• Robert Caserta, Director |

Don’t worry. You are not alone. A consistent definition of the metaverse is hard to come by. It is too early in its lifecycle. The foundations are only just forming. The use cases are only now starting to be developed. The underlying technologies are just in their infancy – many have not yet been developed. Even the biggest metaverse promotors struggle to describe the value proposition clearly.

Here’s what we do know, however: It is big. It is inevitable. And it’s going to require coordinated and collaborative navigational effort by government bodies, industry groups, and market players. Governments have no choice but to start engaging with it.

You can’t ignore this

Let’s start with the big. Some estimates suggest that the metaverse market could be worth up to US$13 trillion by 20301. An estimated US$54 billion is already being spent on virtual goods each year. The GDP of Second Life – a virtual creator world – was US$650 million2 (ranking it above 9 sovereign markets in terms of GDP). And those are just the initial estimates.

The size of the metaverse will make it hard to ignore. If only from a tax and revenue perspective, governments are going to need to understand the transactions being conducted there. But the financial size also denotes the influence the metaverse may have over the way people live, work and play. Many of the things that people do today on the internet, may soon be done in the metaverse instead.

This leads to the point about it being inevitable. In very simple terms, the metaverse is the next evolution of the internet. It is the step that is going to allow humans to interact much more seamlessly with each other and with technology. And in some ways, it’s already here. Digital twins, blockchains, AR/VR, tokens, smart contracts, AI – while these technologies already exist, it will be through the convergence of these and others that new possibilities will begin to take shape. The more we virtualize, the closer we move towards the new epoch of the internet.

It's going to require regulating

Regulators and policy makers should be taking notice. At the very least, the shift to a more virtualized and interactive environment will require regulators to update their existing regulation in a wide range of spheres – from gambling and social welfare through to tax compliance and monitoring. Every level of government will need to be involved.

The characteristics of the metaverse are likely to also create new questions and challenges that regulators will need to grapple with. How will intellectual property created in the metaverse be protected? How will virtual property sales be taxed? How will antisocial behavior (such as bullying or indoctrination) be monitored and controlled? How will identities be established, or certifications authenticated? How will healthcare and personal data be handled in virtual settings? Many questions haven’t even been imagined yet.

Here's why it’s going to be difficult

The big defining characteristic of the metaverse (and the Web3 technologies that underpin it) is that it is decentralized. No single organization owns the metaverse. The infrastructure is not subject to any one country’s rules or regulations. It can’t easily be blocked or manipulated. The technologies, the infrastructure and the data are at nobody’s mercy.

Not surprisingly, pundits talk up the benefits of decentralization. Rather than allowing big tech firms to centralize, utilize and monetize consumer data for their own benefit, a decentralized world allows consumers to become the ultimate owners of their own data. Yet the same goes for their health data, their tax data and their other civic data. In a fully decentralized world, government holds no citizen data at all. That’s going to make regulation in the metaverse much more difficult.

Regulators on the move

The metaverse may still be in its infancy. And we may not yet know exactly what it will look like, what new use cases it will spawn or what influence it will have over society and humanity. But the foundations are forming quickly. And there is already significant activity taking place – both in the metaverse and about the metaverse.

Some high-profile regulatory debates have already begun. Consider, for example, the fate of Meta’s Libra project (a cryptocurrency that was envisioned to be used on Meta’s platforms) which, after significant regulatory scrutiny and push-back, was eventually cancelled in January 2022. Or the debates around the ownership of Non-Fungible Tokens (NFTs) and how they should be reported and taxed. These are conversations that are already shaping the future of the metaverse. And they require governments’ full participation.

Getting in on the action

The other challenge with decentralization is that government is not in the driver’s seat. Citizens are. Which means governments need to think carefully about how they will insert themselves into the conversation. Ultimately, people want regulation to protect them, but understanding where that line is now drawn is becoming increasingly challenging.

At the same time, governments also have a unique opportunity to play a more proactive role in the regulation of the metaverse. For one, governments could be helping drive standardization across the metaverse – not just in standardization of technologies, infrastructure, and interfaces, but also in how regulation is applied. The reality is that the metaverse is borderless; for regulation to be effective, it needs to be interoperable between jurisdictions.

Governments could also play a more proactive role in helping solve the need for identification and authentication in the metaverse. Greater virtualization requires participants to have greater levels of trust. People will want to know they are transacting with legitimate sources, that they are receiving services from certified professionals and that they will be recognized as themselves when they need to be. That is a role government can fulfil and one for which many governments continue to maintain high levels of trust.

Steps into the metaverse

Governments and regulators should start proactively engaging in conversations about the metaverse. Work with the participants to build trust and engagement around regulation. Talk with stakeholder groups and industry influencers to expand your understanding and insight on the trends. Sit down with your colleagues and peers to discuss how the metaverse might influence future regulation and regulatory activity.

The reality is that the metaverse is big, it’s inevitable and it is going to require a lot of regulatory guidance. Government and public sector organizations should move quickly if they hope to remain relevant.


1 https://www.precedenceresearch.com/metaverse-market
2 https://www.jpmorgan.com/content/dam/jpm/treasury-services/documents/opportunities-in-the-metaverse.pdf