks, and other technology leaders have rushed to invest in this field. For instance, a recent report by Bloomberg Intelligence estimates the market size of the metaverse to be nearly $800 billion. The ability to buy, own, and resell virtual digital assets in real-time across all geographical and social boundaries is what makes Metaverse an attractive investment destination. As the technology underlying Metaverse evolves, it will also expand the scope of activities possible through it. This will result in an increase in legal complexity, giving birth to potential future disputes. This also brings to light the possibility of resolving these disputes by way of arbitration.

Potential Disputes in Metaverse

Ever since the concept of a metaverse came into existence, it has remained in a legal vacuum. The lack of any legal framework, scholarly work, and case laws surrounding it has created ambiguities as to the types of disputes that might arise due to the activities in the metaverse. These disputes may arise between the users and the platform, i.e., a “user-platform” dispute, or between users, i.e., an “inter-user” dispute.

User-platform Dispute

As it is almost impossible for metaverse platforms to guarantee the absence of hacking assaults indefinitely, the most obvious and foreseeable sort of conflict that will develop between users and metaverse platforms will concern the violation of users’ personal data. The case of Tulip Trading Limited v. Bitcoin Association for Bitcoin SV (BSV) and Others, March 2022, is a case in this regard. Here, the company had filed a case for crypto digital assets, claiming that it had suffered a loss due to a hack in the crypto web, which restricted them from accessing their crypto assets. A dispute can also arise when personal data relating to the avatar is misused, as there is no clarity as to whether the personal data relating to the avatar are the same as the personal data of the person who created the avatar. Another possible source of such a dispute can be when the metaverse platform unilaterally bans the user altogether, claiming his activities are against its policies.

It’s also probable that there will be an increase in conflicts over virtual real estate properties in the metaverse. This might happen as the value of a property is determined by its availability as well. If the platform decides to extend the boundaries of the virtual world and increase the number of plots, then the value of the property of the users may take a sharp dip. It is not clear if the user would have a legal claim against such a kind of injury. Also, there is no clarity on the laws governing the ownership and the transferability of these properties across platforms.

Inter-user Dispute

Disputes arising from user-to-user transactions of digital assets, on the other hand, are also on the rise. Since the metaverse is made up of virtual marketspaces, it is highly vulnerable to encroachment of copyrights, licenses, and brand names. This increases the likelihood of IPR-related disputes in the metaverse. For instance, in January 2022, Hermes, a French fashion company, filed a legal suit for the iconic Birkin bag, claiming that Mason Rothschild created fake digital meta-Birkin NFTs that featured a Birkin bag and copied the company’s trademark without permission. Similarly, Nike was involved in a dispute over intellectual property in the metaverse. Nike sued reseller StockX in early February 2022, alleging that it was illegally selling NFTs with Nike’s trademarks.

There will also be a number of legal disputes involving pre-Metaverse agreements. Finding out who owns these metaverse rights and whether they include the right to mint (produce) a corresponding NFT will be a key point of contention for all intellectual property treaties written before the metaverse was even considered. Miramax, a production company, filed a lawsuit against director Quentin Tarantino after he announced plans to auction off NFTs of seven exclusive scenes from his handwritten Pulp Fiction script. Despite the fact that the contract was signed long before NFTs were invented, Miramax claims Tarantino’s NFT project violates their contract.

Apart from IPR related disputes, a significant portion of disputes will also involve crimes and torts that will unavoidably be replicated from the real world such as, theft of digital assets, sexual harassment committed by one avatar against another, or even housing disputes between neighbours.

Scope of Arbitration

Such conflicts in the Metaverse may be successfully settled by arbitration because it would settle questions of jurisdiction and appropriate legislation. International arbitration could be useful in settling such conflicts because the majority of the states lack legislation on these subject matters and do not have a well-defined jurisdiction with regard to them. Through arbitration, the parties will be able to decide independently which laws and regulations will be relevant to their dispute.

