Financial Metaverse Platform and Legal Considerations
In this article, we explain the concept of the Metaverse, and in particular the role and status of Metaverse platforms in the financial sector, and related legal considerations. Along with NFTs, these issues have recently attracted a great deal of attention from many interested parties.
Metaverse platforms in the financial sector
The term “Metaverse” is a portmanteau of “meta”, meaning higher, beyond and transcending, and “universe”, which refers to the cosmos. The term was first coined in Neil Stephenson’s 1992 novel, “Snow Crash”. The Metaverse is thus a digital world that has been created through a combination of hardware, software, and AI technologies, which blends and expands the real world and the virtual world. Different categories of virtual space within the Metaverse include Augmented Reality, Lifelogging, Virtual World, and Mirror World.
- Augmented Reality: a technique using computer graphics in order to synthesize virtual objects or information into a real physical environment, so that the computer-generated images and sounds appear to be present in the original physical environment.
- Lifelogging: digitally recording what happens in one’s life, in the form of videos, photos, and audio recordings.
- Virtual World: a computer-simulated world which mimics an actual world, and in which users can explore, communicate with each other, and participate in activities, through a personal avatar.
- Mirror World: a virtual world that digitally reflects the information, images, and scenery of the real world.
Recently, banks and financial companies have started paying attention to the potential scalability of the Metaverse, and are moving to develop “financial Metaverse platforms” that use the Metaverse as a means of providing actual financial products and services (including sales, brokerage, and advisory services). It is anticipated that the Metaverse will be used as an innovative sales channel and as a new form of financial platform. It also has the added advantage, during the era of COVID-19, that it does not require face-to-face interactions.
Current usage of the Metaverse by domestic financial institutions
It is predicted by many in the financial sector that the Metaverse has great potential to create a new digital financial ecosystem, and become another financial platform that will generate a new source of profits. The financial sector is proactively preparing to be ready for the transition of financial transactions from smartphones to Metaverse platforms, and is actively promoting the Metaverse as a key strategy for digital innovation, along with AI. This is aligned with the platform-led strategy to stay ahead of others in winning Millennials and Generation Z consumers, who are already familiar with smartphones, augmented reality, and virtual reality, and are key future customers of the sector. Moreover, the financial sector is actively reviewing whether Metaverse platforms can be considered to be reasonable alternatives, allowing for the gradual reduction of offline stores, and CD/ATMs.
Financial platforms on the Metaverse, like other Metaverse platforms, are still in their infancy. Some banks are providing information and communicating with customers through making financial education broadcasts, using mission completing experience, games and other features on the Metaverse. Some financial platforms are also using famous star avatars as marketing tools.
Once the Metaverse is activated in earnest, it is anticipated that there could be virtual bank branches in virtual worlds, providing services such as financial intermediation and consulting. As a result, some banks are establishing their own financial platforms dedicated to operating within the Metaverse, or opening virtual stores within the Metaverse platforms of large ICT companies. These virtual branches or stores will provide customized financial products, specially tailored to the Metaverse, alongside advertising and marketing activites. They will also provide differentiated user experiences that incorporate game elements, and consumers will be able to respond to an AI banker in the form of an avatar.
Moreover, and depending on how the regulatory environment evolves, the appearance of other financial services can be anticipated. These might involve: NFTs, the main driving force of the Metaverse; “P2E” (Play To Earn) gaming; and “DeFi” (Decentralized Finance), based on smart contracts. Some banks are also preparing for the issuance and distribution of stablecoins and overseas remittances. Finally, there are card companies which are preparing platform payment services that allow customers to visit stores and make payments in a virtual space.
Regulatory status and legal characteristics of the Metaverse
On December 15, 2021, at a meeting with various companies and institutions in the financial industry, the Financial Services Commission stated an outline of their approach towards the Metaverse. They expressed their intent to overhaul regulations and consumer protection principles, so that financial services can expand into the digital arena, in line with the increased demand for supply and consumption of financial services in virtual Metaverse spaces.
There is no domestic law that has been separately enacted or that directly regulates the Metaverse. Moreover, there are no guidelines issued by the supervisory authorities, and no self-regulatory measures implemented by the industry itself. There is thus much uncertainty about the existing legal and regulatory framework that should apply to the Metaverse. Even if financial transactions are conducted in a virtual world, the underlying targets of the transaction are likely to be financial products and services in the real world. It therefore appears likely that, at least for the time being, regulations will be applied within the existing legal boundaries.
