Back in 2021, at “Connect 2021” conference, the Facebook founder Mark Zuckerberg had announced a new era in social media history, via his new project, named, MetaVerse (“Meta” or “MetaVerse”) that is a wide-ranging and interoperable network of 3D virtual worlds, where these worlds are presented in real time, they can be tried simultaneously and continuously by an unlimited number of users.
The MetaVerse terminology was set, and is currently being used globally, to make the future of social media more sophisticated where the Meta users will be able to virtually meet and carry-out further activities using Non-Fungible Tokens (“NFTs”), which are the transferrable digital items (i.e., items that could be sold and purchased) among the MetaVerse users to conduct business and/or any further transactions conducted via on such virtual world.
The launch of the MetaVerse and noticing the fast-growing nature of the virtual world and/or platform(s) urged its users to establish and maintain the concept of virtual assets that is deemed the core of business conducted in the MetaVerse. Given that, these virtual assets are forms of currency trading, a cryptocurrency, and are modern forms invented in financial trading which form commercial transactions that could lead to commercial disputes among its users around the world.
Considering the above, the Emirate of Dubai has released its first domestic Decree Law No. 4 of 2022 regulating the virtual assets in the Emirate of Dubai (the “Decree”), that is the first law to incorporate an authority, named, the Dubai Virtual Assets Regulatory Authority (“VARA”) to govern and regulate the virtual assets in the Emirate of Dubai except for the jurisdiction of the Dubai International Financial Center.
The Decree is keen create a platform that protects both investors and service providers in virtual assets, and to curb illegal practices in coordination with the concerned entities, as per its internal regulations for the sake of protecting investors, dealers and third parties dealing with such service provider(s) to cover and protect the virtual assets’ trading from any potential risks that could be shown in the below legal issued.
As NFT’s are in its entirety digital and of high value, cybercriminals are more prone to target such for their financial gain. Therefore, securing private keys allied with NFT’s can be quite alluring for criminals. An individual who is able to access such private key linked with the NFT, has the ability to access, relocate and sell the NFT without the authorization of the NFT’s legitimate owner(s). Additionally, if stolen, owed to the decentralized and irreversible nature of blockchain- base transactions, it is deemed extremely difficult for the NFT to be recovered.
As per the online NFT Marketplace, the platform recently stated that a limited number of its user accounts had been compromised in “account takeovers”, by means where an unlawful third party had attained the identifications (i.e., passwords) that were necessary to access user accounts. This highlights a calamity in the user-facing virtual platforms, that the users are considered the primary point of contact for such cybercrime; exposing their vulnerability towards phishing attempts, brute-force assaults, including other means exploited by criminals in order to attain account specifics.
It is recommended that NFT platforms considering employing administrative, technical and physical precautions, for instance, multi-factor authentication, in order to improve the security of private keys including other account accessing credentials and control access. Period risk assessments should be undertaken habitually and also drafting policies that evidently mention the aforementioned in order to diminish the risk of loss and legal exposure.
Moreover, cross-border characters of NFTs also poses imperative legal and regulatory concerns that may ascend if NFTs are retailed internationally. Some jurisdictions, have regulatory frameworks already in place that will be relevant to NFTs, one being, the EU’s proposed Markets in Crypto-Assets Regulation. This regulation will be addressed in a follow-up article outlining the particulars of such.
As the asset class is continually developing, the market is expanding, and new laws and existing regulations will need to catch up in order to keep updated with the present modifications, and since this environment is dynamic in itself, rudiments should be followed carefully. Though, now the standing of such apprehensions is understood, as outlined earlier, one must consider those concerns in order to undertake and draft vigilant strategies in order to pursue potential projections within this area.
Correspondingly, the price of NFT is determined by the market fluctuations and the demand, and can be artificially and/ or merely inflated by using illicit or unprincipled means, such as selling and purchasing form various deceiving accounts, and increasing the price with each transaction. An example of such, would be that an NFT acquired for $100 can be retailed to a second account for $1000, bringing the intrinsic worth of the NFT to $1000. The term for such practice is called ‘Wash Trading’. This practice is used quite commonly by criminals’ whist dealing with potential investors. This does not just affect the price, but also the artwork or constituent of the NFT that is being auctioned. Therefore, finding a genuine NFT becomes considerably problematic.
In line with the above, when an individual purchases an NFT, they could be buying an artwork from a vendor that is fake or a replica of the original; similarly, this vendor may be pretending to be the actual owner or artist, constituting as major deception as the NFT being purchased may not be accessible nor or resale value. Since blockchain transactions are irreversible, the purchaser will not be reimbursed any money that was spent on the tokens that either do not exist, or were utilized as bait.
When a client acquires an NFT, a smart contract on the blockchain allocates the customer as the owner of the digital asset. However, there are many debatable questions that arise pertaining to this subject, one in particular being; Is the purchaser still in possession of the digital asset if its location is stored on another user’s computer, i.e., Coinbase, and in the event the computers shut down, what happens? Such apprehension questions the owners’ issues, as well as probing the integrity and authenticity of these platforms. Moreover, NFTs will be accessible in decentralized services soon, which will transform the game, although implementation is still awaiting.
In our opinion, VARA holds an innovative role on issuing decrees and/or circulars regulating the virtual assets’ investments and protecting the interests of its users, which could avoid and reduce the disputes that may arise out of any transactions of the virtual assets and encourages the investment in the virtual assets in Dubai. Moreover, the virtual assets and/or NFTs, due to their developed nature, raise various legal issues that should be legally protected by international laws in the future to cover any potential cross-border disputes. Thus, VARA deemed to define the future of NFT,s transactions or Blockchain technology development to ensure the safe nates of the complicated and sophisticated Meta Verse transactions.
Fatima Hussian, Partner Designate