Most Metaverse platforms these days already have arbitration clauses in their terms of service. For instance, Section 18 of the Decentraland Terms of Service contains a multi-tiered ICC arbitration clause. Other platforms, such as Oculus and Roblox, follow the AAA’s Commercial Arbitration Rules and Supplementary Procedures for Consumer Related Disputes. Similarly, the arbitration clause in Binance’s terms of service specifies that user-to-platform arbitration will be handled by the Hong Kong International Arbitration Centre in accordance with the HKIAC Rules.

Numerous platforms, like Kleros, Jur, Aragon, and Mattereum, have already been developed to support the blockchain arbitration process. The randomization of arbitrator selection, on-chain enforcement of awards using blockchain technology, low or no human as well as judicial interference, a quick dispute resolution process, and elimination of the stage of enforcement of arbitral awards as per the local laws through traditional courts are all notable features of such blockchain arbitration systems.

On April 22, 2021 , the UK Jurisdictional Taskforce issued the Digital Dispute Resolution Laws, 2021 (“the DDR Laws”), which provides the arbitration laws for dispute resolution via on-chain blockchain arbitration using sensible contracts. The DDR Laws specify the appropriate requirements for the resolution of disputes relating to sensible contracts using an automated dispute resolution process of on-chain arbitration, free from judicial interference.

Challenges Ahead

However, despite the inherent benefits of choosing arbitration to resolve the disputes prevalent in the Metaverse, the parties, arbitrators, and the community are likely to face several challenges. For instance, the anonymity of the parties and arbitrators is emphasised as an important part of blockchain arbitration. However, parties may not be sure of the arbitrator’s qualifications to decide a dispute when the arbitrator’s identity is not revealed. Similarly, it also cannot be determined if the parties were actually present or if the users were just bots that were powered by AI, as the parties are also anonymous in such virtual arbitrations. Also, they are likely to face difficulties while displaying or following evidence and the examination of witnesses. Disagreement between parties can also arise as to the seat and venue of arbitration in Metaverse. Further, technological barriers can prevent parties from different locations and countries and less tech-savvy older participants from resolving their disputes by arbitration in the Metaverse. Conflict may also emerge when one party wants to stop or revoke the enforcement of a smart contract, as unlike traditional contracts, which may be revoked in court, smart contracts on the blockchain are automatically enforced and their code is immutable, leaving no room for recourse. Lastly, while there exist clear provisions to govern user-to-platform disputes, there is no universal solution for disputes between metaverse users.

Way Forward

It is quite clear that the Metaverse is going to be the new playground for disputes in the legal world. These disputes may range from simple user-platform disputes to complex inter-user IPR disputes, and the relevance of arbitration in resolving these disputes cannot be overstated.

While current practices in the arbitration regime require that parties disclose their “real” identities, the same is not true for online arbitration where the rules permit the parties to remain anonymous. But this right to anonymity is not absolute in nature and the tribunals may disclose the identity of the parties if it is required for the fair resolution of the dispute as per Rule 13 of the UKJT Rules, or for compliance with the law of the land, or just for the protection of the tribunal’s own interests. In consonance with the anonymous nature of the metaverse, similar rules can be formulated by an overarching administrative body in the metaverse that would mandate disclosure of identity as and when required. This body could further keep an oversight on the fairness of the process in the metaverse and keep a check on the neutrality of the arbitrators.

Further, having a single Authoritative Institution governing the Metaverse would be the ideal solution to address the problem surrounding the jurisdictional ambits of the Metaverse, however, since putting this idea into practice would be very challenging, another option would be to follow the French courts’ “third way”, where the parties themselves get to decide the scope of the arbitration agreement, allowing them to keep aside their respective national laws.

Also, the existing norms and procedures of arbitration may pose difficulties, which can only be resolved when suitable rules are established by International Authorities and Bodies. Thus, taking into consideration the new evolving technological setup, it is imperative that the current dispute resolution framework be redesigned to meet future needs. These rules would also be essential to tackle the issue of enforcement of awards when digital assets are held by anonymous or hidden digital identities.

Lastly, with the advent of metaverse there’s also a corresponding rise in IPR related challenges. A possible roadmap for brand owners to protect their brands in the metaverse would be to initiate broad filing programmes to achieve trademark registration of virtual goods and services. This has already been put in place by businesses like Converse and Nike, by submitting a number of applications to the United States Patent and Trademark Office.

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