Regulators are known to have recently begun a review of the legal nature of financial Metaverse platforms. Because the Metaverse is still in its early stages, and is implemented in a smartphone environment, it can be considered to be similar to financial services and technologies that are available in mobile apps. It is therefore possible that the entire operating system will be viewed as an electronic device, or broadly interpreted as electronic financial infrastructure under the Electronic Financial Transactions Act (EFTA). An amendment to the EFTA has been proposed and discussed at the National Assembly, and if this amendment is passed, then such financial platforms might fall within the scope of the “financial platforms” stipulated in the amendment.
Legal considerations when building financial Metaverse platforms
(1) Authentication of avatars and real names
The usage of avatars within the Metaverse may give rise to legal issues such as identity verification, attribution of liability, and non-repudiation . If an account-based financial transaction occurs on the Metaverse, the person who uses the avatar must undergo real name checks and KYC checks as per the Act on Real Name Financial Transactions and Confidentiality and the Act on Reporting and Use of Specific Financial Transaction Information (Specified Financial Information Act), and identity verification in the event of issuance of the means of access under the EFTA. Therefore, it is unlikely under the current law that financial transactions conducted using anonymous avatars would be allowed.
(2) Sales of financial products and financial platform regulation
A legal review needs to be conducted into financial product sales and brokerage using the Metaverse platform, including issues relating to incomplete sales, under the Financial Consumer Protection Act (FCPA). Depending on how the financial transactions and accompanying services (e.g. selling, comparing, recommending, advertising (providing information), advising) are structured and provided on a Metaverse platform, it is possible that the financial platform regulations of the FCPA and the proposed amendment to the EFTA will be applicable. In particular, if financial products or services from several financial companies are provided on a Metaverse platform, the need to prevent misunderstanding of the subject who provided certain financial products and services will be even greater.
(3) Financial security and information protection
In order for financial transactions to be conducted on a safe and reliable platform, compliance issues related to security and information protection by Metaverse platform operators are also important. Regulations regarding analysis of electronic financial infrastructure vulnerabilities, measures to prevent hacking, regulations on network separation, and compliance with cloud use procedures under the Financial Supervisory Service Regulations will be applied. Privacy issues are also important, and in terms of privacy protection, strict protection measures for biometric data and location information used in the Metaverse, as well as technical implementation methods for gaining the consent of the information subject, need to be carefully reviewed.
(4) IP – copyright, trademark rights, and business method patents
The presence of creative activities in the Metaverse gives rise to numerous risks: the risk of infringement of publicity rights, such as the illegal use of celebrities’ portraits and names; trademark rights concerning “fake” clothes, accessories, and brands used for avatars; copyright issues such as unauthorized reproduction; and infringement of business method patents and exclusive rights to products and services. Therefore, these IP issues need to be closely reviewed by operators of platforms on the Metaverse.
(5) NFT-related regulatory issues
If digital content in the Metaverse is commercialized through NFTs, anti-money laundering and taxation issues arise, with the issues partly dependent on whether a given NFT is considered to be a “virtual asset” under the Specified Financial Information Act. In the case of an NFT trading platform, it may be necessary for this to be reported as a VASP (virtual asset service provider), again depending on whether the NFT is considered to be a virtual asset. Consideration will also need to be given to whether the NFT is a form of security or other financial product, in which case it may be subject to financial regulations such as those contained within the Financial Investment Services and Capital Markets Act.
With a decrease in the number of physical stores in the real world, and an increase in the proportion of transactions conducts on a Metaverse platform, financial companies will also need to conduct a legal review to ensure that they do not fall foul of laws preventing disability discrimination. In particular, companies will need to ensure that they do not unreasonably prevent disabled persons from accessing their products and services which are offered in the Metaverse.
The financial industry is highly regulated, and inevitably sensitive to the government’s regulatory direction. It is important for there to be a discussion on the appropriate level of regulation, and on the speed with which these regulations ought to be implemented. This must be done in such a way that financial products and services can actually be commercialized, and such that consumer demand from the potential major customer groups of the Metaverse such as the Millennials and Generation Z can be satisfied. As the Financial Services Commission stated on December 15, 2021, it is likely that regulation will be reviewed and adopted in a way that does not cause consumer inconvenience or inhibit innovation, and at the same time, that minimizes any side effect of the Metaverse.
There is undoubtedly a pressing need to amend or establish regulations and laws for the Metaverse, and the financial laws need to be overhauled to expand the concurrent and subordinate businesses of financial institutions allowed thereunder. However, in parallel with these legal developments, it is also necessary for platform operators to prepare rules of use, autonomous guidelines for ethics and security, and methods of self-regulation. Indirect commercialization through Korea’s financial regulatory sandbox (with a given business being designated as an “innovative financial service”) can also be considered as an alternative.
Lee & Ko’s Digital Finance Team has advised extensively on the above legal matters and issues, and has also actively participated in research activities with academia, lawmakers, and government agencies, in relation to the Metaverse, NFTs, and virtual assets.
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