The digital real estate rush is gaining momentum as more and more people buy “property” in the metaverse. However, there are significant legal risks to buying digital real estate.
The Digital Land Rush
The metaverse is a 3D, immersive, virtual world, and some of its early platforms are selling plots of digital land within their ecosystems. Although digital property sales are not new, Facebook’s metamorphosis to “Meta” in late 2021 spurred sales.
The biggest purchases on the two most popular platforms – The Sandbox and Decentraland – exceed $1 million. The $2.43 million sale of land in the “fashion district” of Decentraland in November was topped a week later by a $4.3 million purchase of land in The Sandbox, according to Business Insider.
Prices of virtual land undergo significant swings, in part because of the variability in the value of the cryptocurrencies used to purchase them, but prices for the cheapest plots have ranged around $11,000 to $14,000 in January 2022. As of January 16, secondary market Opensea listed some properties on The Sandbox at over $30 million.
Enter the Accountants
And it’s not just extreme crypto enthusiasts and cutting-edge tech firms buying up land.
Prager Metis International LLC, a New York-based accounting and advisory firm, announced recently that it had opened virtual office space in Decentraland. PricewaterhouseCoopers’s Hong Kong unit acquired virtual real estate in The Sandbox, according to The Wall Street Journal.
“The Metaverse offers new possibilities for organizations to create value through innovative business models, as well as introducing new ways to engage with their customers and communities,” William Gee, a partner at PwC Hong Kong, said in a statement quoted by The Journal.
With “new possibilities” comes risk.
Digital property owners are hoping to be the early entrants – the equivalent of owners of property on New York’s Madison Avenue or the Hollywood Hills before they were developed. With that opportunity comes risk of theft and even the collapse of the platform on which the land exists.
In the real world, property owners have a deed that at least in places with reliable property laws gives them a reasonably unassailable claim on their land. That claim is more easily lost in the metaverse.
Take Decentraland as an example. Land purchasers buy a nonfungible token (NFT) called a LAND token that represents the property that was purchased. NFTs are unique digital files generated on a blockchain platform that represent IRL assets like art or music digital or property. The purchase is recorded on a blockchain, making the transaction immutable, at least barring some highly unlikely scenarios. The transaction is also publicly viewable. In this regard, the claim to digital property in Decentraland is at least as strong as a purchase of physical property, and likely quite a bit stronger than in places in which physical property laws are not respected.
Once the owner has the LAND NFT, she can sell the property, hold the property and even develop the property. The tokens are sold easily through digital marketplaces.
Here’s where the risk starts to come in. LAND owners must store their tokens in a “wallet,” which is really just a method of storing the private keys to crypto assets.
Imagine one day you go to chill out in your beachfront condo in the metaverse, and instead of a view of the ocean, you find yourself locked out. When you check your digital wallet, your LAND tokens are gone.
Theft of crypto assets from digital wallets is common. Wallet holders fail to follow the technical instructions to keep them safe. Thieves use crafty means such as switching their targets’ mobile number to get around two-factor authentication, and users have lost millions of dollars worth of crypto currency and NFTs.
That same thing could happen to LAND tokens in a wallet, with the result being the loss of claim to ownership of digital property, and the only legal recourse being reporting the theft to law enforcement or a lawsuit that would be very hard to successfully pursue if the thieves are in another country. Compare that to physical real property, where, at least in the United States, actual thefts of land exist only in Westerns.
Don’t “MySpace” Me
A second concern is that digital property owners have no guarantees that the owners of the platform in which the property exists will continue to operate the platform, or even remain in business.
Imagine if a platform like Web 1.0 stalwart Geocities or early social media Web 2.0 pioneers Myspace or Bebo had sold digital property at the height of their popularity. These properties have now shut down, gone through bankruptcy or radically changed business models. Would owners still be able to access their property if the platform owner went bankrupt, changed business models or even decided to shut down their metaverse platform?
The major metaverse platforms make it clear in their legal terms that they won’t be responsible for keeping their platforms accessible.
“The Foundation has no continuing obligation to operate the Tools and the Site and may cease to operate one or more of the Tools in the future, at its exclusive discretion, with no liability whatsoever in connection thereto.”
Likewise, the terms of The Sandbox (TSB) state:
“At any time and without notice, TSB reserves the right to modify or stop offering all or part of the Services. TSB may, in its sole discretion and at any time, refuse anyone who requests access to The Sandbox, terminate your rights to create and/or upload Assets and Games, and/or block or prevent your access to and use of any Services or features governed by these Terms; provided, however, that you will remain the owner of your Assets and Games in accordance with these Terms.”
It’s true that there are physical properties with values that depend on continued operation of a “host.” Think of a residential condo or office space in a commercial building. The owners of those properties are dependent on maintenance services and access being provided by another party, but no one would sign a purchase agreement for real property that depends on operations that “may cease to operate” at the “exclusive discretion” of another person or business.
The Good News
The good news is that, unlike with physical real estate, buyers of digital property are pretty much guaranteed that their purchase will come with no liabilities. Particularly with commercial real estate in the real world, there is always a risk that a hidden issue could cost buyers amounts far beyond their initial investment in the property.
For example, the property may there may have been a toxic waste dump that a new owner would have to clean up. There also is a risk that there may be claims on the land. Perhaps, the title search failed to turn up a potential owner of the property. Or an adjacent landowner may have been using part of the property, which could give the adjacent landowner a claim through what’s known as “adverse possession.” Digital property owners are unlikely to face these concerns in the metaverse.
Digital property purchases come with considerable risks, both legal and financial. The fundamental value of real property depends on the scarcity of property in areas in high demand. Although the major digital property platforms have attempted to create scarcity, there is no guarantee that they won’t offer additional property or that a new platform operator won’t offer more desirable land. It’s also possible that the whole digital land rush is really a pump-and-dump scheme as early digital property owners are already making huge returns on their investments.
Time will tell whether the risks of digital property acquisitions were worth taking. But, as with any investment, buyers definitely need to be aware of the risks.